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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

For the quarterly period ended September 27, 2009

or

For the transition period from              to              

Commission file number 001-11499

WATTS WATER TECHNOLOGIES, INC.

(Exact Name of Registrant as Specified in Its Charter)

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o   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):

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.

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WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES

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)

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)

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)

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)

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. (the Company) Consolidated Balance Sheet as of September 27, 2009, the Consolidated Statements of Operations for the third quarter and nine months ended September 27, 2009 and the third quarter and nine months ended September 28, 2008, and the Consolidated Statements of Cash Flows for the nine months ended September 27, 2009 and the nine months ended September 28, 2008.

The balance sheet at December 31, 2008 has been derived from the audited consolidated 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, 2008. The 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, 2008. Operating results for the interim period presented are not necessarily indicative of the results to be expected for the year ending December 31, 2009.

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 generally reflects the results of operations for the 13-week period ended on the Sunday nearest September 30th of the respective year.

In preparing the accompanying unaudited consolidated financial statements, the Company has reviewed, as determined necessary by the Company’s management, events that have occurred after September 27, 2009, up until the issuance of the financial statements, which occurred on November 4, 2009.

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, 2008 to September 27, 2009 are as follows:

In February 2009, the Company reached a settlement with the seller regarding a purchase price adjustment to the Core Industries, Inc. acquisition that resulted in the Company receiving $1.1 million.  In May 2009, the Company deconsolidated TEAM Precision Pipework, Ltd. (TEAM).  As a result of the deconsolidation, the Company reduced goodwill by $8.4 million associated with TEAM.  See Note 3 for additional information relating to the deconsolidation of TEAM.  In September 2009, the Company’s Board of Directors approved a plan to dispose of its investment in Watts Valve (Changsha) Co., Ltd. (CWV), an indirect wholly-owned subsidiary of the Company located in China.  The Company classified the operations of CWV as a discontinued operation and recorded a decrease in the net assets to their estimated fair market value less costs to sell.  As a result, the Company reduced goodwill by $6.1 million associated with CWV.  See Note 3 and Note 10 for additional information relating to CWV.

Goodwill is tested for impairment at least annually or more frequently if events or circumstances indicate that it is “more likely than not” that goodwill might be impaired, such as a change in business conditions. The Company performs its annual goodwill impairment assessment in the fourth quarter of each year.

In connection with the restructuring plan announced in February 2009, the Company will be closing several facilities to reduce the overall size of the manufacturing footprint.  The Company concluded that it is more likely than not that the carrying amount of certain assets held and used may not be recoverable.  Specifically, the Company identified a long-lived asset group primarily comprised of

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buildings and land use rights in China.  The Company used an undiscounted future cash flow model to test the long-lived asset group based on the primary asset identified, the current economic outlook and the estimated fair value from the ultimate disposition of the asset group.  The inputs used in this analysis are unobservable inputs (level 3).  Based on the analysis performed, the Company recorded a $5.5 million impairment charge for one asset group in China during the quarter ended September 27, 2009. This charge is reported in the restructuring and other charges in the consolidated statements of operations.

In connection with the plan to dispose of CWV, certain long-lived assets were reduced by $1.4 million to reflect their estimated fair market value.  This charge was recorded in discontinued operations as part of the $5.9 million loss.

Intangible assets include the following at September 27, 2009:

Aggregate amortization expense for amortized intangible assets for the third quarters of 2009 and 2008 was $3.4 million and $3.7 million, respectively, and for the nine-month periods of 2009 and 2008 was $10.2 million and $8.8 million, respectively. Additionally, future amortization expense on amortizable intangible assets is approximately $3.1 million for the remainder of 2009, $12.5 million for 2010, $12.2 million for 2011, $10.5 million for 2012 and $9.5 million for 2013. 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 10.0 years. Patents, customer relationships, technology and other amortizable intangibles have weighted-average remaining lives of 7.6 years, 9.3 years, 4.5 years and 18.5 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 non-employee members of the Company’s Board of 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 213,500 and 202,000 options under the 2004 Stock Incentive Plan in the first nine months of 2009 and 2008, 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:

The above assumptions were used to determine the weighted average grant-date fair value of stock options of $9.70 and $10.10 in 2009 and 2008, 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. Shares of restricted stock granted to employees vest over a three-year period at the rate of one-third per year. Stock awards to non-employee members of the Company’s Board of Directors are fully vested at the time of grant. The restricted stock awards are amortized to expense on a straight-line basis over the vesting period. The Company issued 84,535 and 79,597 shares of restricted stock under the 2004 Stock Incentive Plan in the third quarters of 2009 and 2008, respectively.  The Company issued 86,241 and 79,597 shares of restricted stock under the 2004 Stock Incentive Plan in the first nine months of 2009 and 2008, 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

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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 150,098 RSUs and 60,128 RSUs in the first nine months of 2009 and 2008, 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:

The above assumptions were used to determine the weighted average grant-date fair value of RSUs of $8.14 and $11.44 in 2009 and 2008, respectively.

A more detailed description of each of these equity incentive 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, 2008.

Shipping and Handling

The Company’s shipping costs included in selling, general and administrative expenses were $8.1 million and $11.0 million for the third quarters of 2009 and 2008, respectively, and were $23.2 million and $29.5 million for the first nine months of 2009 and 2008, respectively.

Research and Development

Research and development costs included in selling, general and administrative expenses were $4.2 million and $4.0 million for the third quarters of 2009 and 2008, respectively, and were $12.9 million and $13.2 million for the first nine months of 2009 and 2008, 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.

New Accounting Standards

In June 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) No. 2009-1, which amended the FASB Accounting Standards Codifiction (ASC) for the issuance of FASB Statement No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162”(ASU No. 2009-1).  ASU No. 2009-1 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy).  This standard also establishes the FASB Accounting Standards Codification (ASC) as the source of authoritative accounting principles recognized by the FASB to be applied in the preparation of non-governmental financial statements. ASU No. 2009-1 is effective for all interim and annual financial statements issued after September 15, 2009.  The adoption of ASU No. 2009-1 did not have a material impact on the Company’s consolidated financial statements.

In June 2009, FASB issued FAS No. 167, “Amendments to FASB Interpretation No. 46(R)”(FAS No. 167).  FAS No. 167 amends certain requirements of FASB Interpretation No. 46(R) to require an entity to perform an analysis to determine whether the variable interest or interests give it a controlling financial interest.  This statement also requires an entity to regularly reassess whether the entity has a controlling financial interest in the variable interest or interests.  This statement will also expand disclosures on variable interest or interests in the footnotes.  FAS No. 167 is effective for the first annual reporting period beginning after November 15, 2009 as well as the interim period therein.  The Company does not expect the adoption of FAS No. 167 will have a material impact on its consolidated financial statements.

In June 2009, FASB issued FAS No. 166, “Accounting for Transfers of Financial Assets — an amendment of FASB Statement No. 140” (FAS No. 166). This statement eliminates the concept of a qualifying special-purpose entity as defined in FAS No. 140.  This statement also establishes more stringent conditions for reporting a transfer of a portion of a financial asset as a sale and changes the initial measurement of

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a transferor’s interest in transferred financial assets.   FAS No. 166 also expands disclosures for interim and annual reports.  This statement is effective for the first annual reporting period beginning after November 15, 2009.  The Company does not expect the adoption of FAS No. 166 will have a material impact on its consolidated financial statements.

3. Discontinued Operations

In September 2009, the Company’s Board of Directors approved the sale of its investment in CWV.  CWV is a leading manufacturer of large diameter hydraulic-actuated butterfly valves for thermo-power and hydro-power plants, water distribution projects and water works projects in China.  Management determined the CWV business no longer fit strategically with the Company.  The Company has engaged the services of an investment bank to assist in the disposition.  See Note 10 for further information related to CWV.

The Company evaluated the classification of CWV and concluded that the net assets qualified as discontinued operations.  The Company evaluated the fair value of the net assets of CWV and recorded an estimated pre-tax loss of approximately $5.9 million.  The Company estimated the fair value of the net assets based on the likely proceeds to be received in the sale process.  The Company estimated the likely proceeds based on recent comparable transactions .  In addition to examining recent transactions, the Company also estimated the fair value of the business using a discounted cash flow model.  The inputs used in this analysis are unobservable inputs (level 3).  The final loss may be different from the estimate as the actual loss will be dependent on the actual proceeds received.  In addition, the Company recorded $1.4 million for income taxes, including a charge to pay for previously recognized tax benefits associated with tax holidays which will no longer be realized as a result of the disposition.    The Company concluded that the future cash flows associated with CWV will be completely eliminated from the continuing operations of the Company.  As such, the Company classified CWV’s result of operations and the estimated loss from the disposition as discontinued operations for all periods presented.

In May 2009, the Company liquidated its TEAM business, located in Ammanford, U.K. TEAM custom designed and manufactured manipulated pipe and hose tubing assemblies and served the heating, ventilation and air conditioning and automotive markets in Western Europe.  Management determined the business no longer fit strategically with the Company.  On May 22, 2009, the Company appointed an administrator for TEAM under the United Kingdom Insolvency Act of 1986.  During the administration process, the administrator has sole control over, and responsibility for, TEAM’s operations, assets and liabilities.   The Company deconsolidated TEAM when the administrator obtained control of TEAM.  The deconsolidation resulted in the recognition of a $18.8 million non-cash loss in the quarter ended June 28, 2009.  During the quarter ended September 27, 2009, the Company was informed that the administrator completed the sale of TEAM’s assets for funds sufficient to pay all creditors.  The Company evaluated the operations of TEAM and determined that it will not have a continuing involvement in TEAM’s operations and cash flows.  As a result of the loss of control, TEAM’s cash flows and operations have been completely eliminated from the continuing operations of the Company.  As such, the Company has classified TEAM’s results of operations and the loss from deconsolidation as discontinued operations for all periods presented.

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 quarters and first nine months of 2009 and 2008 are related to the operations and write-off of TEAM, operations and write down of the net assets of CWV and legal costs, net of reserve adjustments, associated with the James Jones Litigation, which is described in Part I, Item 1, “Business - Product Liability, Environmental and Other Litigation Matters” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

Condensed operating statements for discontinued operations are summarized below:

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The Company did not recognize any tax benefits on the write down of CWV and the disposal of TEAM as the Company does not believe that it is more likely than not that the tax benefits would be realized.

Revenues reported in discontinued operations are as follows:

The carrying amounts of major classes of assets and liabilities at September 27, 2009 and December 31, 2008 associated with the Municipal Water Group, relating primarily to reserves for the James Jones Litigation, are as follows:

The major classes of assets and liabilities associated with the operations of CWV at September 27, 2009 are as follows:

The major classes of assets and liabilities associated with the operations of CWV and TEAM at December 31, 2008 are as follows:

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4. Financial Instruments and Derivatives Instruments

The Company measures certain financial assets and liabilities at fair value on a recurring basis, including auction rate securities, foreign currency derivatives, deferred compensation plan assets and related liability, and metal derivatives. The fair value of these certain financial assets and liabilities was determined using the following inputs at September 27, 2009:

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, 2008 to September 27, 2009.

Trading securities comprise auction rate securities and rights issued by UBS, AG (UBS).  The Company holds a variety of interest bearing auction rate securities, or ARS, including $4.6 million in municipal bonds and $0.7 million in student loans at September 27, 2009. 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.

During the fourth quarter of 2008, the Company and its investment advisor elected to participate in a settlement offer from UBS for all of the outstanding ARS investments.  Under the terms of the settlement offer, the Company through its investment advisor was issued rights by UBS entitling the holder to require UBS to purchase the underlying ARS at par value during the period from June 30, 2010, through July 2, 2012.  The rights, valued at $1.2 million at September 27, 2009, also entitle UBS to purchase or sell the ARS at any time from the settlement date, in which case UBS would be required to pay par value for the ARS.

While the Company continues to earn interest on its ARS investments, these investments are not currently trading and therefore do not currently have a readily determinable market value.

The Company used a discounted cash flow model to determine the estimated fair value of its investment in ARS and investments in UBS rights as of September 27, 2009. 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, the Company recorded a credit of approximately $0.3 million to other income in the consolidated statement of operations for its investment in ARS in the first nine months of 2009.  To determine the fair value of the rights issued by UBS in connection with the settlement, the Company used a discounted cash flow model for the period up to the first date which the Company can exercise the rights.   Based on this assessment of fair value, the Company recorded a charge of approximately $0.4 million to other expense in the first nine months of 2009.

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

The Company used financial instruments to enhance its ability to manage risk, including foreign currency and commodity pricing exposures, which exist as part of its ongoing business operations.  The use of derivatives exposes the Company to counterparty credit risk for nonperformance and to market risk related to changes in currency exchange rates and commodity prices. The Company manages its exposure to counterparty credit risk through diversification of counterparties. The Company’s counterparties in derivative transactions are substantial commercial banks with significant experience using such derivative instruments. The impact of market risk on the fair value and cash flows of the Company’s derivative instruments is monitored and the Company restricts the use of derivative financial instruments to hedging activities. The Company does not enter into contracts for trading purposes nor does the Company enter into any contracts for speculative purposes.  The use of derivative instruments is approved by senior management under written guidelines.

The Company has exposure to a number of foreign currency rates, including the Canadian Dollar, the Euro, the Chinese Yuan and the British Pound.  To manage this risk, the Company generally uses a layering methodology whereby at the end of any quarter, the Company has generally entered into forward exchange contracts which hedge approximately 50% of the projected intercompany purchase transactions for the next twelve months.  The Company uses this strategy for the purchases between Canada and the U.S., for purchases between the Euro zone and the U.S., and for purchases between the Euro zone and the United Kingdom.  The average volume of contracts can vary but generally approximates $10 to $12 million in open contracts at the end of any given quarter.  At September 27, 2009, the Company had contracts for notional amounts aggregating approximately $13.0 million to buy various currencies and $4.5 million to sell various currencies.   The Company accounts for the forward exchange contracts as an economic hedge.  Realized and unrealized gains and losses on the contracts are recognized in other (income) expense in the consolidated statement of operations. These contracts do not subject the Company to significant market risk from exchange movement because they offset gains and losses on the related foreign currency denominated transactions.

From time to time, the Company enters into contracts 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 1 million pounds to be delivered over 12 months for one customer.  The Company has determined that these copper swaps do not qualify for hedge accounting and accounts 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.

The following table discloses the fair values of derivative instruments on the Company’s balance sheet as of September 27, 2009 (in millions):

The following table discloses the impact of derivative instruments on the Company’s financial operations for the quarter ended September 27, 2009 (in millions):

The following table discloses the impact of derivative instruments on the Company’s financial operations for the nine months ended September 27, 2009 (in millions):

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