UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q

ý	 	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934	
 	 	 	
For the quarterly period ended October 2, 2005	
 	 	 	
or	
 	 	 	
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  ý    No  o
 
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes  ý    No  o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o    No  ý
 
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 28, 2005	
Class A Common Stock, $.10 par value	 	25,203,210	
 	 	 	
Class B Common Stock, $.10 par value	 	7,343,880	

 
WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
 
INDEX

Part I. Financial Information	 	
 	 	
Item 1.  Financial Statements	 	
 	 	
Consolidated Balance Sheets at October 2, 2005 and December 31, 2004 (unaudited)	 	
 	 	
Consolidated Statements of Operations for the Third Quarter Ended October 2, 2005 and September 26, 2004 (unaudited)	 	
 	 	
Consolidated Statements of Operations for the Nine Months Ended October 2, 2005 and September 26, 2004 (unaudited)	 	
 	 	
Consolidated Statements of Cash Flows for the Nine Months Ended October 2, 2005 and September 26, 2004 (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 6.  Exhibits	 	
 	 	
Signatures	 	
 	 	
Exhibit Index	 	
 
2

 
 PART I. FINANCIAL INFORMATION
 
 ITEM 1. Financial Statements
 
WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
 CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share information)
(Unaudited)

 	 	October 2,
2005	 	December 31,
2004	 	
ASSETS	 	 	 	 	 	
CURRENT ASSETS:	 	 	 	 	 	
Cash and cash equivalents	 	$	56,876	 	$	65,913	 	
Investment securities	 	—	 	26,600	 	
Trade accounts receivable, less allowance for doubtful accounts of $8,690 at October 2, 2005 and $7,551 at December 31, 2004	 	171,802	 	150,073	 	
Inventories, net:	 	 	 	 	 	
Raw materials	 	74,162	 	61,250	 	
Work in process	 	27,013	 	28,020	 	
Finished goods	 	121,313	 	113,774	 	
Total Inventories	 	222,488	 	203,044	 	
Prepaid expenses and other assets	 	17,936	 	14,359	 	
Deferred income taxes	 	28,265	 	27,463	 	
Assets of discontinued operations	 	9,480	 	10,227	 	
Total Current Assets	 	506,847	 	497,679	 	
PROPERTY, PLANT AND EQUIPMENT:	 	 	 	 	 	
Property, plant and equipment, at cost	 	306,421	 	321,655	 	
Accumulated depreciation	 	(160,581	)	(170,966	)	
Property, plant and equipment, net	 	145,840	 	150,689	 	
OTHER ASSETS:	 	 	 	 	 	
Goodwill	 	240,756	 	226,178	 	
Other	 	60,075	 	49,702	 	
TOTAL ASSETS	 	$	953,518	 	$	924,248	 	
 	 	 	 	 	 	
LIABILITIES AND STOCKHOLDERS’ EQUITY	 	 	 	 	 	
CURRENT LIABILITIES:	 	 	 	 	 	
Accounts payable	 	$	75,614	 	$	73,606	 	
Accrued expenses and other liabilities	 	68,959	 	64,604	 	
Accrued compensation and benefits	 	30,715	 	29,679	 	
Current portion of long-term debt	 	6,043	 	4,981	 	
Liabilities of discontinued operations	 	22,914	 	24,303	 	
Total Current Liabilities	 	204,245	 	197,173	 	
LONG-TERM DEBT, NET OF CURRENT PORTION	 	185,081	 	180,562	 	
DEFERRED INCOME TAXES	 	21,971	 	19,578	 	
OTHER NONCURRENT LIABILITIES	 	24,407	 	26,632	 	
MINORITY INTEREST	 	7,715	 	7,515	 	
STOCKHOLDERS’ EQUITY:	 	 	 	 	 	
Preferred Stock, $.10 par value; 5,000,000 shares authorized; no shares issued or outstanding	 	—	 	—	 	
Class A Common Stock, $.10 par value; 80,000,000 shares authorized; 1 vote per share; issued and outstanding: 25,189,164 shares at October 2, 2005 and 25,049,338 shares at December 31, 2004	 	2,519	 	2,505	 	
Class B Common Stock, $.10 par value; 25,000,000 shares authorized; 10 votes per share; issued and outstanding: 7,343,880 shares at October 2, 2005 and at December 31, 2004	 	734	 	734	 	
Additional paid-in capital	 	143,517	 	140,172	 	
Retained earnings	 	355,956	 	324,145	 	
Deferred compensation	 	(1,935	)	(1,386	)	
Accumulated other comprehensive income	 	9,308	 	26,618	 	
Total Stockholders’ Equity	 	510,099	 	492,788	 	
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	 	$	953,518	 	$	924,248	 	
 
See accompanying notes to consolidated financial statements.
 
3

 
WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share information)
(Unaudited)

 	 	Third Quarter Ended	 	
 	 	October 2,
2005	 	September 26,
2004	 	
Net sales	 	$	232,729	 	$	210,190	 	
Cost of goods sold	 	152,916	 	135,822	 	
GROSS PROFIT	 	79,813	 	74,368	 	
Selling, general & administrative expenses	 	56,908	 	51,478	 	
OPERATING INCOME	 	22,905	 	22,890	 	
Other (income) expense:	 	 	 	 	 	
Interest income	 	(243	)	(229	)	
Interest expense	 	2,579	 	2,628	 	
Minority interest	 	106	 	380	 	
Other	 	(369	)	(239	)	
 	 	2,073	 	2,540	 	
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	 	20,832	 	20,350	 	
Provision for income taxes	 	7,393	 	6,515	 	
INCOME FROM CONTINUING OPERATIONS	 	13,439	 	13,835	 	
Loss from discontinued operations, net of taxes	 	(71	)	(130	)	
NET INCOME	 	$	13,368	 	$	13,705	 	
 	 	 	 	 	 	
BASIC EPS	 	 	 	 	 	
Income (loss) per share:	 	 	 	 	 	
Continuing operations	 	$	.41	 	$	.43	 	
Discontinued operations	 	—	 	(.01	)	
NET INCOME	 	$	.41	 	$	.42	 	
Weighted average number of shares	 	32,525	 	32,320	 	
 	 	 	 	 	 	
DILUTED EPS	 	 	 	 	 	
Income (loss) per share:	 	 	 	 	 	
Continuing operations	 	$	.41	 	$	.42	 	
Discontinued operations	 	—	 	—	 	
NET INCOME	 	$	.40	 	$	.42	 	
Weighted average number of shares	 	33,062	 	32,792	 	
 	 	 	 	 	 	
Dividends per share	 	$	.08	 	$	.07	 	
 
See accompanying notes to consolidated financial statements.
 
4

 
WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share information)
(Unaudited)

 	 	Nine Months Ended	 	
 	 	October 2,
2005	 	September 26,
2004	 	
Net sales	 	$	679,939	 	$	603,152	 	
Cost of goods sold	 	441,565	 	388,245	 	
GROSS PROFIT	 	238,374	 	214,907	 	
Selling, general & administrative expenses	 	169,958	 	147,532	 	
OPERATING INCOME	 	68,416	 	67,375	 	
Other (income) expense:	 	 	 	 	 	
Interest income	 	(881	)	(792	)	
Interest expense	 	7,667	 	7,930	 	
Minority interest	 	243	 	895	 	
Other	 	(546	)	(495	)	
 	 	6,483	 	7,538	 	
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	 	61,933	 	59,837	 	
Provision for income taxes	 	22,109	 	20,948	 	
INCOME FROM CONTINUING OPERATIONS	 	39,824	 	38,889	 	
Loss from discontinued operations, net of taxes	 	(185	)	(230	)	
NET INCOME	 	$	39,639	 	$	38,659	 	
 	 	 	 	 	 	
BASIC EPS	 	 	 	 	 	
Income (loss) per share:	 	 	 	 	 	
Continuing operations	 	$	1.23	 	$	1.21	 	
Discontinued operations	 	(.01	)	(.01	)	
NET INCOME	 	$	1.22	 	$	1.20	 	
Weighted average number of shares	 	32,470	 	32,242	 	
 	 	 	 	 	 	
DILUTED EPS	 	 	 	 	 	
Income (loss) per share:	 	 	 	 	 	
Continuing operations	 	$	1.21	 	$	1.19	 	
Discontinued operations	 	(.01	)	(.01	)	
NET INCOME	 	$	1.20	 	$	1.18	 	
Weighted average number of shares	 	33,006	 	32,673	 	
 	 	 	 	 	 	
Dividends per share	 	$	.24	 	$	.21	 	
 
See accompanying notes to consolidated financial statements.
 
5

 
WATTS WATER TECHNOLOGIES, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)

 	 	Nine Months Ended	 	
 	 	October 2,
2005	 	September 26,
2004	 	
OPERATING ACTIVITIES	 	 	 	 	 	
Income from continuing operations	 	$	39,824	 	$	38,889	 	
Adjustments to reconcile net income from continuing operations to net cash provided by continuing operating activities:	 	 	 	 	 	
Depreciation	 	18,238	 	20,050	 	
Amortization	 	1,730	 	1,242	 	
Deferred income taxes	 	(1,700	)	(236	)	
Other	 	506	 	559	 	
Changes in operating assets and liabilities, net of effects from business acquisitions and divestitures:	 	 	 	 	 	
Accounts receivable	 	(24,295	)	(21,640	)	
Inventories	 	(21,287	)	(43,775	)	
Prepaid expenses and other assets	 	(3,556	)	(1,941	)	
Accounts payable, accrued expenses and other liabilities	 	10,559	 	4,868	 	
Net cash provided by (used in) operating activities	 	20,019	 	(1,984	)	
 	 	 	 	 	 	
INVESTING ACTIVITIES	 	 	 	 	 	
Additions to property, plant and equipment	 	(13,816	)	(16,823	)	
Proceeds from the sale of property, plant and equipment	 	130	 	1,939	 	
Investment in securities	 	—	 	(25,000	)	
Proceeds from maturity of securities	 	26,600	 	2,250	 	
Increase in other assets	 	(221	)	(1,472	)	
Business acquisitions, net of cash acquired	 	(46,846	)	(67,642	)	
Net cash used in investing activities	 	(34,153	)	(106,748	)	
 	 	 	 	 	 	
FINANCING ACTIVITIES	 	 	 	 	 	
Proceeds from long-term borrowings	 	33,279	 	89,924	 	
Payments of long-term debt	 	(21,955	)	(85,605	)	
Debt issue costs	 	—	 	(949	)	
Proceeds from exercise of stock options	 	2,810	 	4,708	 	
Dividends	 	(7,828	)	(6,801	)	
Net cash provided by financing activities	 	6,306	 	1,277	 	
Effect of exchange rate changes on cash and cash equivalents	 	(316	)	(346	)	
Net cash provided by (used in) discontinued operations	 	(893	)	5,704	 	
DECREASE IN CASH AND CASH EQUIVALENTS	 	(9,037	)	(102,097	)	
Cash and cash equivalents at beginning of period	 	65,913	 	145,001	 	
CASH AND CASH EQUIVALENTS AT END OF PERIOD	 	$	56,876	 	$	42,904	 	
 	 	 	 	 	 	
NON CASH INVESTING AND FINANCING ACTIVITIES	 	 	 	 	 	
Acquisition of businesses:	 	 	 	 	 	
Fair value of assets acquired	 	$	53,568	 	$	79,266	 	
Cash paid, net of cash acquired	 	46,846	 	67,642	 	
Liabilities assumed	 	$	6,722	 	$	11,624	 	
 	 	 	 	 	 	
CASH PAID FOR	 	 	 	 	 	
Interest	 	$	5,187	 	$	5,839	 	
Taxes	 	$	21,179	 	$	26,267	 	
 
See accompanying notes to consolidated financial statements.
 
6

 
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 Watts Water Technologies, Inc.’s Consolidated Balance Sheet as of October 2, 2005, its Consolidated Statements of Operations for the third quarter and nine months ended October 2, 2005 and the third quarter and nine months ended September 26, 2004, and its Consolidated Statements of Cash Flows for the nine months ended October 2, 2005 and the nine months ended September 26, 2004.
 
The balance sheet at December 31, 2004 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, 2004. It is suggested that the financial statements included in this report be read in conjunction with the audited consolidated financial statements and notes included in the December 31, 2004 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 13, 2005. Operating results for the interim period presented are not necessarily indicative of the results to be expected for the year ending December 31, 2005.
 
The Company operates on a 52-week fiscal year ending on December 31.  Any third quarter ended data contained in this 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.  There were four additional billing days in the nine months ended October 2, 2005 than in the nine months ended September 26, 2004.
 
Certain amounts in fiscal year 2004 have been reclassified to permit comparison with the 2005 presentation. These reclassifications had no effect on reported results of operations or stockholders’ equity.
 
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 segments from December 31, 2004 to October 2, 2005 are as follows:

 	 	North
America	 	Europe	 	China	 	Total	 	
 	 	(in thousands)	 	
 	 	 	 	 	 	 	 	 	 	
Carrying amount at the beginning of period	 	$	123,539	 	$	98,117	 	$	4,522	 	$	226,178	 	
Goodwill acquired during the period	 	11,970	 	12,576	 	—	 	24,546	 	
Adjustments to goodwill during the period	 	254	 	(187	)	936	 	1,003	 	
Effect of change in exchange rates used for translation	 	23	 	(11,117	)	123	 	(10,971	)	
Carrying amount at end of period	 	$	135,786	 	$	99,389	 	$	5,581	 	$	240,756	 	
 
Other intangible assets include the following and are presented in “Other Assets: Other” in the October 2, 2005 Consolidated Balance Sheet:

 	 	Gross
Carrying
Amount	 	Accumulated
Amortization	 	
 	 	(in thousands)	 	
 	 	 	 	 	 	
Patents	 	$	9,237	 	$	(4,630	)	
Other	 	25,150	 	(3,900	)	
Total amortizable intangibles	 	34,387	 	(8,530	)	
Intangible assets not subject to amortization	 	22,723	 	—	 	
Total	 	$	57,110	 	$	(8,530	)	
 
7

 
Aggregate amortization expense for amortized other intangible assets for the third quarter of 2005 and 2004 was $693,000 and $529,000, respectively, and for the nine-month period of 2005 and 2004 was $1,730,000 and $1,242,000, respectively. Additionally, future amortization expense on other intangible assets will be approximately $721,000 for 2005, $2,736,000 for 2006, $2,501,000 for 2007, $2,348,000 for 2008 and $2,323,000 for 2009.
 
Stock-Based Compensation
 
The Company accounts for stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB No. 25), and related interpretations. The Company records stock-based compensation expense associated with its Management Stock Purchase Plan due to the discount from market price. Stock-based compensation expense is amortized to expense on a straight-line basis over the vesting period. The following tables illustrate the effect on reported net income and earnings per common share if the Company had applied the fair value method to measure stock-based compensation as required under the disclosure provisions of Financial Accounting Standards Board No. 123, “Accounting for Stock-Based Compensation ” (FAS 123) as amended by Financial Accounting Standards Board No. 148 “Accounting for Stock-Based Compensation Transition and Disclosure” (FAS 148).

 	 	Third Quarter Ended	 	
 	 	October 2,
2005	 	September 26,
2004	 	
 	 	(in thousands, except per share information)	 	
Net income, as reported	 	$	13,368	 	$	13,705	 	
Add: Stock-based employee compensation expense from the Management Stock Purchase Plan included in reported net income, net of tax	 	117	 	137	 	
Deduct: Stock-based employee compensation expense determined under the fair value method, net of tax:	 	 	 	 	 	
Restricted stock units (Management Stock Purchase Plan)	 	(159	)	(112	)	
Employee stock options	 	(427	)	(150	)	
Pro forma net income	 	$	12,899	 	$	13,580	 	
 	 	 	 	 	 	
Earnings per share:	 	 	 	 	 	
Basic-as reported	 	$	.41	 	$	.42	 	
Basic-pro forma	 	$	.40	 	$	.42	 	
Diluted-as reported	 	$	.40	 	$	.42	 	
Diluted-pro forma	 	$	.39	 	$	.41	 	

 	 	Nine Months Ended	 	
 	 	October 2,
2005	 	September 26,
2004	 	
 	 	(in thousands, except per share information)	 	
 	 	 	 	 	 	
Net income, as reported	 	$	39,639	 	$	38,659	 	
Add: Stock-based employee compensation expense from the Management Stock Purchase Plan included in reported net income, net of tax	 	433	 	343	 	
Deduct: Stock-based employee compensation expense determined under the fair value method, net of tax:	 	 	 	 	 	
Restricted stock units (Management Stock Purchase Plan)	 	(477	)	(336	)	
Employee stock options	 	(597	)	(450	)	
Pro forma net income	 	$	38,998	 	$	38,216	 	
 	 	 	 	 	 	
Earnings per share:	 	 	 	 	 	
Basic-as reported	 	$	1.22	 	$	1.20	 	
Basic-pro forma	 	$	1.20	 	$	1.18	 	
Diluted-as reported	 	$	1.20	 	$	1.18	 	
Diluted-pro forma	 	$	1.17	 	$	1.17	 	
 
Shipping and Handling
 
The Company’s shipping costs included in selling, general and administrative expense were $7,418,000 and $5,950,000 for the third quarter of 2005 and 2004, respectively, and were $20,423,000 and $18,252,000 for the first nine months of 2005 and 2004, respectively.
 
8

 
Research and Development
 
Research and development costs included in selling, general and administrative expense were $2,780,000 and $2,447,000 for the third quarter of 2005 and 2004, respectively, and were $8,688,000 and $7,312,000 for the first nine months of 2005 and 2004, respectively.
 
New Accounting Standards
 
On November 29, 2004, the Financial Accounting Standards Board (FASB) issued Financial Accounting Standards Board Statement No. 151, “Inventory Costs” (FAS 151). FAS 151 amends the guidance in Accounting Research Bulletin No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for inventory costs. The provisions of this statement are effective for fiscal years beginning after June 15, 2005, although early application is permitted. The Company does not expect that the impact of this statement will be material to the consolidated financial statements.
 
On December 16, 2004, the FASB issued its final standard on accounting for share-based payments (SBP), Financial Accounting Standards Board Statement No. 123R (FAS 123R) that requires companies to expense the value of employee stock options and similar awards. The statement was initially effective for public companies for interim and annual periods beginning after June 15, 2005, and applies to all outstanding and unvested SBP awards at a company’s adoption date.  The Securities and Exchange Commission delayed implementation to fiscal years beginning after June 15, 2005.  Therefore, the Company intends to delay implementation of FAS 123R until January 1, 2006. The impact of this statement on the Company’s results of operations (based on equity instruments outstanding at October 2, 2005) for the fiscal year ending December 31, 2006 is expected to be approximately ($0.03) per share.
 
On December 16, 2004, the FASB issued Financial Accounting Standards Board Statement No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions” (FAS 153). The amendments made by FAS 153 are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Further, the amendments eliminate the narrow exception for nonmonetary exchanges of similar productive assets and replace it with a broader exception for exchanges of nonmonetary assets that do not have commercial substance. Previously, Opinion No. 29 required that the accounting for an exchange of a productive asset for a similar productive asset or an equivalent interest in the same or similar productive asset should be based on the recorded amount of the asset relinquished. The statement is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges occurring in fiscal periods beginning after the date of issuance. The provisions of this statement shall be applied prospectively in January 2006.
 
In March 2005, the FASB issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations” (FIN 47).  FIN 47 is an interpretation of FASB Statement No. 143, “Accounting for Asset Retirement Obligations” (FAS 143) and serves to clarify that an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liability’s fair value can be reasonably estimated.  FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate such a liability.  FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005.  The Company does not expect the impact of this statement will be material to the consolidated financial statements.
 
In May 2005, the FASB issued Financial Accounting Standards Board Statement No. 154, “ Accounting Changes and Error Corrections”(FAS 154), a replacement of APB Opinion No. 20, “Accounting Changes” and a replacement of FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements”.  FAS 154 changes the accounting for, and reporting of, a change in accounting principle.  The statement requires retrospective application to prior periods financial statements of voluntary changes in accounting principles and changes required by new accounting standards when the standard does not include specific transition provisions, unless it is impracticable to do so.  The statement is effective for accounting changes and corrections of errors in fiscal years beginning after December 15, 2005.  Earlier application is permitted for accounting changes and corrections of errors during fiscal years beginning after June 1, 2005.
 
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.  Costs and expenses related to the Municipal Water Group for 2005 and 2004 primarily relate to legal and settlement costs associated with the James Jones Litigation.
 
In the fourth quarter of 2004 the Company decided to divest its interest in a minority-owned subsidiary Jameco International, LLC (Jameco) that had been previously consolidated as a result of Financial Accounting Standards Board Interpretation No. 46, “Consolidation of Variable Interest Entities-Revised” (FIN 46R). Jameco was recorded in the North American segment. Management determined that Jameco did not have a long-term strategic fit with the Company. As a result, in the fourth quarter of 2004 the Company recorded an impairment charge net of tax of $739,000 to write down its investment to estimated fair value of $250,000. The Company sold its interest in Jameco in March 2005 to the majority owner of Jameco for $250,000.
 
9

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

 	 	Third Quarter Ended	 	
 	 	October 2,
2005	 	September 26,
2004	 	
 	 	(in thousands)	 	
Net sales—Jameco International, LLC	 	$	—	 	$	4,681	 	
Cost and expenses:	 	 	 	 	 	
Jameco International, LLC	 	—	 	(4,691	)	
Municipal Water Group	 	(115	)	(203	)	
Loss before income taxes	 	(115	)	(213	)	
Income tax benefit	 	44	 	83	 	
Loss from discontinued operations, net of taxes	 	$	(71	)	$	(130	)	

 	 	Nine Months Ended	 	
 	 	October 2,
2005	 	September 26,
2004	 	
 	 	(in thousands)	 	
Net sales—Jameco International, LLC	 	$	—	 	$	15,219	 	
Cost and expenses:	 	 	 	 	 	
Jameco International, LLC	 	—	 	(15,238	)	
Municipal Water Group	 	(299	)	(357	)	
Loss before income taxes	 	(299	)	(376	)	
Income tax benefit	 	114	 	146	 	
Loss from discontinued operations, net of taxes	 	$	(185	)	$	(230	)	

 	 	October 2,
2005	 	
 	 	(in thousands)	 	
Prepaid expenses and other assets	 	$	2,373	 	
Deferred income taxes	 	7,107	 	
Assets of discontinued operations	 	$	9,480	 	
Accrued expenses and other liabilities	 	22,914	 	
Liabilities of discontinued operations	 	$	22,914	 	
 
The assets and liabilities at October 2, 2005 primarily relate to the reserves for the James Jones Litigation.
 
4.  Derivative Instruments
 
The Company uses foreign currency forward exchange contracts as a cash flow hedge to reduce the impact of currency fluctuations on certain anticipated intercompany purchase transactions that are expected to occur within the year and certain other foreign currency transactions. Related gains and losses are recognized in other income/expense when the contracts expire, which is in the same period as the underlying foreign currency denominated transaction. 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. For the first nine months of 2005 and 2004 the amount recorded in other comprehensive income for the change in the fair value of the contracts was immaterial.
 
The Company occasionally uses commodity futures contracts to fix the price on a portion of certain raw materials used in the manufacturing process. These contracts highly correlate to the actual purchases of the commodity and the contract values are reflected in the cost of the commodity as it is actually purchased. At October 2, 2005 and September 26, 2004 the Company had no commodity contracts.
 
5.  Restructuring
 
The Company continues to implement a plan to consolidate several of its manufacturing plants in North America and Europe. At the same time it is expanding its manufacturing capacity in China and other low cost areas of the world.  In the third quarter of 2005, the Company recorded a pre-tax charge of approximately $995,000 compared to $567,000 in the third quarter of 2004. For the nine months of 2005, the Company recorded a pre-tax charge of approximately $2,167,000 compared to $2,304,000 for the first nine months of 2004. Pre-tax costs of $991,000 and $567,000 were recorded in costs of goods sold in the third quarter of 2005 and 2004, respectively, and pre-tax costs of $1,705,000 and $2,304,000 were recorded in costs of goods sold for the nine months of 2005 and 2004, respectively. Costs incurred for the third quarters and the nine months of 2005 and 2004 included accelerated depreciation for the closure of a U.S. manufacturing plant, the write-down of a European building held for sale from a prior restructuring and a reduction in the estimated useful lives of certain manufacturing equipment.  Additionally, $4,000 and $462,000 were charged to
 
10

 
selling, general and administrative expenses in the third quarter and nine months ended October 2, 2005, respectively.  These costs represent severance related to a European restructuring including personnel reductions and the movement of manufacturing equipment to a lower cost location.
 
6.  Earnings per Share
 
The following tables set forth the reconciliation of the calculation of earnings per share:

 	 	For the Third Quarter Ended October 2, 2005	 	
 	 	Income
(Numerator)	 	Shares
(Denominator)	 	Per Share
Amount	 	
 	 	(Amounts in thousands, except share and per share amounts)	 	
Basic EPS	 	 	 	 	 	 	 	
Income from continuing operations	 	$	13,439	 	32,525,422	 	$	.41	 	
Loss from discontinued operations	 	(71	)	 	 	—	 	
Net income	 	$	13,368	 	 	 	$	.41	 	
Effect of dilutive securities	 	 	 	 	 	 	 	
Common stock equivalents	 	 	 	536,578	 	 	 	
Diluted EPS	 	 	 	 	 	 	 	
Income from continuing operations	 	$	13,439	 	 	 	$	.41	 	
Loss from discontinued operations	 	(71	)	 	 	—	 	
Net income	 	$	13,368	 	33,062,000	 	$	.40	 	

 	 	For the Third Quarter Ended September 26, 2004	 	
 	 	Income
(Numerator)	 	Shares (Denominator)	 	Per Share
Amount	 	
 	 	(Amounts in thousands, except share and per share amounts)	 	
Basic EPS	 	 	 	 	 	 	 	
Income from continuing operations	 	$	13,835	 	32,319,532	 	$	.43	 	
Loss from discontinued operations	 	(130	)	 	 	(.01	)	
Net income	 	$	13,705	 	 	 	$	.42	 	
Effect of dilutive securities	 	 	 	 	 	 	 	
Common stock equivalents	 	 	 	472,233	 	 	 	
Diluted EPS	 	 	 	 	 	 	 	
Income from continuing operations	 	$	13,835	 	 	 	$	.42	 	
Loss from discontinued operations	 	(130	)	 	 	—	 	
Net income	 	$	13,705	 	32,791,765	 	$	.42	 	

 	 	For the Nine Months Ended October 2, 2005	 	
 	 	Income
(Numerator)	 	Shares
(Denominator)	 	Per Share
Amount	 	
 	 	(Amounts in thousands, except share and per share amounts)	 	
Basic EPS	 	 	 	 	 	 	 	
Income from continuing operations	 	$	39,824	 	32,469,951	 	$	1.23	 	
Loss from discontinued operations	 	(185	)	 	 	(.01	)	
Net income	 	$	39,639	 	 	 	$	1.22	 	
Effect of dilutive securities	 	 	 	 	 	 	 	
Common stock equivalents	 	 	 	536,328	 	 	 	
Diluted EPS	 	 	 	 	 	 	 	
Income from continuing operations	 	$	39,824	 	 	 	$	1.21	 	
Loss from discontinued operations	 	(185	)	 	 	(.01	)	
Net income	 	$	39,639	 	33,006,279	 	$	1.20	 	
 
11

 

 	 	For the Nine Months Ended September 26, 2004	 	
 	 	Income
(Numerator)	 	Shares
(Denominator)	 	Per Share
Amount	 	
 	 	(Amounts in thousands, except share and per share amounts)	 	
Basic EPS	 	 	 	 	 	 	 	
Income from continuing operations	 	$	38,889	 	32,242,083	 	$	1.21	 	
Loss from discontinued operations	 	(230	)	 	 	(.01	)	
Net income	 	$	38,659	 	 	 	$	1.20	 	
Effect of dilutive securities	 	 	 	 	 	 	 	
Common stock equivalents	 	 	 	430,518	 	 	 	
Diluted EPS	 	 	 	 	 	 	 	
Income from continuing operations	 	$	38,889	 	 	 	$	1.19	 	
Loss from discontinued operations	 	(230	)	 	 	(.01	)	
Net income	 	$	38,659	 	32,672,601	 	$	1.18	 	
 
7.  Segment Information
 
Under the criteria set forth in Financial Accounting Standards Board 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 senior management. 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 our significant accounts and balances by segment, reconciled to the Company’s consolidated totals:

 	 	North
America	 	Europe	 	China	 	Corporate (*)	 	Consolidated	 	
 	 	(in thousands)	 	
Quarter ended October 2, 2005	 	 	 	 	 	 	 	 	 	 	 	
Net sales	 	$	160,029	 	$	65,554	 	$	7,146	 	$	—	 	$	232,729	 	
Operating income (loss)	 	17,829	 	7,854	 	1,433	 	(4,211	)	22,905	 	
Capital expenditures	 	1,972	 	1,748	 	758	 	—	 	4,478	 	
Depreciation and amortization	 	3,568	 	2,282	 	892	 	—	 	6,742	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Quarter ended September 26, 2004	 	 	 	 	 	 	 	 	 	 	 	
Net sales	 	$	140,403	 	$	62,386	 	$	7,401	 	$	—	 	$	210,190	 	
Operating income (loss)	 	18,565	 	8,023	 	1,277	 	(4,975	)	22,890	 	
Capital expenditures	 	2,919	 	1,177	 	1,278	 	—	 	5,374	 	
Depreciation and amortization	 	3,894	 	2,191	 	1,062	 	—	 	7,147	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Nine months ended October 2, 2005	 	 	 	 	 	 	 	 	 	 	 	
Net sales	 	$	464,622	 	$	195,624	 	$	19,693	 	$	—	 	$	679,939	 	
Operating income (loss)	 	55,352	 	23,299	 	2,550	 	(12,785	)	68,416	 	
Identifiable assets	 	551,498	 	308,481	 	93,539	 	—	 	953,518	 	
Long-lived assets	 	73,243	 	46,674	 	25,923	 	—	 	145,840	 	
Intangibles	 	32,596	 	13,304	 	2,680	 	—	 	48,580	 	
Capital expenditures	 	7,535	 	4,194	 	2,087	 	—	 	13,816	 	
Depreciation and amortization	 	10,180	 	6,513	 	3,275	 	—	 	19,968	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Nine months ended September 26, 2004	 	 	 	 	 	 	 	 	 	 	 	
Net sales	 	$	400,167	 	$	183,400	 	$	19,585	 	$	—	 	$	603,152	 	
Operating income (loss)	 	54,800	 	23,460	 	1,276	 	(12,161	)	67,375	 	
Identifiable assets	 	533,593	 	294,521	 	76,092	 	—	 	904,206	 	
Long-lived assets	 	74,144	 	47,462	 	26,183	 	—	 	147,789	 	
Intangibles	 	26,173	 	9,771	 	2,744	 	—	 	38,688	 	
Capital expenditures	 	6,978	 	4,207	 	5,638	 	—	 	16,823	 	
Depreciation and amortization	 	11,459	 	6,815	 	3,018	 	—	 	21,292	 	
 
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The above operating segments are presented on a basis consistent with the presentation included in the Company’s December 31, 2004 financial statements included in its Annual Report on Form 10-K.
 
*Corporate expenses are primarily for Sarbanes-Oxley compliance, compensation expense, and professional fees, including legal and audit expenses and benefit administration costs. These costs are not allocated to the geographic segments as they are viewed as corporate functions that support all segments.
 
The North American segment consists of U.S. net sales of $147,640,000 and $130,996,000 for the third quarter of 2005 and 2004, respectively, and $430,175,000 and $373,358,000 for the nine months of 2005 and 2004, respectively. The North American segment also consists of U.S. long-lived assets of $68,304,000 and $69,396,000 at October 2, 2005 and September 26, 2004, respectively.
 
Intersegment sales for the quarter ended October 2, 2005 for North America, Europe and China were $1,209,000, $1,072,000 and $13,677,000, respectively.  Intersegment sales for the quarter ended September 26, 2004 for North America, Europe and China were $2,009,000, $989,000 and $7,141,000, respectively.
 
Intersegment sales for the nine months ended October 2, 2005 for North America, Europe and China were $3,740,000, $4,054,000 and $35,534,000, respectively.  Intersegment sales for the nine months ended September 26, 2004 for North America, Europe and China were $4,620,000, $4,752,000 and $18,714,000, respectively.
 
8.  Other Comprehensive Income (Loss)
 
Other comprehensive income (loss) consists of the following:

 	 	Foreign
Currency
Translation	 	Pension
Adjustment	 	Cash Flow
Hedges	 	Accumulated Other
Comprehensive
Income (Loss)	 	
 	 	(in thousands)	 	
 	 	 	 	 	 	 	 	 	 	
Balance December 31, 2004	 	$	32,506	 	$	(5,849	)	$	(39	)	$	26,618	 	
Change in period	 	(6,857	)	—	 	(28	)	(6,885	)	
Balance April 3, 2005	 	$	25,649	 	$	(5,849	)	$	(67	)	$	19,733	 	
Change in period	 	(11,737	)	—	 	100	 	(11,637	)	
Balance July 3, 2005	 	$	13,912	 	$	(5,849	)	$	33	 	$	8,096	 	
Change in period	 	1,227	 	—	 	(15	)	1,212	 	
Balance October 2, 2005	 	$	15,139	 	$	(5,849	)	$	18	 	$	9,308	 	
 	 	 	 	 	 	 	 	 	 	
Balance December 31, 2003	 	$	19,588	 	$	(5,829	)	$	46	 	$	13,805	 	
Change in period	 	(5,585	)	—	 	(209	)	(5,794	)	
Balance at March 28, 2004	 	$	14,003	 	$	(5,829	)	$	(163	)	$	8,011	 	
Change in period	 	(518	)	—	 	196	 	(322	)	
Balance June 27, 2004	 	$	13,485	 	$	(5,829	)	$	33	 	$	7,689	 	
Change in period	 	2,370	 	—	 	(36	)	2,334	 	
Balance September 26, 2004	 	$	15,855	 	$	(5,829	)	$	(3	)	$	10,023	 	
 
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Accumulated other comprehensive income (loss) in the Consolidated Balance Sheets as of October 2, 2005 and September 26, 2004 consists of cumulative translation adjustments and changes in the fair value of certain financial instruments that qualify for hedge accounting as required by FAS 133.  The Company’s total comprehensive income was as follows:

 	 	Third Quarter Ended	 	
 	 	October 2,
2005	 	September 26,
2004	 	
 	 	(in thousands)	 	
 	 	 	 	 	 	
Net income	 	$	13,368	 	$	13,705	 	
Unrealized loss on derivative instruments	 	(15	)	(36	)	
Foreign currency translation adjustments	 	1,227	 	2,370	 	
Total comprehensive income	 	$	14,580	 	$	16,039	 	

 	 	Nine Months Ended	 	
 	 	October 2,
2005	 	September 26,
2004	 	
 	 	(in thousands)	 	
 	 	 	 	 	 	
Net income	 	$	39,639	 	$	38,659	 	
Unrealized gain (loss) on derivative instruments	 	57	 	(49	)	
Foreign currency translation adjustments	 	(17,367	)	(3,733	)	
Total comprehensive income	 	$	22,329	 	$	34,877	 	
 
9.  Acquisitions
 
On July 8, 2005, a wholly owned subsidiary of the Company acquired the water connector business of the Donald E. Savard Company  (Savard) located in San Gabriel, California for approximately $3,660,000. The allocations for goodwill and intangible assets are approximately $1,305,000 and $1,730,000, respectively.  The amount recorded as intangible assets is primarily for trade names with indefinite lives and customer relationships that have 14-year lives. This acquisition allows the Company to expand its presence in one of its product lines with a brand name that is well known to the plumbing wholesale market.
 
On July 5, 2005, a wholly owned subsidiary of the Company acquired 100% of the outstanding stock of Microflex N.V. (Microflex) located in Rotselaar, Belgium for approximately $14,900,000 net of cash acquired of approximately $875,000. The allocations for goodwill and intangible assets are approximately $6,740,000 and $4,915,000, respectively. The amount recorded as intangible assets is primarily for customer relationships that have 8-year lives and trade names that have indefinite lives.  Microflex produces and distributes flexible, pre-insulated, waterproof PEX pipes for hot and cold water transport, as well as a range of accessory products including couplings, caps, and insulation kits in the HVAC and water protection markets.
 
On June 20, 2005, a wholly owned subsidiary of the Company acquired the water softener business of Alamo Water Refiners, Inc. (Alamo) located in San Antonio, Texas for approximately $5,100,000.  The allocation for intangible assets is approximately $285,000 and is primarily for the trade name with an indefinite life.  There was no allocation to goodwill. Alamo sells both residential and commercial water softeners, which are used to filter calcium and magnesium from water supplies.
 
On May 11, 2005, a wholly owned subsidiary of the Company acquired 100% of the outstanding stock of Electro Controls Ltd. (Electro Controls) located in Hounslow, United Kingdom for approximately $11,784,000 net of cash acquired of approximately $5,014,000. The allocations for goodwill and intangible assets are approximately $5,836,000 and $315,000, respectively. The amount recorded as intangible assets is primarily for trade names that have indefinite lives. Electro Controls designs and assembles a range of electrical controls for the HVAC market, with sales primarily in the United Kingdom.
 
On January 5, 2005, a wholly owned subsidiary of the Company acquired 100% of the outstanding stock of HF Scientific, Inc., (HF) located in Fort Myers, Florida for approximately $7,260,000 in cash plus $800,000 in assumed debt. The allocations for goodwill and intangible assets are approximately $4,167,000 and $2,660,000, respectively. The amount recorded as intangible assets is primarily for customer relationships that have 15-year lives and trade names that have indefinite lives.  HF manufactures and distributes a line of instrumentation equipment, test kits and chemical reagents used for monitoring water quality in a variety of applications.
 
On January 4, 2005, a wholly owned subsidiary of the Company acquired substantially all of the assets of Sea Tech, Inc. (Sea Tech) located in Wilmington, North Carolina for approximately $10,100,000 in cash. The purchase agreement contains an earn-out provision to be calculated on a cumulative basis over a three-year period ending December 31, 2007.  Payments under the agreement, if any, will not exceed $5,000,000.  The allocations for goodwill and intangible assets are approximately $6,498,000 and $3,033,000, respectively. The amount recorded as intangible assets is primarily for customer relationships that have 15-year lives and trade names that have indefinite lives.  Sea Tech provides cost effective solutions for fluidic connection needs. Sea Tech offers a wide range of standard and custom quick connect fittings, valves and manifolds and pex tubing designed to address specific customer requirements.
 
14

 
The acquisitions above have been accounted for using the purchase method of accounting.  The Company obtains third-party valuations to aid in the purchase price allocation process. At any point in time, some valuations and allocations may be preliminary, and subject to further adjustment. The pro-forma results have not been displayed, as the results are not significant, either individually or aggregated.
 
10.  Debt Issuance
 
On September 23, 2004, the Company entered into an unsecured revolving credit facility with a syndicate of banks (the Revolving Credit Facility). The Revolving Credit Facility provides for multi-currency unsecured borrowings and stand-by letters of credit of up to $300,000,000 and expires in September 2009. Borrowings outstanding under the Revolving Credit Facility bear interest at a fluctuating rate per annum for an applicable percentage equal to (i) in the case of Eurocurrency rate loans, the British Bankers Association LIBOR rate plus an applicable percentage, of up to 0.875% based on the Company’s current 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 annual rate of interest announced by Bank of America, N.A. as its “prime rate.”  The average interest rate for borrowings under the revolving credit facility was approximately 2.7% for the quarter ended October 2, 2005. The Revolving Credit Facility replaced the unsecured revolving credit facility provided under the Revolving Credit Agreement dated February 28, 2002. The Revolving Credit Facility was used to pay off the debt that existed on the previous credit facility. 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 October 2, 2005, the Company was in compliance with all covenants related to the Revolving Credit Facility. The Company had approximately $209,061,000 of unused and available credit under the Revolving Credit Facility at October 2, 2005.  At October 2, 2005, $58,297,000 of debt was outstanding for euro based borrowings on the Revolving Credit Facility and recorded as long-term debt. Additionally, there was $32,642,000 outstanding for stand-by letters of credit on the Revolving Credit Facility at October 2, 2005.
 
Effective July 1, 2005, the Company entered into a three-year interest rate swap with a counterparty for a notional amount of €25,000,000, which is outstanding under its Revolving Credit Facility.  The Company swapped the variable rate from the Revolving Credit Facility, which is EURIBOR plus 0.6% for a fixed rate of 3.02%.  The Company had designated the swap as a hedge using the cash flow method.  The swap is hedging the cash flows associated with interest payments on the first €25,000,000 of its Revolving Credit Facility.  The Company will mark to market the changes in fair value of the swap through other comprehensive income.  Any ineffectiveness will be recorded in income.  At October 2, 2005, the fair value of the swap was immaterial.
 
The Company had previously entered into a two-year interest rate swap for a notional amount of €25,000,000 outstanding on the Company’s revolving credit facility that expired on June 30, 2005.  The Company swapped the variable rate from the revolving credit facility, which is three month EURIBOR plus 0.7%, for a fixed rate of 2.3%. The Company designated the swap as a hedging instrument using the cash flow method. The swap hedged the cash flows associated with interest payments on the first €25,000,000 of the Company’s revolving credit facility. The Company marked to market the changes in value of the swap through other comprehensive income. Any ineffectiveness was recorded in income.
 
In May 2005, the Company filed a universal shelf registration statement on Form S-3 with the Securities and Exchange Commission, pursuant to which the Company registered $300,000,000 of an indeterminate amount of debt and/or equity securities.  Funds from any offerings will be used to finance acquisitions and working capital, repay or refinance debt and for other general corporate purposes.
 
11.  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, 2004, the Company is a party to litigation described as the James Jones Litigation and is also engaged in certain environmental remediation.
 
In the James Jones Litigation, on June 22, 2005, the California Superior Court dismissed the claims of the Relator on behalf of the remaining Phase II cities (Contra Costa, Corona, Santa Cruz and Vallejo) and ruled that the Relator and these cities were obliged to show that the cities had received out of spec parts which were related to specific invoices, and that this showing had not been made.  Although each city’s claim is unique, this ruling is significant for the claims of the remaining cities, and the Relator has appealed.  Litigation is inherently uncertain, and the Company is unable to predict the outcome of this appeal.
 
During the quarter ended October 2, 2005, the Company learned that it may be a potentially responsible party (PRP) for the clean-up of the Philips Services Corporation Site in Rock Hill, South Carolina.  Common counsel for the PRP group has invited the Company to become part of the PRP group.  A remedial investigation/feasibility study has yet to be completed, the number of PRPs and Watts’ participation in a PRP group has yet to be determined and the Company is unable to determine a loss or range of loss at the present time.
 
15

 
12.  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. The Company uses a September 30 measurement date for its plans.
 
The components of net periodic benefit cost are as follows:

 	 	Third Quarter Ended	 	
 	 	October 2,
2005	 	September 26,
2004	 	
 	 	(in thousands)	 	
 	 	 	 	 	 	
Service cost—benefits earned	 	$	715	 	$	630	 	
Interest costs on benefits obligation	 	838	 	767	 	
Estimated return on assets	 	(797	)	(718	)	
Transitional asset amortization	 	—	 	(12	)	
Prior service cost amortization	 	60	 	60	 	
Net loss amortization	 	216	 	189	 	
Net periodic benefit cost	 	$	1,032	 	$	916	 	

 	 	Nine Months Ended	 	
 	 	October 2,
2005	 	September 26,
2004	 	
 	 	(in thousands)	 	
 	 	 	 	 	 	
Service cost—benefits earned	 	$	2,145	 	$	1,830	 	
Interest costs on benefits obligation	 	2,514	 	2,287	 	
Estimated return on assets	 	(2,377	)	(2,138	)	
Transitional asset amortization	 	—	 	(137	)	
Prior service cost amortization	 	180	 	170	 	
Net loss amortization	 	646	 	569	 	
Net periodic benefit cost	 	$	3,108	 	$	2,581	 	
 
Cash flows:
 
The information related to the Company’s pension funds cash flow is as follows:

 	 	Nine Months Ended	 	
 	 	October 2,
2005	 	September 26,
2004	 	
 	 	(in thousands)	 	
 	 	 	 	 	 	
Employer contributions	 	$	1,786	 	$	81	 	

Remaining 2005 contributions are expected to be immaterial.
 
13.  Subsequent Events
 
On November 4, 2005, a wholly owned subsidiary of the Company acquired substantially all of the assets of Flexflow Tubing LLP (Flexflow) located in Langley, British Columbia, Canada for approximately $6,250,000 in cash.  The purchase agreement contains an earn-out provision to be calculated over a five-year period ending December 31, 2010.  Earn-out payments under the purchase agreement, if any, will not exceed $4,300,000.  Flexflow manufactures pex tubing for potable and non-potable applications.
 
On October 26, 2005, the Company entered into a definitive acquisition agreement to acquire the assets of Changsha Valve Works, a valve manufacturing company located in the People’s Republic of China.  The closing is subject to several conditions, including the receipt of certain government approvals and the establishment of a new wholly foreign owned enterprise, and is expected to occur by the end of January 2006.
 
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 Item 2.   Management’s Discussion And Analysis Of Financial Condition And Results Of Operations
 
Overview
 
The following discussion and analysis are provided to increase understanding of, and should be read in conjunction with, the accompanying unaudited consolidated financial statements and notes.  In this quarterly report on Form 10-Q, references to “the Company”, “Watts”, “we”, “us” or “our” refer to Watts Water Technologies, Inc. and its consolidated subsidiaries.
 
We operate on a 52-week fiscal year ending on December 31.  Any third quarter ended data contained in this 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.  There were four additional billing days in the nine months ended October 2, 2005 than were in the nine months ended September 26, 2004.
 
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. For more than 130 years, we have designed and manufactured products that promote the comfort and safety of people and the quality and conservation for water used in commercial, residential and light industrial applications. We earn revenue and income almost exclusively from the sale of our products. Our principal product lines include:
 
•        backflow preventers for preventing contamination of potable water caused by reverse flow within water supply lines and fire protection  systems;
 
•        a wide range of water pressure regulators for both commercial and residential applications;
 
•        water supply and drainage products for commercial and residential applications;
 
•        temperature and pressure relief valves for water heaters, boilers and associated systems;
 
•        point-of-use water filtration and reverse osmosis systems for both commercial and residential applications;
 
•        thermostatic mixing valves for tempering water in commercial and residential applications; and
 
•        systems for under-floor radiant heat applications, and hydraulic pump groups for gas boiler manufacturers.
 
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).  Increases in Gross National Product (GNP) indicate a healthy economic environment, which we believe positively impacts our results of operations. An economic factor that has a direct effect on the demand for our products is the number of new housing construction starts and non-residential, or commercial, construction starts.  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. An additional factor that has had an effect on our sales is fluctuations in foreign currencies, as a portion of our sales and certain portions of our costs, assets and liabilities are denominated in currencies other than the U.S. dollar.
 
We believe that the factors relating to our future growth include our ability to continue to make selected acquisitions, both in our core markets as well as new complementary markets, regulatory requirements relating to the quality and conservation of water and increased demand for clean water and continued enforcement of plumbing and building codes. We have completed twenty-two acquisitions since divesting our industrial and oil and gas business in 1999. Our acquisition strategy focuses on businesses that manufacture preferred brand name products that address our themes of water quality, water safety, water conservation and water flow control. We target businesses that will provide us with one or more of the following: an entry into new markets, an increase in shelf space with existing customers, a new or improved technology or an expansion of the breadth of our water quality, water conservation, water safety and water flow control products for the residential and commercial markets.
 
Products representing a majority of our sales are subject to regulatory standards and code enforcement, which typically require that these products meet stringent performance criteria. Together with our commissioned manufacturers’ representatives, we have consistently advocated the development and enforcement of such plumbing codes. We are focused on maintaining stringent quality control and testing procedures at each of our manufacturing facilities in order to manufacture products in compliance with code requirements and take advantage of the resulting demand for compliant products. We believe that product development, product testing capability and investment in plant and equipment is needed to manufacture products in compliance with code requirements, which represents a barrier to entry for competitors. We believe there is an increasing demand among consumers for products to ensure water quality, which creates growth opportunities for our products.
 
A risk we face is increases in raw material costs. We require substantial amounts of raw materials, including bronze, brass, cast iron, steel and plastic to produce our products and substantially all of the raw materials we require are purchased from outside sources. We have experienced increases in the costs of bronze, brass, cast iron, steel and plastic. If we are not able to reduce or eliminate the effect of these cost increases by reducing production costs or successfully implementing price increases, these increases in raw material costs
 
17

 
could reduce our profit margins.
 
Another risk we face in all areas of our business is competition. We consider brand preference, engineering specifications, plumbing code requirements, price, technological expertise, delivery times and breadth of product offerings to be the primary competitive factors. As mentioned previously, we believe that product development, product testing capability and investment in plant and equipment is needed to manufacture products in compliance with code requirements, which represents a barrier to entry for competitors. We are committed to maintaining our capital equipment at a level consistent with current technologies, as we spent approximately $4,500,000 in the third quarter of 2005, and expect to invest a total of approximately $20,000,000 in 2005. We are also committed to expanding our manufacturing capacity in lower cost countries such as China, Tunisia and Bulgaria. These manufacturing plant relocations and consolidations are an important part of our ongoing commitment to reduce production costs.
 
Recent Developments
 
On November 4, 2005, we acquired substantially all of the assets of Flexflow Tubing LLP (Flexflow) located in Langley, British Columbia, Canada for approximately $6,250,000 in cash.  The purchase agreement contains an earn-out provision to be calculated over a five-year period ending December 31, 2010.  Earn-out payments under the purchase agreement, if any, will not exceed $4,300,000.  Flexflow manufactures pex tubing for potable and non-potable applications.
 
On October 31, 2005, we announced the appointment of William D. Martino as Chief Operating Officer and President of North American and Asia Operations.
 
On October 26, 2005, we entered into a definitive acquisition agreement to acquire the assets of Changsha Valve Works, a valve manufacturing company located in the People’s Republic of China.  The closing is subject to several conditions, including the receipt of certain government approvals and the establishment of a new wholly foreign owned enterprise, and is expected to occur by the end of January 2006.
 
On October 13, 2005, we announced the appointment of Lynn A. McVay as President of the Retail Division. Mr. McVay had previously served as our Executive Vice President of Wholesale Sales. Ernest E. Elliott, Executive Vice President of Wholesale Marketing, will assume Mr. McVay’s responsibilities in the wholesale division.
 
On September 26, 2005, Jeffrey A. Polofsky, the Executive Vice President - Retail Sales and Marketing, resigned from the Company.
 
Acquisitions
 
On July 8, 2005, we acquired the assets of the water connector business of the Donald E. Savard Company  (Savard) located in San Gabriel, California for approximately $3,660,000.  The allocations for goodwill and intangible assets are approximately $1,305,000 and $1,730,000, respectively. The amount recorded as intangible assets is primarily for trade names with indefinite lives and customer relationships that have 14-year lives.  The acquisition of the water connector business of Savard is consistent with our theme of water conservation, safety and control. This acquisition allows us to expand our presence in one of our leading product lines with a brand name that is well known to the plumbing wholesale market.
 
On July 5, 2005, we acquired 100% of the outstanding stock of Microflex N.V. (Microflex) located in Rotselaar, Belgium for approximately $14,900,000 net of cash acquired of approximately $875,000.  The allocations for goodwill and intangible assets are approximately $6,740,000 and $4,915,000, respectively.  The amount recorded as intangible assets is primarily for customer relationships that have 8-year lives and trade names that have indefinite lives.  Microflex produces and distributes flexible, pre-insulated, waterproof PEX pipes for hot and cold water transport, as well as a range of accessory products including couplings, caps, and insulation kits in the HVAC and water protection markets.
 
On June 20, 2005, we acquired the water softener business of Alamo Water Refiners, Inc. (Alamo) located in San Antonio, Texas for approximately $5,100,000.  The allocation for intangible assets is approximately $285,000 and is primarily for the trade name with an indefinite life. There was no allocation to goodwill. The products of Alamo are consistent with our theme of water quality and provide many synergistic opportunities when utilized in conjunction with our existing water filtration and water quality businesses. The acquisition of Alamo also expands our distribution presence into the southwestern U.S. markets.
 
On May 11, 2005, we acquired 100% of the outstanding stock of Electro Controls Ltd. (Electro Controls) located in Hounslow, United Kingdom for approximately $11,784,000 net of cash acquired of approximately $5,014,000.  The allocations for goodwill and intangible assets are approximately $5,836,000 and $315,000, respectively. The amount recorded as intangible assets is primarily for trade names that have indefinite lives. Electro Controls designs and assembles a range of electrical controls for the HVAC market, with sales primarily in the United Kingdom.
 
On January 5, 2005, we acquired 100% of the outstanding stock of HF Scientific, Inc. (HF) located in Fort Myers, Florida for approximately $7,260,000 in cash plus $800,000 in assumed debt.  The allocations for goodwill and intangible assets are approximately $4,167,000 and $2,660,000, respectively. The amount recorded as intangible assets is primarily for customer
 
18

 
relationships that have 15-year lives and trade names that have indefinite lives.  HF manufactures and distributes a line of instrumentation equipment, test kits and chemical reagents used for monitoring water quality in a variety of applications.
 
On January 4, 2005, we acquired substantially all of the assets of Sea Tech, Inc. (Sea Tech) located in Wilmington, North Carolina for approximately $10,100,000 in cash.  The allocations for goodwill and intangible assets are approximately $6,498,000 and $3,033,000, respectively. The amount recorded as intangible assets is primarily for customer relationships that have 15-year lives and trade names that have indefinite lives.  Sea Tech provides cost effective solutions for fluidic connection needs. Sea Tech offers a wide range of standard and custom quick connect fittings, valves and manifolds and pex tubing designed to address specific customer requirements.
 
On September 28, 2004, we completed the increase of our ownership in Watts Stern Rubinetti, S.r.l (Stern) from 51% to 85%. The price paid for this additional 34% was approximately $800,000. We have a call option to acquire the remaining 15% from the minority shareholders for approximately $400,000. The option became exercisable on January 1, 2005. We anticipate exercising this option in 2006.
 
On May 21, 2004, we acquired 100% of the outstanding stock of McCoy Enterprises, Inc., which we subsequently renamed Orion Enterprises, Inc. (Orion), located in Kansas City, Kansas, for approximately $27,900,000 in cash. Orion distributes its products under the brand names of Orion, Flo Safe and Laboratory Enterprises. The allocation to goodwill was approximately $18,100,000, and approximately $4,300,000 was allocated to intangible assets. The amount recorded as intangibles assets was primarily for trademarks that have indefinite lives. Orion’s product lines include a complete line of acid resistant waste disposal products, double containment piping systems, as well as a line of high purity pipes, fittings and faucets.
 
On April 16, 2004, we acquired 90% of the stock of TEAM Precision Pipework, Ltd. (TEAM), located in Ammanford, West Wales, United Kingdom for approximately $17,200,000, in cash subject to final adjustments, if any, as stipulated in the purchase and sale agreement. The allocation to goodwill was approximately $9,500,000, and approximately $9,500,000 was allocated to intangible assets. The amount recorded as intangible assets was primarily for the valuation of its customer base that is estimated to have a 12- year life. TEAM custom designs and manufactures manipulated pipe and hose tubing assemblies, which are utilized in the heating ventilation and air conditioning markets. TEAM is a supplier to major original equipment manufacturers of air conditioning systems and several of the major European automotive air conditioning manufacturers.
 
On March 29, 2004, we acquired the 40% equity interest in Taizhou Shida Plumbing Manufacturing Co., Ltd. (Shida), that had been held by the our former joint venture partner for approximately $3,000,000 in cash and installment payments totaling $3,500,000 in connection with a know-how transfer and non-compete agreement. As of December 31, 2004 we had paid an aggregate of $5,750,000 in cash and in on April 1, 2005 we made the final installment payment for $750,000. We now own 100% of Shida. Prior to the acquisition the joint venture declared a dividend of $1,250,000 and based on the 40% ownership, a $500,000 cash dividend was paid to our joint venture partner. The allocation to goodwill was $2,374,000, and $1,126,000 was allocated to intangible assets. The amount recorded as intangible assets was primarily for the non-compete agreement that has a 3-year life. We had made prior investments in 2003 and 2002 totaling $8,000,000 in cash for our initial 60% interest. Shida is a manufacturer of a variety of plumbing products sold both into the Chinese domestic market and export markets.
 
On January 5, 2004, we acquired substantially all of the assets of Flowmatic Systems, Inc. (Flowmatic), located in Dunnellon, Florida, for approximately $16,800,000 in cash. We contracted for a third-party valuation to allocate the purchase price consistent with the guidelines of FAS 141. The allocation to goodwill was approximately $5,300,000, and approximately $5,600,000 was allocated to intangible assets. The amount recorded as intangible assets was primarily for trademarks that have indefinite lives. Flowmatic designs and distributes a complete line of high quality reverse osmosis components and filtration equipment. Their product line includes stainless steel and plastic housings, filter cartridges, storage tanks, control valves, as well as complete reverse osmosis systems for residential and commercial applications.
 
The acquisitions above have been accounted for utilizing the purchase method of accounting.  We obtain third-party valuations to aid in the purchase price allocation process. At any point in time, some valuations and allocations may be preliminary, and subject to further adjustment The pro-forma results have not been displayed, as the results are not significant, either individually or aggregated, to our consolidated financial position or results of operations.
 
Divestures
 
In March 2005, we sold our minority interest in Jameco International, LLC (Jameco) to the majority owner for $250,000 in cash, completing the divestiture of our interest in Jameco.  In the fourth quarter of 2004, we recorded an impairment charge in discontinued operations to write-down the investment to estimated fair value.
 
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Results of Operations
 
Third Quarter Ended October 2, 2005 Compared to Third Quarter Ended September 26, 2004
 
Net Sales.   Our business is reported in three geographic segments: North America, Europe and China. Our net sales in each of these segments for each of the third quarters ended 2005 and 2004 were as follows:

 	 	Third Quarter Ended
October 2, 2005	 	Third Quarter Ended
September 26, 2004	 	 	 	% Change to Consolidated	 	
 	 	Net Sales	 	% Sales	 	Net Sales	 	% Sales	 	Change	 	Net Sales	 	
 	 	(Dollars in thousands)	 	
North America	 	$	160,029	 	68.7	%	$	140,403	 	66.8	%	$	19,626	 	9.3	%	
Europe	 	65,554	 	28.2	 	62,386	 	29.7	 	3,168	 	1.5	 	
China	 	7,146	 	3.1	 	7,401	 	3.5	 	(255	)	(.1	)	
Total	 	$	232,729	 	100	%	$	210,190	 	100	%	$	22,539	 	10.7	%	
 
The increase in net sales is attributable to the following:

 	 	 	 	 	 	 	 	 	 	Change
As a % of Consolidated Net Sales	 	Change
As a % of Segment Net Sales	 	
 	 	North
America	 	Europe	 	China	 	Total	 	North
America	 	Europe	 	China	 	Total	 	North
America	 	Europe	 	China	 	
 	 	(Dollars in thousands)	 	
Internal growth	 	$	11,757	 	$	495	 	$	(407	)	$	11,845	 	5.6	%	.2	%	(.2	)%	5.6	%	8.4	%	.8	%	(5.5	)%	
Foreign exchange	 	945	 	(876	)	152	 	221	 	.4	 	(.4	)	.1	 	.1	 	.7	 	(1.4	)	2.1	 	
Acquisitions	 	6,924	 	3,549	 	—	 	10,473	 	3.3	 	1.7	 	—	 	5.0	 	4.9	 	5.7	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	19,626	 	$	3,168	 	$	(255	)	$	22,539	 	9.3	%	1.5	%	(.1	) %	10.7	%	14.0	%	5.1	%	(3.4	) %	
 
Internal growth in North America net sales is due to increased price and unit sales in certain product lines into the wholesale market and increased unit sales in the DIY market. Our wholesale market in the third quarter of 2005, excluding sales from acquisitions, grew by 8.0% compared to the third quarter of 2004, primarily due to increased sales of backflow preventers, as well as in our plumbing and under-floor radiant heating product lines. Our sales into the North American DIY market in the third quarter of 2005 increased by 12.5% compared to the third quarter of 2004 primarily due to the new product introduction of FloodSafe TM connectors.
 
The increase in North America net sales from foreign exchange is due to the Canadian dollar appreciating against the U.S. dollar. We cannot predict whether the Canadian dollar will continue to appreciate against the U.S. dollar in future periods or whether future foreign exchange rate fluctuations will have a positive or negative impact on our net sales.
 
Acquired growth in net sales in North America is due to the inclusion of net sales of Savard, acquired on July 8, 2005, Alamo, acquired on June 20, 2005, HF, acquired on January 5, 2005, and Sea Tech, acquired on January 4, 2005.
 
Internal growth in Europe net sales was essentially flat primarily due to increased sales into the Eastern European wholesale market and increased market share gains in Germany, offset by decreased sales in the OEM market primarily in Spain and Switzerland.
 
Net sales decreased due to foreign exchange in Europe primarily from the depreciation of the euro against the U.S. dollar. We cannot predict whether the euro will continue to depreciate against the U.S. dollar in future periods or whether future foreign exchange rate fluctuations will have a positive or negative impact on our net sales.
 
Acquired growth in Europe net sales is due to the inclusion of the net sales of Microflex, acquired on July 5, 2005 and Electro Controls, acquired on May 11, 2005.
 
The decrease in external net sales in China is primarily due to decreased sales in the Chinese export market which is now handled by our U.S. subsidiaries, partially offset by increased sales into the Chinese domestic market. Our intersegment sales for the quarter ended October 2, 2005, for China were $13,677,000 compared to  $7,141,000 for the comparable quarter in 2004.
 
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Gross Profit.   Gross profit for the third quarter of 2005 increased $5,445,000, or 7.3%, compared to the third quarter of 2004. The increase in gross profit is attributable to the following:

 	 	(in thousands)	 	% Change	 	
 	 	 	 	 	 	
Internal growth	 	$	1,208	 	1.6	%	
Foreign exchange	 	218	 	.3	 	
Acquisitions	 	4,443	 	6.0	 	
Restructuring	 	(424	)	(.6	)	
Total	 	$	5,445	 	7.3	%	
 
The internal growth in gross profit is primarily due to the China segment, which increased internal gross profits by $1,294,000 primarily due to increased sourcing to our domestic facilities. Our gross profit in North America did not increase in relation to sales primarily due to decreased gross margins in the DIY market due to cost increases in raw materials which were not recovered by increased selling prices or other product cost reductions. The increase in gross profit from foreign exchange is primarily due to the appreciation of the Canadian dollar and the yuan against the U.S. dollar offset by the depreciation of the euro against the U.S. dollar.  The increase in gross profit from acquisitions is due to the inclusion of gross profit from Savard, Microflex, Alamo, Electro Controls, HF and Sea Tech.
 
The increase in gross profit is partially offset by increased manufacturing restructuring and other costs.  In the third quarter of 2005 we charged $991,000 to cost of sales as compared to $567,000 in the third quarter of 2004 for accelerated depreciation and other costs.
 
Selling, General and Administrative Expenses.   Selling, General and Administrative expenses, or SG&A expenses, for the third quarter of 2005 increased $5,430,000, or 10.5%, compared to the third quarter of 2004.  The increase in SG&A expenses is attributable to the following:

 	 	(in thousands)	 	% Change	 	
 	 	 	 	 	 	
Internal growth	 	$	2,795	 	5.4	%	
Foreign exchange	 	100	 	.2	 	
Acquisitions	 	2,308	 	4.5	 	
Restructuring	 	4	 	—	 	
Other	 	223	 	.4	 	
Total	 	$	5,430	 	10.5	%	
 
The internal increase in SG&A expenses is primarily due to increased variable selling expenses due to increased sales volumes primarily in North America and China, due diligence-related charges, and increased bad debt reserves, partially offset by decreased product liability expenses and decreased costs for work performed to comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (SOX).  The increase in SG&A expenses from foreign exchange is primarily due to the appreciation of the Canadian dollar and yuan against the U.S. dollar, offset by the depreciation of the euro against the U.S. dollar.  The increase in SG&A expenses from acquisitions is due to the inclusion of Savard, Microflex, Alamo, Electro Controls, HF and Sea Tech.   Other includes costs of $223,000 for an earn-out arrangement from a prior period acquisition that is being accounted for as compensation expense. This earn-out arrangement was completed on August 31, 2005.
 
Operating Income.   Operating income by geographic segment for each of the third quarters ended 2005 and 2004 were as follows:

 	 	
Third Quarter Ended	 	Change	 	% Change to
Consolidated Operating
Income	 	
		October 2,
2005	 	September 26,
2004						
 	 	(Dollars in thousands)	 	
 	 	 	 	 	 	 	 	 	 	
North America	 	$	17,829	 	$	18,565	 	$	(736	)	(3.2	)%	
Europe	 	7,854	 	8,023	 	(169	)	(.7	)	
China	 	1,433	 	1,277	 	156	 	.7	 	
Corporate	 	(4,211	)	(4,975	)	764	 	3.3	 	
Total	 	$	22,905	 	$	22,890	 	$	15	 	.1	%	
 
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The change in operating income is attributable to the following:

 	 	 	 	 	 	 	 	 	 	 	 	Change	 	Change	 	
 	 	 	 	 	 	 	 	 	 	 	 	As a% of Consolidated
Operating Income	 	As a% of Segment
Operating Income	 	
 	 	North
America	 	Europe	 	China	 	Corp.	 	Total	 	North
America	 	Europe	 	China	 	Corp.	 	Total	 	North
America	 	Europe	 	China	 	Corp.	 	
 	 	(Dollars in thousands)	 	
Internal growth	 	$	(1,675	)	$	(802	)	$	126	 	$	764	 	$	(1,587	)	(7.3	)%	(3.5	)%	.6	%	3.3	%	(6.9	)%	(9.0	)%	(10.0	)%	9.9	%	15.4	%	
Foreign exchange	 	199	 	(111	)	30	 	—	 	118	 	.9	 	(.5	)	.1	 	—	 	.5	 	1.1	 	(1.4	)	—	 	—	 	
Acquisitions	 	1,006	 	1,129	 	—	 	—	 	2,135	 	4.4	 	4.9	 	—	 	—	 	9.3	 	5.4	 	14.1	 	—	 	—	 	
Restructuring	 	(43	)	(385	)	—	 	—	 	(428	)	(.2	)	(1.6	)	—	 	—	 	(1.8	)	(.3	)	(4.8	)	—	 	—	 	
Other	 	(223	)	—	 	—	 	—	 	(223	)	(1.0	)	—	 	—	 	—	 	(1.0	)	(1.2	)	—	 	—	 	—	 	
Total	 	$	(736	)	$	(169	)	$	156	 	$	764	 	$	15	 	(3.2	)%	(.7	)%	.7	%	3.3	%	.1	%	(4.0	)%	(2.1	)%	9.9	%	15.4	%	
 
Internal profits lagged in North America primarily due to decreased gross profit and increased net SG&A expense. Compared to the comparable period last year, we experienced raw material cost increases in plastics purchases due to increases in oil costs and copper- contained material purchases, which have yet to be recovered through price increases or other product cost reductions. The spot rate for copper has increased approximately 37% since the third quarter of 2004.  In 2004, we experienced raw material cost increases for a majority of the commodities that we purchased, which we were able to recover by implementing price increases on some of our products.  In the third quarter of 2005, we recorded $610,000 for costs associated with our manufacturing restructuring plan compared to $567,000 for the same period in 2004. The increase in operating income from foreign exchange is primarily due to the appreciation of the Canadian dollar against the U.S. dollar. We cannot predict whether the Canadian dollar will continue to appreciate against the U.S. dollar in future periods or whether future foreign exchange rate fluctuations will have a positive or negative impact on our operating income. The acquired growth is due to the inclusion of operating income from Savard, Alamo, HF and Sea Tech.  Other represents costs accrued for an earn-out arrangement that is being accounted for as compensation expense.
 
Internal profits lagged in Europe primarily from inventory valuation adjustments and increased SG&A expense for due diligence-related charges.  In the third quarter of 2005, we recorded $385,000 of costs associated with our European manufacturing restructuring plan compared to no costs in 2004.  The decrease in operating income from foreign exchange is primarily due to the depreciation of the euro against the U.S. dollar. We cannot predict whether the euro will appreciate or depreciate against the U.S. dollar in future periods or whether future foreign exchange rate fluctuations will have a positive or negative impact on our operating income. The acquired growth in Europe is due to the inclusion of the operating income from Microflex and Electro Controls.
 
The increase in internal growth in China of $126,000 is primarily attributable to increased capacity utilization and low cost sourcing to our domestic facilities offset by increased SG&A expense primarily related to increased variable selling expenses due to increased sales volumes and increased bad debt reserves. The increase in operating income from foreign exchange is primarily due to the appreciation of the yuan against the U.S. dollar. We cannot predict whether the yuan will continue to appreciate against the U.S. dollar in future periods or whether future foreign exchange rate fluctuations will have a positive or negative impact on our operating income.
 
The increase in internal growth in Corporate of $764,000 is primarily attributable to decreased costs for work performed during the quarter to date to comply with SOX and reductions in legal and relocation expenses.
 
Interest Expense.   Interest expense decreased $49,000, or 1.8%, for the third quarter of 2005 compared to the third quarter of 2004.
 
Effective July 1, 2005, we entered into a three-year interest rate swap with a counterparty for a notional amount of €25,000,000, which is outstanding under our Revolving Credit Facility.  We swapped the variable rate from the Revolving Credit Facility, which is EURIBOR plus 0.6% for a fixed rate of 3.02%.
 
We had previously entered into an interest rate swap for a notional amount of €25,000,000 outstanding on our prior revolving credit facility. We swapped the variable rate from the revolving credit facility, which is three month EURIBOR plus 0.7%, for a fixed rate of 2.3%. The swap was terminated at June 30, 2005. The impact of the swap was immaterial to the overall interest expense.
 
Income Taxes.   Our effective tax rate for continuing operations increased to 35.5% in the third quarter of 2005, from 32.0% for the third quarter of 2004.  The increase is primarily due to the effect of multi-year refund claims relating to state tax credits that were realized in the third quarter of 2004. The amount realized in 2005 for these credits was significantly less. This increase is partially offset by a decrease in our European tax rate for the third quarter of 2005 compared to the third quarter of 2004 due to earnings mix in Europe.
 
Income From Continuing Operations.   Income from continuing operations for the third quarter of 2005 decreased $396,000, or 2.9%, to $13,439,000, or $0.41 per common share, from $13,835,000, or $0.42 per common share, for the third quarter of 2004, in each case, on a diluted basis.  Income from continuing operations for the third quarter of 2005 and 2004 include net costs incurred for our restructuring plan of $655,000, or ($0.02) per common share, and $349,000, or ($0.01) per common share, respectively.
 
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Loss From Discontinued Operations.   We recorded a charge net of tax to discontinued operations for the third quarter of 2005 of $71,000, or $0.00 per common share, and $130,000, or $0.00 per common share, for the third quarter of 2004, in each case, on a diluted basis. These charges are primarily attributable to legal fees associated with the James Jones litigation, as described in Part I, Item 1. “Business-Product Liability, Environmental and Other Litigation Matters” in our Annual Report on Form 10-K for the year ended December 31, 2004.
 
Nine Months Ended October 2, 2005 Compared to Nine Months Ended September 26, 2004
 
Net Sales.   Our business is reported in three geographic segments: North America, Europe and China. Our net sales in each of these segments for the nine months ended 2005 and 2004 were as follows:

 	 	Nine Months Ended
October 2, 2005	 	Nine Months Ended
September 26, 2004	 	 	 	% Change to
Consolidated	 	
 	 	Net Sales	 	% Sales	 	Net Sales	 	% Sales	 	Change	 	Net Sales	 	
 	 	(Dollars in thousands)	 	
North America	 	$	464,622	 	68.3	%	$	400,167	 	66.3	%	$	64,455	 	10.7	%	
Europe	 	195,624	 	28.8	 	183,400	 	30.4	 	12,224	 	2.0	 	
China	 	19,693	 	2.9	 	19,585	 	3.3	 	108	 	—	 	
Total	 	$	679,939	 	100	%	$	603,152	 	100	%	$	76,787	 	12.7	%	
 
The increase in net sales is attributable to the following:

 	 	 	 	 	 	 	 	 	 	Change
As a% of Consolidated Net Sales	 	Change
As a% of Segment Net Sales	 	
 	 	North
America	 	Europe	 	China	 	Total	 	North
America	 	Europe	 	China	 	Total	 	North
America	 	Europe	 	China	 	
 	 	(Dollars in thousands)	 	
Internal growth	 	$	42,676	 	$	1,302	 	$	(44	)	$	43,934	 	7.1	%	.2	%	—	%	7.3	%	10.7	%	.7	%	(.2	)%	
Foreign exchange	 	2,603	 	3,935	 	152	 	6,690	 	.4	 	.7	 	—	 	1.1	 	.6	 	2.2	 	.8	 	
Acquisitions	 	19,176	 	6,987	 	—	 	26,163	 	3.2	 	1.1	 	—	 	4.3	 	4.8	 	3.8	 	—	 	
Total	 	$	64,455	 	$	12,224	 	$	108	 	$	76,787	 	10.7	%	2.0	%	—	%	12.7	%	16.1	%	6.7	%	.6	%	
 
The internal growth in North America net sales is due to increased price and unit sales in certain product lines into the wholesale market and increased unit sales in the DIY market. Our wholesale market for the nine months ended 2005, excluding the sales from acquisitions, grew by 9.8% compared to the nine months ended 2004, primarily due to increased sales of backflow preventers, as well as in our plumbing and under-floor radiant heating product lines. Our sales into the North American DIY market in the nine months ended 2005 increased by 15.5% compared to the nine months ended 2004 primarily due to the new product introduction of FloodSafe TM connectors.
 
The increase in North America net sales from foreign exchange is due to the Canadian dollar appreciating against the U.S. dollar. We cannot predict whether the Canadian dollar will continue to appreciate against the U.S. dollar in future periods or whether future foreign exchange rate fluctuations will have a positive or negative impact on our net sales.
 
Acquired growth in net sales in North America is due to the inclusion of net sales of Savard, acquired on July 8, 2005, Alamo, acquired on June 20, 2005, HF, acquired on January 5, 2005, Sea Tech, acquired on January 4, 2005, and Orion, acquired on May 21, 2004.
 
Internal growth in Europe net sales results from increased sales into the wholesale market as a result of gaining market share, particularly in Germany.
 
The increase in Europe net sales from foreign exchange is primarily due to the appreciation of the euro against the U.S. dollar. We cannot predict whether the euro will appreciate or depreciate against the U.S. dollar in future periods or whether future foreign exchange rate fluctuations will have a positive or negative impact on our net sales.
 
Acquired growth in Europe net sales is due to the inclusion of the net sales of Microflex, which we acquired on July 5, 2005, Electro Controls, which we acquired on May 11, 2005 and TEAM, acquired on April 16, 2004.
 
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Gross Profit.   Gross profit for the nine months ended 2005 increased $23,467,000, or 10.9%, compared to the nine months ended 2004. The increase in gross profit is attributable to the following:

 	 	(in thousands)	 	% Change	 	
 	 	 	 	 	 	
Internal growth	 	$	8,636	 	4.0	%	
Foreign exchange	 	2,519	 	1.2	 	
Acquisitions	 	11,713	 	5.4	 	
Restructuring	 	599	 	.3	 	
Total	 	$	23,467	 	10.9	%	
 
The internal growth in gross profit is primarily due to the North American and China segments, which increased internal gross profits by $3,086,000 and $2,756,000, respectively. The increase in North America is primarily due to increased sales of products to the wholesale market.  The increase in gross profit from foreign exchange is primarily due to the appreciation of the euro and the Canadian dollar against the U.S. dollar.  The increase in gross profit from acquisitions is due to the inclusion of gross profit from Savard, Microflex, Alamo, Electro Controls, HF, Sea Tech, Orion and TEAM.
 
The increase in gross profit includes decreased manufacturing restructuring and other costs.  In the nine months ended 2005 we charged $1,705,000 to cost of sales as compared to $2,304,000 in the nine months ended 2004 for accelerated depreciation and other costs.
 
Selling, General and Administrative Expenses.   SG&A expenses for the nine months ended 2005 increased $22,426,000, or 15.2%, compared to the nine months ended 2004.  The increase in SG&A expenses is attributable to the following:

 	 	(in thousands)	 	% Change	 	
 	 	 	 	 	 	
Internal growth	 	$	11,047	 	7.5	%	
Foreign exchange	 	1,516	 	1.0	 	
Acquisitions	 	6,928	 	4.7	 	
Restructuring	 	462	 	.3	 	
Other	 	2,473	 	1.7	 	
Total	 	$	22,426	 	15.2	%	
 
The internal increase in SG&A expenses is primarily due to increased variable selling expenses due to increased sales volume primarily in North America and China, due diligence-related charges, and increased bad debt reserves, partially offset by decreased product liability expenses. The increase in SG&A expenses from foreign exchange is primarily due to the appreciation of the euro and Canadian dollar against the U.S. dollar.  The increase in SG&A expenses from acquisitions is due to the inclusion of Savard, Microflex, Alamo, Electro Controls, HF, Sea Tech, Orion and TEAM.  Other includes costs of $1,473,000 for an earn-out arrangement from a prior period acquisition that is being accounted for as compensation expense and $1,000,000 in reserve reductions recorded in the nine months ended 2004 related to a favorable ruling in a legal matter. This earn-out arrangement was completed on August 31, 2005.
 
Operating Income.   Operating income by geographic segment for each of the nine months ended 2005 and 2004 were as follows:

 	 	
Nine Months Ended	 	Change	 	% Change to
Consolidated
Operating
Income	 	
		October 2,
2005	 	September 26,
2004						
 	 	(Dollars in thousands)	 	
 	 	 	 	 	 	 	 	 	 	
North America	 	$	55,352	 	$	54,800	 	$	552	 	.8	%	
Europe	 	23,299	 	23,460	 	(161	)	(.2	)	
China	 	2,550	 	1,276	 	1,274	 	1.9	 	
Corporate	 	(12,785	)	(12,161	)	(624	)	(.9	)	
Total	 	$	68,416	 	$	67,375	 	$	1,041	 	1.6	%	
 
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The increase in operating income is attributable to the following:

 	 	 	 	 	 	 	 	 	 	 	 	Change	 	Change	 	
 	 	 	 	 	 	 	 	 	 	 	 	As a% of Consolidated
Operating Income	 	As a% of Segment
Operating Income	 	
 	 	North
America	 	Europe	 	China	 	Corp.	 	Total	 	North
America	 	Europe	 	China	 	Corp.	 	Total	 	North
America	 	Europe	 	China	 	Corp.	 	
 	 	(Dollars in thousands)	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Internal growth	 	$	(2,147	)	$	(1,884	)	$	1,244	 	$	376	 	$	(2,411	)	(3.2	)%	(2.8	)%	1.8	%	.6	%	(3.6	)%	(3.9	)%	(8.0	)%	97.5	%	3.1	%	
Foreign exchange	 	548	 	425	 	30	 	—	 	1,003	 	.8	 	.6	 	.1	 	—	 	1.5	 	1.0	 	1.8	 	2.3	 	—	 	
Acquisitions	 	2,580	 	2,205	 	—	 	—	 	4,785	 	3.8	 	3.3	 	—	 	—	 	7.1	 	4.7	 	9.4	 	—	 	—	 	
Restructuring	 	1,044	 	(907	)	—	 	—	 	137	 	1.6	 	(1.3	)	—	 	—	 	.3	 	1.9	 	(3.9	)	—	 	—	 	
Other	 	(1,473	)	—	 	—	 	(1,000	)	(2,473	)	(2.2	)	—	 	—	 	(1.5	)	(3.7	)	(2.7	)	—	 	—	 	(8.2	)	
Total	 	$	552	 	$	(161	)	$	1,274	 	$	(624	)	$	1,041	 	.8	%	(.2	)%	1.9	%	(.9	)%	1.6	%	1.0	%	(.7	)%	99.8	%	(5.1	)%	
 
Internal profits lagged in North America primarily due to increased net SG&A expense and lower gross profit due to decreased gross margins in the DIY market due to raw material cost increases.  Since the first quarter of 2005, we experienced raw material cost increases in plastics purchases due to increases in oil costs and in copper-contained metals purchases, which have yet to be recovered through price increases or other product cost reductions. The spot rate for copper has increased approximately 22% since December 31, 2004.  In 2004, we experienced raw material cost increases for a majority of the commodities that we purchased, which we were able to recover by implementing price increases on some of our products. In the nine months ended 2005, we recorded $1,260,000 for costs associated with our manufacturing restructuring plan compared to $2,304,000 for the same period in 2004. The acquired growth is due to the inclusion of operating income from Savard, Alamo, HF, Sea Tech and Orion.  Other represents costs accrued for an earn-out arrangement from a prior period acquisition. This earn-out arrangement was completed on August 31, 2005.
 
Internal profits lagged in Europe primarily due to increased sales to the wholesale market that generally have lower margins and increased SG&A expense. In the nine months ended 2005, we recorded $907,000 of costs associated with our European manufacturing restructuring plan compared to no costs in 2004.  The increase in operating income from foreign exchange is primarily due to the appreciation of the euro against the U.S. dollar. We cannot predict whether the euro will appreciate or depreciate against the U.S. dollar in future periods or whether future foreign exchange rate fluctuations will have a positive or negative impact on our operating income. The acquired growth in Europe is due to the inclusion of the operating income from Microflex, Electro Controls and TEAM.
 
The increase in internal growth in China of $1,244,000 is primarily attributable to increased capacity utilization and low cost sourcing to our domestic facilities offset by increased SG&A expense primarily related to increased variable selling expenses due to increased sales volumes and increased bad debt reserves.
 
The increase in internal operating income in Corporate of $376,000 is primarily attributable to reductions in relocation and audit expenses.  Other includes a reserve reduction in the first quarter of 2004 due to a favorable ruling in a legal matter.
 
Interest Expense.   Interest expense decreased $263,000, or 3.3%, in the nine months ended 2005 compared to the nine months ended 2004, primarily due to reduced debt levels.
 
Effective July 1, 2005, we entered into a three-year interest rate swap with a counterparty for a notional amount of €25,000,000, which is outstanding under our Revolving Credit Facility.  We swapped the variable rate from the Revolving Credit Facility, which is EURIBOR plus 0.6% for a fixed rate of 3.02%.
 
We had previously entered into an interest rate swap for a notional amount of €25,000,000 outstanding on our prior revolving credit facility. We swapped the variable rate from the revolving credit facility, which is three month EURIBOR plus 0.7%, for a fixed rate of 2.3%. The swap was terminated at June 30, 2005. The impact of the swap was immaterial to the overall interest expense.
 
Income Taxes.   Our effective tax rate for continuing operations increased to 35.7% in the nine months ended 2005, from 35.0% in the nine months ended 2004.  The increase is primarily due to the effect of multi-year refund claims relating to state tax credits that were realized in 2004. The amount realized in 2005 for these credits was significantly less. This increase was partially offset by a decrease in our European tax rate for the nine months of 2005 compared to the nine months of 2004 due to earnings mix in Europe.
 
Income From Continuing Operations.   Income from continuing operations in the nine months ended 2005 increased $935,000, or 2.4%, to $39,824,000, or $1.21 per common share, from $38,889,000, or $1.19 per common share, in the nine months ended 2004, in each case, on a diluted basis. The appreciation of the euro, Canadian dollar and yuan against the U.S. dollar resulted in a positive impact on income from continuing operations of $0.02 per share in the nine months ended 2005 compared to the comparable period last year. We cannot predict whether the euro, Canadian dollar or yuan will appreciate or depreciate against the U.S. dollar in future periods or whether future foreign exchange rate fluctuations will have a positive or negative impact on our net income.  Income from continuing operations in the nine months ended 2005 and 2004 include net costs incurred for our restructuring plan of $1,392,000, or ($0.04) per common share, and $1,417,000, or ($0.04) per common share, respectively.
 
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Loss From Discontinued Operations.   We recorded a charge net of tax to discontinued operations in the nine months ended 2005 of $185,000, or $0.01 per common share, and $230,000, or $0.01 per common share, in the nine months ended 2004, in each case, on a diluted basis. These charges are primarily attributable to legal fees associated with the James Jones litigation, as described in Part I, Item 1. “Business-Product Liability, Environmental and Other Litigation Matters” in our Annual Report on Form 10-K for the year ended December 31, 2004.
 
Liquidity and Capital Resources
 
We generated $20,019,000 of cash from continuing operations in the nine months ended 2005. We experienced an increase in accounts receivable in North America and Europe totaling approximately $24,300,000. This increase is primarily due to increased sales volume.  Additionally, we experienced an increase in inventories in North America, Europe and China totaling approximately $21,300,000. A portion of the increase in inventory is due to the increased costs of raw materials. The increase in inventory in Europe is primarily due to increased finished goods to support the delivery requirements of OEM customers in Europe.  North American and China inventories increased due to the extended supply chain from China, expected seasonal upswing in product demand and for new product introductions.
 
We used $34,153,000 of net cash from investing activities in the nine months ended 2005 due to the acquisitions of Savard, Microflex, Alamo, Electro Controls, HF and Sea Tech partially offset by the sale of investment securities. We also invested  $13,816,000 in capital equipment.  Capital expenditures were primarily for manufacturing machinery and equipment as part of our ongoing commitment to improve our manufacturing capabilities. We expect to invest approximately $20,000,000 in capital equipment in 2005.
 
We generated $6,306,000 of net cash from financing activities in the nine months ended 2005 primarily from increased borrowings in Europe and increased option proceeds, offset by higher dividend payments and payments of debt.
 
Our revolving credit facility with a syndicate of banks (the Revolving Credit Facility) provides for multi-currency unsecured borrowings and stand-by letters of credit of up to $300,000,000 and matures in September 2009. The Revolving Credit Facility is being used to support our acquisition program, working capital requirements and for general corporate purposes.
 
Outstanding indebtedness under the Revolving Credit Facility bears interest at a rate determined by the type of loan plus an applicable margin determined by the Company’s debt rating, depending on the applicable base rate and our bond rating. The average interest rate for borrowings under the Revolving Credit Facility was approximately 2.7% for the quarter ended October 2, 2005. We had approximately $209,061,000 of unused and potentially available revolving credit at October 2, 2005. At October 2, 2005, we had $58,297,000 of debt outstanding for euro based borrowings on our Revolving Credit Facility. Additionally, we had $32,642,000 outstanding for stand-by letters of credit on our Revolving Credit Facility at October 2, 2005. 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. At October 2, 2005, we were in compliance with all covenants related to the Revolving Credit Facility.
 
Effective July 1, 2005, we entered into a three-year interest rate swap with a counter party for a notional amount of €25,000,000, which is outstanding under our Revolving Credit Facility.  We swapped the variable rate from the Revolving Credit Facility, which is EURIBOR plus 0.6% for a fixed rate of 3.02%.  We have designated the swap as a hedge using the cash flow method.  The swap is hedging the cash flows associated with interest payments on the first €25,000,000 of our Revolving Credit Facility.  We will mark to market the changes in fair value of the swap through other comprehensive income.  Any ineffectiveness will be recorded in income.  At October 2, 2005, the fair value of the swap was immaterial.
 
We previously entered into an interest rate swap for a notional amount of €25,000,000 outstanding under our revolving credit facility that expired on June 30, 2005. The term of the swap was two years. We swapped the variable rate from the revolving credit facility that is three month EURIBOR plus 0.7% for a fixed rate of 2.3%. We designated the swap as a hedging instrument using the cash flow method. The swap hedged the cash flows associated with interest payments on the first €25,000,000 of our Revolving Credit Facility. We marked to market the changes in value of the swap through other comprehensive income. Any ineffectiveness was recorded in income.
 
We used $893,000 of net cash from discontinued operations. During the nine months ended 2005, we received approximately $510,000 in cash as an indemnification payment for settlement costs we incurred in the James Jones case. This cash has been recorded as a liability at October 2, 2005 because of the possibility that we might have to reimburse the insurance company if it is ultimately successful with a future appeal. We also received approximately $2,100,000 in cash for reimbursement of defense costs related to the James Jones case. During the nine months ended 2005, we paid approximately $2,363,000 for defense costs, $550,000 for legal costs and approximately $1,020,000 for indemnity costs we incurred in the James Jones case.
 
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Working capital (defined as current assets less current liabilities) as of October 2, 2005 was $302,602,000 compared to $300,506,000 as of December 31, 2004. This increase is primarily due to an increase in inventories and accounts receivable offset by a reduction in investment securities. The ratio of current assets to current liabilities was 2.5 to 1 as of October 2, 2005 and as of December 31, 2004. Cash and cash equivalents were $56,876,000 as of October 2, 2005 compared to $65,913,000 as of December 31, 2004.  This decrease in cash is due to increased working capital requirements and capital expenditures, as well as cash paid for acquisitions, offset by the sale of investment securities.
 
In May 2005, we filed a universal shelf registration statement on Form S-3 with the Securities and Exchange Commission, pursuant to which we registered $300,000,000 of an indeterminate amount of debt and/or equity securities.  Funds from any offerings will be used to finance acquisitions and working capital, repay or refinance debt and for other general corporate purposes.
 
We anticipate that available funds from current operations, existing cash and other sources of liquidity will be sufficient to meet current operating requirements and anticipated capital expenditures for at least the next 12 months. However, we may have to consider external sources of financing for any large future acquisitions.
 
Our long-term contractual obligations as of October 2, 2005 are presented in the following table:

 	 	Payments Due by Period	 	
Contractual Obligations	 	Total	 	Less than
1 year	 	1-3 years	 	3-5 years	 	More than
5 years	 	
 	 	(in thousands)	 	
Long-term debt obligations, including current maturities (a)	 	$	191,124	 	$	6,042	 	$	1,142	 	$	58,762	 	$	125,178	 	
Operating lease obligations	 	19,170	 	1,013	 	6,265	 	4,556	 	7,336	 	
Capital lease obligations (a)	 	803	 	141	 	608	 	54	 	—	 	
Earn-out payment (b)	 	7,100	 	7,100	 	—	 	—	 	—	 	
Pension contributions	 	11,030	 	3,693	 	175	 	201	 	6,961	 	
Other (c)	 	19,025	 	16,033	 	1,591	 	1,078	 	323	 	
Total	 	$	248,252	 	$	34,022	 	$	9,781	 	$	64,651	 	$	139,798	 	

(a)    as recognized in the consolidated balance sheet
(b)    includes $7,100,000 recognized in the consolidated balance sheet
(c)    includes acquisitions, commodity and capital expenditure commitments at October 2, 2005
 
We have been verbally notified that the local Italian government has selected us as the potential purchaser of a building located in northern Italy. The verbal approval by the local government commits us to the transaction.  We currently expect to consummate the transaction during 2006.  However, we continue to examine alternative financing options, including leasing the building.  Should we purchase the building, we will spend approximately $15,600,000 in 2006.  In a related transaction, the local government has committed to purchasing one of our facilities in Italy for approximately $9,250,000. We expect to record a gain on the sale of this facility of approximately $7,300,000 in 2006.
 
We maintain letters of credit that guarantee our performance or payment to third parties in accordance with specified terms and conditions. Amounts outstanding were approximately $48,302,000 as of October 2, 2005 and $42,570,000 as of December 31, 2004. Our letters of credit are primarily associated with insurance coverage and to a lesser extent foreign purchases and generally expire within one year of issuance. The increase is primarily associated with increased foreign purchases. These instruments may exist or expire without being drawn down, therefore they do not necessarily represent future cash flow obligations.
 
We own a 20% interest in www.plumbworld.co.uk Limited (Plumbworld), a variable interest entity. Plumbworld is primarily an e-business that sells bathroom and sanitary appliances, as well as plumbing and heating products, tools and plumbing consumables. Its annualized sales are approximately $11,000,000. We have a nominal investment of approximately $500 in Plumbworld and maintain a loan receivable in the amount of approximately $806,000 with Plumbworld. We have entered in to an agreement with the majority shareholders of Plumbworld to exchange our 20% ownership interest for full receipt of our loan receivable. We expect to receive installment payments through September 2006, at which time we will relinquish our shares in Plumbworld. We continue to account for our investment in Plumbworld using the equity method.
 
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Application of Critical Accounting Policies and Key Estimates
 
The preparation of our consolidated financial statements in accordance with U.S. GAAP requires management to make judgments, assumptions and estimates that affect the amounts reported. A critical accounting estimate is an assumption about highly uncertain matters and could have a material effect on the consolidated financial statements if another, also reasonable, amount were used, or, a change in the estimate is reasonably likely from period to period. We base our assumptions on historical experience and on other estimates that we believe are reasonable under the circumstances. Actual results could differ significantly from these estimates. There were no changes in accounting policies or significant changes in accounting estimates during the nine months ended October 2, 2005.
 
We periodically discuss the development, selection and disclosure of the estimates with the Audit Committee. Management believes the following critical accounting policies reflect its more significant estimates and assumptions.
 
Revenue recognition
 
We recognize revenue when all of the following criteria are met: (1) we have entered into a binding agreement, (2) the product has shipped and title has passed, (3) the sales price to the customer is fixed or is determinable and (4) collectibility is reasonably assured. We recognize revenue based upon a determination that all criteria for revenue recognition have been met, which, based on the majority of our shipping terms, is considered to have occurred upon shipment of the finished product. Some shipping terms require the goods to be received by the customer before title passes. In those instances, revenues are not recognized until the customer has received the goods. We record estimated reductions to revenue for customer returns and allowances and for customer programs. Provisions for returns and allowances are made at the time of sale, derived from historical trends and form a portion of the allowance for doubtful accounts. Customer programs, which are primarily annual volume incentive plans, allow customers to earn credit for attaining agreed upon purchase targets from us. We record customer programs as an adjustment to net sales.
 
Allowance for doubtful accounts
 
The allowance for doubtful accounts is established to represent our best estimate of the net realizable value of the outstanding accounts receivable. The development of our allowance for doubtful accounts varies by region but in general is based on a review of past due amounts, historical write-off experience, as well as aging trends affecting specific accounts and general operational factors affecting all accounts. In North America, management specifically analyzes individual accounts receivable and establishes specific reserves against financially troubled customers. In addition, factors are developed utilizing historical trends in bad debts, returns and allowances. The ratio of these factors to sales on a rolling twelve-month basis is applied to total outstanding receivables (net of accounts specifically identified) to establish a reserve. In Europe, management develops their bad debt allowance through an aging analysis of all their accounts, with analysis on the aging of specific delinquent accounts. In China, where payment terms are generally extended, we reserve all accounts receivable in excess of one year from the invoice date.
 
We uniformly consider current economic trends and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. We also aggressively monitor the credit worthiness of our largest customers, and periodically review customer credit limits to reduce risk. If circumstances relating to specific customers change or unanticipated changes occur in the general business environment, our estimates of the recoverability of receivables could be further adjusted.
 
Inventory valuation
 
Inventories are stated at the lower of cost or market with costs generally determined on a first-in first-out basis. We utilize both specific product identification and historical product demand as the basis for determining our excess or obsolete inventory reserve. We identify all inventories that exceed a range of one to three years in sales. This is determined by comparing the current inventory balance against unit sales for the trailing twelve months. New products added to inventory within the past twelve months are excluded from this analysis. A portion of our products contain recoverable materials, therefore the excess and obsolete reserve is established net of any recoverable amounts. Changes in market conditions, lower than expected customer demand or changes in technology or features could result in additional obsolete inventory that is not saleable and could require additional inventory reserve provisions.
 
In certain countries, additional inventory reserves are maintained for potential losses experienced in the manufacturing process. The reserve is established based on the prior year’s inventory losses adjusted for any change in the gross inventory balance.
 
Goodwill and other intangibles
 
We adopted Financial Accounting Standards Board Statement No. 142 “Goodwill and Other Intangible Assets” (FAS 142) on January 1, 2002, and as a result we no longer amortize goodwill. Goodwill and intangible assets with indefinite lives are tested annually for impairment in accordance with the provisions of FAS 142. We use judgment in assessing whether assets may have become impaired between annual impairment tests.  We perform our annual test for goodwill impairment as of the last day of our fiscal October, which for 2005 will be as of October 30.
 
Intangible assets such as purchased technology are generally recorded in connection with a business acquisition. Generally the value
 
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assigned to intangible assets is determined by an independent valuation firm based on estimates and judgments regarding expectations of the success and life cycle of products and technology acquired.
 
It has been three years since adoption, and for all years our valuations have been greater than the carrying value of our goodwill and intangibles. While we believe that our estimates of future cash flows are reasonable, different assumptions regarding such factors as future sales volume, selling price changes, material cost changes, cost savings programs and capital expenditures could significantly affect our valuations. Other changes that may affect our valuations include, but are not limited to, product acceptances and regulatory approval. If actual product acceptance differs significantly from the estimates, we may be required to record an impairment charge to write down the assets to their realizable value. A severe decline in market value could result in an unexpected impairment charge to goodwill, which could have a material impact on the results of operations and financial position.
 
Product liability and workers compensation costs
 
Because of retention requirements associated with our insurance policies, we are generally self-insured for potential product liability claims and for workers compensation costs associated with workplace accidents. For product liability cases in the U.S., management estimates expected settlement costs by utilizing stop loss reports provided by our third-party administrators as well as developing internal historical trend factors based on our specific claims experience. Management employs internal trend factors to determine our product liability reserve because we believe they more accurately reflect final expected settlement costs. In other countries, we maintain insurance coverage with relatively high deductible payments, as product liability claims tend to be smaller than those experienced in the U.S. Changes in the nature of claims or the actual settlement amounts could affect the adequacy of this estimate and require changes to the provisions.
 
Workers compensation liabilities in the U.S. are recognized for claims incurred (including claims incurred but not reported) and for changes in the status of individual case reserves. At the time a workers’ compensation claim is filed, a liability is estimated to settle the claim. The liability for workers’ compensation claims is determined based on management’s estimates of the nature and severity of the claims and based on analysis provided by third party administrators and by various state statutes and reserve requirements. We have developed our own trend factors based on our specific claims experience. In other countries where workers compensation costs are applicable, we maintain insurance coverage with limited deductible payments. Because the liability is an estimate, the ultimate liability may be more or less than reported.
 
We maintain excess liability insurance with outside insurance carriers to minimize our risks related to catastrophic claims in excess of all self-insured positions. Any material change in the aforementioned factors could have an adverse impact on our operating results.
 
Legal contingencies
 
We are a defendant in numerous legal matters including those involving environmental law and product liability as discussed further in Note 15 of Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2004. As required by Financial Accounting Standards Board Statement No. 5 “Accounting for Contingencies” (FAS 5), we determine whether an estimated loss from a loss contingency should be accrued by assessing whether a loss is deemed probable and the loss amount can be reasonably estimated, net of any applicable insurance proceeds. Estimates of potential outcomes of these contingencies are developed in consultation with outside counsel. While this assessment is based upon all available information, litigation is inherently uncertain and the actual liability to fully resolve this litigation cannot be predicted with any assurance of accuracy. Final settlement of these matters could possibly result in significant effects on our results of operations, cash flows and financial position.
 
Pension benefits
 
We account for our pension plans in accordance with Financial Accounting Standards Board Statement No. 87 “Employers Accounting for Pensions” (FAS 87). In applying FAS 87, assumptions are made regarding the valuation of benefit obligations and the performance of plan assets. The primary assumptions are as follows:
 
•        Weighted average discount rate—this rate is used to estimate the current value of future benefits. This rate is adjusted based on movement in long-term interest rates.
 
•        Expected long-term rate of return on assets—this rate is used to estimate future growth in investments and investment earnings. The expected return is based upon a combination of historical market performance and anticipated future returns for a portfolio reflecting the mix of equity, debt and other investments indicative of our plan assets.
 
•        Rates of increase in compensation levels—this rate is used to estimate projected annual pay increases, which are used to determine the wage base used to project employees’ pension benefits at retirement.
 
We determine these assumptions based on consultation with outside actuaries and investment advisors. Any variance in the above assumptions could have a significant impact on future recognized pension costs, assets and liabilities.
 
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Income taxes
 
We estimate and use our expected annual effective income tax rates to accrue income taxes. Effective tax rates are determined based on budgeted earnings before taxes including our best estimate of permanent items that will impact the effective rate for the year. Management periodically reviews these rates with outside tax advisors and changes are made if material discrepancies from expectations are identified.
 
We recognize deferred taxes for the expected future consequences of events that have been reflected in the consolidated financial statements in accordance with the rules of Financial Accounting Standards Board Statement No. 109 “Accounting for Income Taxes” (FAS 109). Under FAS 109, deferred tax assets and liabilities are determined based on differences between the book values and tax bases of particular assets and liabilities, using tax rates in effect for the years in which the differences are expected to reverse. A valuation allowance is provided to offset any net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. We consider estimated future taxable income and ongoing prudent tax planning strategies in assessing the need for a valuation allowance.
 
Certain Factors Affecting Future Results
 
This report includes statements which are not historical facts and are considered forward looking within the meaning of the Private Securities Litigation Reform Act of 1995.  These forward-looking statements reflect Watts Water Technologies, Inc.’s current views about future results of operations and other forward-looking information.  In some cases you can identify these statements by forward- looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “should,” “will” and “would” or similar words. You should not rely on forward-looking statements because our actual results may differ materially from those indicated by these forward-looking statements as a result of a number of important factors.  These factors include, but are not limited to, the following:  shortages in and pricing of raw materials and supplies including recent cost increases by suppliers of raw materials and our ability to pass these costs on to customers, loss of market share through competition, introduction of competing products by other companies, pressure on prices from competitors, suppliers, and/or customers, costs associated with efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002, the identification and disclosure of material weaknesses in our internal controls over financial reporting, failure to expand our markets through acquisitions, failure or delay in developing new products, lack of acceptance of new products, failure to manufacture products that meet required performance and safety standards, foreign exchange rate fluctuations, cyclicality of industries, such as plumbing and heating wholesalers and home improvement retailers, in which the Company markets certain of its products, economic factors, such as the levels of housing starts and remodeling, affecting the markets where the Company’s products are sold, manufactured, or marketed, environmental compliance costs, product liability risks, the results and timing of the Company’s manufacturing restructuring plan, changes in the status of current litigation, including the James Jones case, and other risks and uncertainties discussed under the heading “Certain Factors Affecting Future Results” in the Watts Water Technologies, Inc. Annual Report on Form 10-K for the year ended December 31, 2004 filed with the Securities Exchange Commission and other reports Watts files from time to time with the Securities and Exchange Commission.
 
 Item 3.  Quantitative and Qualitative Disclosures about Market Risk
 
We use derivative financial instruments primarily to reduce exposure to adverse fluctuations in foreign exchange rates, interest rates and costs of certain raw materials used in the manufacturing process. We do not enter into derivative financial instruments for trading purposes. As a matter of policy, all derivative positions are used to reduce risk by hedging underlying economic exposure. The derivatives we use are instruments with liquid markets.
 
Our consolidated earnings, which are reported in United States dollars are subject to translation risks due to changes in foreign currency exchange rates. This risk is concentrated in the exchange rate between the U.S. dollar and the euro; the U.S. dollar and the Canadian dollar; and the U.S. dollar and the Chinese yuan.
 
Our foreign subsidiaries transact most business, including certain intercompany transactions, in foreign currencies. Such transactions are principally purchases or sales of materials and are denominated in European currencies, the yuan, or the U.S. or Canadian dollar. We use foreign currency forward exchange contracts to manage the risk related to intercompany purchases that occur during the course of a year and certain open foreign currency denominated commitments to sell products to third parties. For the nine months ended October 2, 2005, the amount recorded in other comprehensive income for the change in the fair value of such contracts in our Canadian operation was immaterial.
 
We have historically had a very low exposure on the cost of our debt to changes in interest rates. Interest rate swaps are used to mitigate the impact of interest rate fluctuations on certain variable rate debt instruments and reduce interest expense on certain fixed rate instruments. Information about our long-term debt including principal amounts and related interest rates appears in Note 11 of Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2004.
 
We purchase significant amounts of bronze ingot, brass rod, cast iron, steel and plastic, which are utilized in manufacturing our many product lines. Our operating results can be adversely affected by changes in commodity prices if we are unable to pass on related price increases to our customers. We manage this risk by monitoring related market prices, working with our suppliers to achieve the
 
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maximum level of stability in their costs and related pricing, seeking alternative supply sources when necessary and passing increases in commodity costs to our customers, to the maximum extent possible, when they occur. Additionally, on a limited basis, we use commodity futures contracts to manage this risk, but we did not in the nine months ended October 2, 2005.
 
 Item 4.   Controls and Procedures
 
As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as of the end of the period covered by this report, we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the disclosure controls and procedures.  In designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating and implementing possible controls and procedures.  The effectiveness of our disclosure controls and procedures is necessarily limited by the staff and other resources available to us and, although we have designed our disclosure controls and procedures to address the geographic diversity of our operations, this diversity inherently may limit the effectiveness of those controls and procedures.  Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective, in that they provide reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.  There was no change in our internal control over financial reporting that occurred during the quarter covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.  In connection with these rules, we will continue to review and document our disclosure controls and procedures, including our internal controls and procedures for financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.
 
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 Part II. OTHER INFORMATION
 
 Item l.    Legal Proceedings
 
As disclosed in Part I, Item 1, “Product Liability, Environmental and Other Litigation Matters” of our Annual Report on Form 10-K for the year ended December 31, 2004, we are a party to litigation described as the James Jones Litigation and we are also engaged in certain environmental remediation.
 
In the James Jones Litigation, on June 22, 2005, the California Superior Court dismissed the claims of the Relator on behalf of the remaining Phase II cities (Contra Costa, Corona, Santa Cruz and Vallejo) and ruled that the Relator and these cities were obliged to show that the cities had received out of spec parts which were related to specific invoices, and that this showing had not been made.  Although each city’s claim is unique, this ruling is significant for the claims of the remaining cities, and the Relator has appealed.  Litigation is inherently uncertain, and we are unable to predict the outcome of this appeal.
 
During the quarter ended October 2, 2005, we learned that we may be a potentially responsible party (PRP) for the clean-up of the Philips Services Corporation Site in Rock Hill, South Carolina.  Common counsel for the PRP group has invited us to become part of the PRP group.  A remedial investigation/feasibility study has yet to be completed, the number of PRPs and our participation in a PRP group has yet to be determined and we are unable to determine a loss or range of loss at the present time.
 
 Item 6.   Exhibits
 
See the Exhibit Index immediately preceding the exhibits for a list of exhibits filed as part of this Quarterly Report on Form 10-Q and such Exhibit Index is incorporated herein by reference.
 
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 SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 	 	WATTS WATER TECHNOLOGIES, INC.	
 	 	 	
Date:	November 7, 2005	 	 	By:	/s/ Patrick S. O’Keefe	 	
 	 	 	 	Patrick S. O’Keefe	
 	 	 	 	Chief Executive Officer	
 	 	 	 	 	
Date:	November 7, 2005	 	 	By:	/s/ William C. McCartney	 	
 	 	 	 	William C. McCartney	
 	 	 	 	Chief Financial Officer and Treasurer	

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 EXHIBIT INDEX
 
Listed and indexed below are all Exhibits filed as part of this report.

Exhibit No.	 	Description	
 	 	 	
3.1	 	 	Restated Certificate of Incorporation, as amended (1)	
 	 	 	 	
3.2	 	 	Amended and Restated By-Laws, as amended (2)	
 	 	 	 	
10	 	 	Form of Indemnification Agreement between the Registrant and certain directors and officers of the Registrant	
 	 	 	 	
11	 	 	Statement Regarding Computation of Earnings per Common Share (3)	
 	 	 	 	
31.1	 	 	Certification of Principal Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.	
 	 	 	 	
31.2	 	 	Certification of Principal Financial Officer pursuant Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.	
 	 	 	 	
32.1	 	 	Certification of Principal Executive Officer pursuant to 18 U.S.C. 1350.	
 	 	 	 	
32.2	 	 	Certification of Principal Financial Officer pursuant to 18 U.S.C. 1350.	

(1)                                   Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q (No. 001-11499) for the quarter ended July 3, 2005.
 
(2)            Incorporated by reference to the Registrant’s Registration Statement on Form S-3 (No. 333-105989) filed with the Securities and Exchange Commission on June 10, 2003.
 
(3)            Incorporated by reference to Note 6 to the Notes to Consolidated Financial Statements included in this Report.
 
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Exhibit 10
 
INDEMNIFICATION AGREEMENT
 
This Agreement made and entered into this        day of                                , (the “Agreement”), by and between Watts Water Technologies, Inc., a Delaware corporation (the “Company,” which term shall include, where appropriate, any Entity (as hereinafter defined) controlled directly or indirectly by the Company) and                     (the “Indemnitee”):
 
WHEREAS, it is essential to the Company that it be able to retain and attract as directors and officers the most capable persons available;
 
WHEREAS, increased corporate litigation has subjected directors and officers to litigation risks and expenses, and the limitations on the availability of directors and officers liability insurance have made it increasingly difficult for the Company to attract and retain such persons;
 
WHEREAS, the Company’s Certificate of Incorporation and By-laws (the “Certificate of Incorporation” and “By-laws,” respectively) require it to indemnify its directors and officers to the fullest extent permitted by law and permit it to make other indemnification arrangements and agreements;
 
WHEREAS, the Company desires to provide Indemnitee with specific contractual assurance of Indemnitee’s rights to full indemnification against litigation risks and expenses (regardless, among other things, of any amendment to or revocation of the Certificate of Incorporation or By-laws or any change in the ownership of the Company or the composition of its Board of Directors);
 
WHEREAS, the Company intends that this Agreement provide Indemnitee with greater protection than that which is provided by the Company’s Certificate of Incorporation and By-laws; and
 
WHEREAS, Indemnitee is relying upon the rights afforded under this Agreement in continuing as a director or officer of the Company.
 
NOW, THEREFORE, in consideration of the promises and the covenants contained herein, the Company and Indemnitee do hereby covenant and agree as follows:
 
1.              Definitions .
 
(a)            “Corporate Status” describes the status of a person who is serving or has served (i) as a director or officer of the Company, (ii) in any capacity with respect to any employee benefit plan of the Company, or (iii) as a director, partner, trustee, officer, employee, or agent of any other Entity at the request of the Company.  For purposes of subsection (iii) of this Section 1(a), if Indemnitee is serving or has served as a director, partner, trustee, officer, employee or agent of a

 
Subsidiary, Indemnitee shall be deemed to be serving at the request of the Company.
 
(b)            “Entity” shall mean any corporation, partnership, limited liability company, joint venture, trust, foundation, association, organization or other legal entity.
 
(c)            “Expenses” shall mean all fees, costs and expenses incurred by Indemnitee in connection with any Proceeding (as defined below), including, without limitation, attorneys’ fees, disbursements and retainers (including, without limitation, any such fees, disbursements and retainers incurred by Indemnitee pursuant to Sections 10 and 11(c) of this Agreement), fees and disbursements of expert witnesses, private investigators and professional advisors (including, without limitation, accountants and investment bankers), court costs, transcript costs, fees of experts, travel expenses, duplicating, printing and binding costs, telephone and fax transmission charges, postage, delivery services, secretarial services, and other disbursements and expenses.
 
(d)            “Indemnifiable Expenses,” “Indemnifiable Liabilities” and “Indemnifiable Amounts” shall have the meanings ascribed to those terms in Section 3(a) below.
 
(e)            “Liabilities” shall mean judgments, damages, liabilities, losses, penalties, excise taxes, fines and amounts paid in settlement.
 
(f)             “Proceeding” shall mean any threatened, pending or completed claim, action, suit, arbitration, alternate dispute resolution process, investigation, administrative hearing, appeal, or any other proceeding, whether civil, criminal, administrative, arbitrative or investigative, whether formal or informal, including a proceeding initiated by Indemnitee pursuant to Section 10 of this Agreement to enforce Indemnitee’s rights hereunder.
 
(g)            “Subsidiary” shall mean any corporation, partnership, limited liability company, joint venture, trust or other Entity of which the Company owns (either directly or through or together with another Subsidiary of the Company) either (i) a general partner, managing member or other similar interest or (ii) (A) 50% or more of the voting power of the voting capital equity interests of such corporation, partnership, limited liability company, joint venture or other Entity, or (B) 50% or more of the outstanding voting capital stock or other voting equity interests of such corporation, partnership, limited liability company, joint venture or other Entity.

 
2.              Services of Indemnitee .  In consideration of the Company’s covenants and commitments hereunder, Indemnitee agrees to serve or continue to serve as a director and/or officer of the Company.  However, this Agreement shall not impose any obligation on Indemnitee or the Company to continue Indemnitee’s service to the Company beyond any period otherwise required by law or by other agreements or commitments of the parties, if any.
 
3.              Agreement to Indemnify .  The Company agrees to indemnify Indemnitee as follows:
 
(a)            Proceedings Other Than By or In the Right of the Company .  Subject to the exceptions contained in Section 4(a) below, if Indemnitee was or is a party or is threatened to be made a party to any Proceeding (other than an action by or in the right of the Company) by reason of Indemnitee’s Corporate Status, Indemnitee shall be indemnified by the Company against all Expenses and Liabilities incurred or paid by Indemnitee in connection with such Proceeding (referred to herein as “Indemnifiable Expenses” and “Indemnifiable Liabilities,” respectively, and collectively as “Indemnifiable Amounts”).
 
(b)            Proceedings By or In the Right of the Company .  Subject to the exceptions contained in Section 4(b) below, if Indemnitee was or is a party or is threatened to be made a party to any Proceeding by or in the right of the Company by reason of Indemnitee’s Corporate Status, Indemnitee shall be indemnified by the Company against all Indemnifiable Expenses.
 
(c)            Conclusive Presumption Regarding Standard of Care .  In making any determination required to be made under Delaware law with respect to entitlement to indemnification hereunder, the person, persons or entity making such determination shall presume that Indemnitee is entitled to indemnification under this Agreement if Indemnitee submitted a request therefor in accordance with Section 5 of this Agreement, and the Company shall have the burden of proof to overcome that presumption in connection with the making by any person, persons or entity of any determination contrary to that presumption.
 
4.              Exceptions to Indemnification .  Indemnitee shall be entitled to indemnification under Sections 3(a) and 3(b) above in all circumstances other than with respect to any specific claim, issue or matter involved in the Proceeding out of which Indemnitee’s claim for indemnification has arisen, as follows:
 
(a)            Proceedings Other Than By or In the Right of the Company .  If indemnification is requested under Section 3(a) and it has been finally adjudicated by a court of competent jurisdiction that, in connection with such specific claim, issue or matter, Indemnitee failed to act (i) in good faith and (ii) in a manner

 
Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, or, with respect to any criminal Proceeding, Indemnitee had reasonable cause to believe that Indemnitee’s conduct was unlawful, Indemnitee shall not be entitled to payment of Indemnifiable Amounts hereunder.
 
(b)            Proceedings By or In the Right of the Company .  If indemnification is requested under Section 3(b) and
 
(i) it has been finally adjudicated by a court of competent jurisdiction that, in connection with such specific claim, issue or matter, Indemnitee failed to act (A) in good faith and (B) in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, Indemnitee shall not be entitled to payment of Indemnifiable Expenses hereunder; or
 
(ii) it has been finally adjudicated by a court of competent jurisdiction that Indemnitee is liable to the Company with respect to such specific claim, Indemnitee shall not be entitled to payment of Indemnifiable Expenses hereunder with respect to such claim, issue or matter unless the Court of Chancery or another court in which such Proceeding was brought shall determine upon application that, despite the adjudication of liability, but in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnification for such Indemnifiable Expenses which such court shall deem proper; or
 
(iii) it has been finally adjudicated by a court of competent jurisdiction that Indemnitee is liable to the Company for an accounting of profits made from the purchase or sale by the Indemnitee of securities of the Company pursuant to the provisions of Section 16(b) of the Securities Exchange Act of 1934, the rules and regulations promulgated thereunder and amendments thereto or similar provisions of any federal, state or local statutory law, Indemnitee shall not be entitled to payment of Indemnifiable Expenses hereunder.
 
(c)            Insurance Proceeds .  To the extent payment is actually made to the Indemnitee under a valid and collectible insurance policy in respect of Indemnifiable Amounts in connection with such specific claim, issue or matter, Indemnitee shall not be entitled to payment of Indemnifiable Amounts hereunder except in respect of any excess beyond the amount of payment under such insurance.

 
5.              Procedure for Payment of Indemnifiable Amounts .  Indemnitee shall submit to the Company a written request specifying the Indemnifiable Amounts for which Indemnitee seeks payment under Section 3 of this Agreement and the basis for the claim.  The Company shall pay such Indemnifiable Amounts to Indemnitee within sixty (60) calendar days of receipt of the request.  At the request of the Company, Indemnitee shall furnish such documentation and information as are reasonably available to Indemnitee and necessary to establish that Indemnitee is entitled to indemnification hereunder.
 
6.              Indemnification for Expenses of a Party Who is Wholly or Partly Successful .   Notwithstanding any other provision of this Agreement, and without limiting any such provision, to the extent that Indemnitee is, by reason of Indemnitee’s Corporate Status, a party to and is successful, on the merits or otherwise, in any Proceeding, Indemnitee shall be indemnified against all Expenses reasonably incurred by Indemnitee or on Indemnitee’s behalf in connection therewith.  If Indemnitee is not wholly successful in such Proceeding but is successful, on the merits or otherwise, as to one or more but less than all claims, issues or matters in such Proceeding, the Company shall indemnify Indemnitee against all Expenses reasonably incurred by Indemnitee or on Indemnitee’s behalf in connection with each successfully resolved claim, issue or matter.  For purposes of this Agreement, the termination of any claim, issue or matter in such a Proceeding by dismissal, with or without prejudice, by reason of settlement, judgment, order or otherwise, shall be deemed to be a successful result as to such claim, issue or matter.
 
7.              Effect of Certain Resolutions .  Neither the settlement or termination of any Proceeding nor the failure of the Company to award indemnification or to determine that indemnification is payable shall create a presumption that Indemnitee is not entitled to indemnification hereunder.  In addition, the termination of any proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent shall not create a presumption that Indemnitee did not act in good faith and in a manner which Indemnitee reasonably believed to be in or not opposed to the best interests of the Company or, with respect to any criminal Proceeding, had reasonable cause to believe that Indemnitee’s action was unlawful.
 
8.              Agreement to Advance Expenses; Undertaking .  The Company shall advance all Expenses incurred by or on behalf of Indemnitee in connection with any Proceeding, including a Proceeding by or in the right of the Company, in which Indemnitee is involved by reason of such Indemnitee’s Corporate Status within ten (10) calendar days after the receipt by the Company of a written statement from Indemnitee requesting such advance or advances from time to time, whether prior to or after final disposition of such Proceeding.  To the extent required by Delaware law, Indemnitee hereby undertakes to repay any and all of the amount of Indemnifiable Expenses paid to Indemnitee if it is finally determined by a court of competent jurisdiction that Indemnitee is not entitled under this Agreement to indemnification with respect to such Expenses.  This undertaking is an unlimited general obligation of Indemnitee.
 
9.              Procedure for Advance Payment of Expenses .  Indemnitee shall submit to the Company a written request specifying the Indemnifiable Expenses for which Indemnitee seeks an advancement under Section 8 of this Agreement, together with documentation evidencing that Indemnitee has incurred such Indemnifiable Expenses.  Payment of Indemnifiable Expenses

 
under Section 8 shall be made no later than ten (10) calendar days after the Company’s receipt of such request.
 
10.            Remedies of Indemnitee .
 
(a)            Right to Petition Court .  In the event that Indemnitee makes a request for payment of Indemnifiable Amounts under Sections 3 and 5 above or a request for an advancement of Indemnifiable Expenses under Sections 8 and 9 above and the Company fails to make such payment or advancement in a timely manner pursuant to the terms of this Agreement, Indemnitee may petition the Court of Chancery to enforce the Company’s obligations under this Agreement.
 
(b)            Burden of Proof .  In any judicial proceeding brought under Section 10(a) above, the Company shall have the burden of proving that Indemnitee is not entitled to payment of Indemnifiable Amounts hereunder.
 
(c)            Expenses .  The Company agrees to reimburse Indemnitee in full for any Expenses incurred by Indemnitee in connection with investigating, preparing for, litigating, defending or settling any action brought by Indemnitee under Section 10(a) above, or in connection with any claim or counterclaim brought by the Company in connection therewith, whether or not Indemnitee is successful in whole or in part in connection with any such action.
 
(d)            Failure to Act Not a Defense .  The failure of the Company (including its Board of Directors or any committee thereof, independent legal counsel, or stockholders) to make a determination concerning the permissibility of the payment of Indemnifiable Amounts or the advancement of Indemnifiable Expenses under this Agreement shall not be a defense in any action brought under Section 10(a) above, and shall not create a presumption that such payment or advancement is not permissible.
 
11.            Defense of the Underlying Proceeding .
 
(a)            Notice by Indemnitee .  Indemnitee agrees to notify the Company promptly upon being served with any summons, citation, subpoena, complaint, indictment, information, or other document relating to any Proceeding which may result in the payment of Indemnifiable Amounts or the advancement of Indemnifiable Expenses hereunder; provided, however, that the failure to give any such notice shall not disqualify Indemnitee from the right, or otherwise affect in any manner any right of Indemnitee, to receive payments of Indemnifiable Amounts or advancements of Indemnifiable Expenses unless the Company’s ability to defend in such Proceeding is materially and adversely prejudiced thereby.

 
(b)            Defense by Company .  Subject to the provisions of the last sentence of this Section 11(b) and of Section
11(c) below, the Company shall have the right to defend Indemnitee in any Proceeding which may give rise to the payment of Indemnifiable Amounts hereunder; provided, however that the Company shall notify Indemnitee of any such decision to defend within ten (10) calendar days of receipt of notice of any such Proceeding under Section
11(a) above.  The Company shall not, without the prior written consent of Indemnitee, consent to the entry of any judgment against Indemnitee or enter into any settlement or compromise which (i) includes an admission of fault of Indemnitee or (ii) does not include, as an unconditional term thereof, the full release of Indemnitee from all liability in respect of such Proceeding, which release shall be in form and substance reasonably satisfactory to Indemnitee.  This Section 11(b) shall not apply to a Proceeding brought by Indemnitee under Section 10(a) above or pursuant to Section 19 below.
 
(c)            Indemnitee’s Right to Counsel .  Notwithstanding the provisions of Section 11(b) above, if in a Proceeding to which Indemnitee is a party by reason of Indemnitee’s Corporate Status, (i) Indemnitee reasonably concludes that he or she may have separate defenses or counterclaims to assert with respect to any issue which may not be consistent with the position of other defendants in such Proceeding, (ii) a conflict of interest or potential conflict of interest exists between Indemnitee and the Company, or (iii) if the Company fails to assume the defense of such proceeding in a timely manner, Indemnitee shall be entitled to be represented by separate legal counsel of Indemnitee’s choice at the expense of the Company.  In addition, if the Company fails to comply with any of its obligations under this Agreement or in the event that the Company or any other person takes any action to declare this Agreement void or unenforceable, or institutes any action, suit or proceeding to deny or to recover from Indemnitee the benefits intended to be provided to Indemnitee hereunder, Indemnitee shall have the right to retain counsel of Indemnitee’s choice, at the expense of the Company, to represent Indemnitee in connection with any such matter.
 
12.           Representations and Warranties of the Company .  The Company hereby represents and warrants to Indemnitee as follows:
 
(a)            Authority .  The Company has all necessary power and authority to enter into, and be bound by the terms of, this Agreement, and the execution, delivery and performance of the undertakings contemplated by this Agreement have been duly authorized by the Company.
 
(b)            Enforceability .  This Agreement, when executed and delivered by the Company in accordance with the provisions hereof, shall be a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, moratorium, reorganization or similar laws affecting the enforcement of creditors’ rights generally.

 
13.           Insurance .  For a period of six (6) years following the date on which Indemnitee no longer serves as a director, officer or employee of the Company or any Subsidiary, and for such longer period, if any, for which Indemnitee may be subject to a Proceeding by reason of Indemnitee’s Corporate Status, the Company (i) shall maintain a policy or policies of insurance with one or more reputable insurance companies providing the Indemnitee with coverage in an amount not less than, and of a type and scope not materially less favorable to Indemnitee than, the directors’ and officers’ liability insurance coverage presently maintained by the Company, (ii) shall pay on a timely basis all premiums on such insurance and (iii) shall provide such notices and renewals in a complete and timely manner and take such other actions as may be required in order to keep such insurance in full force and effect.  In all policies of director and officer liability insurance, Indemnitee shall be named as an insured in such a manner as to provide Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company’s officers and directors.
 
14.           Contract Rights Not Exclusive .  The rights to payment of Indemnifiable Amounts and advancement of Indemnifiable Expenses provided by this Agreement shall be in addition to, but not exclusive of, any other rights which Indemnitee may have at any time under applicable law, the Company’s Certificate of Incorporation or By-laws, or any other agreement, vote of stockholders or directors (or a committee of directors), or otherwise, both as to action in Indemnitee’s official capacity and as to action in any other capacity as a result of Indemnitee’s serving as a director or officer of the Company.
 
15.           Successors .  This Agreement shall be (a) binding upon all successors and assigns of the Company (including any transferee of all or a substantial portion of the business, stock and/or assets of the Company and any direct or indirect successor by merger or consolidation or otherwise by operation of law) and (b) binding on and shall inure to the benefit of the heirs, personal representatives, executors and administrators of Indemnitee.  In the event that the Company or any of its successors or assigns (i) consolidates with or merges into any other person or entity and shall not be the continuing or surviving corporation or entity of such consolidation or merger or (ii) transfers or conveys all or substantially all of its properties and assets to any person or entity, then, and in each such case, proper provision shall be made so that the successors and assigns of the Company assume the obligations of the Company under this Agreement.  This Agreement shall continue for the benefit of Indemnitee and such heirs, personal representatives, executors and administrators after Indemnitee has ceased to have Corporate Status.
 
16.           Subrogation .  In the event of any payment of Indemnifiable Amounts under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of contribution or recovery of Indemnitee against other persons, and Indemnitee shall take, at the request of the Company, all reasonable action necessary to secure such rights, including the execution of such documents as are necessary to enable the Company to bring suit to enforce such rights.
 
17.           Change in Law .  To the extent that a change in Delaware law (whether by statute or judicial decision) shall permit broader indemnification or advancement of expenses than is

 
provided under the terms of the By-laws and this Agreement, Indemnitee shall be entitled to such broader indemnification and advancements, and this Agreement shall be deemed to be amended to such extent.
 
18.           Severability .  Whenever possible, each provision of this Agreement shall be interpreted in such a manner as to be effective and valid under applicable law, but if any provision of this Agreement, or any clause thereof, shall be determined by a court of competent jurisdiction to be illegal, invalid or unenforceable, in whole or in part, such provision or clause shall be limited or modified in its application to the minimum extent necessary to make such provision or clause valid, legal and enforceable, and the remaining provisions and clauses of this Agreement shall remain fully enforceable and binding on the parties.
 
19.           Indemnitee as Plaintiff .  Except as provided in Section 10(c) of this Agreement and in the next sentence, Indemnitee shall not be entitled to payment of Indemnifiable Amounts or advancement of Indemnifiable Expenses with respect to any Proceeding brought by Indemnitee against the Company, any Entity which it controls, any director or officer thereof, or any third party, unless the Board of Directors of the Company has consented to the initiation of such Proceeding.  This Section shall not apply to counterclaims or affirmative defenses asserted by Indemnitee in an action brought against Indemnitee.
 
20.           Modifications and Waiver .  Except as provided in Section 17 above with respect to changes in Delaware law which broaden the right of Indemnitee to be indemnified by the Company, no supplement, modification or amendment of this Agreement shall be binding unless executed in writing by each of the parties hereto.  No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions of this Agreement (whether or not similar), nor shall such waiver constitute a continuing waiver.
 
21.           General Notices .  All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given (a) when delivered by hand, (b) when transmitted by facsimile and receipt is acknowledged, or (c) if mailed by certified or registered mail with postage prepaid, on the third business day after the date on which it is so mailed:

 
(i)             If to Indemnitee, to:

 
(ii)            If to the Company, to:
 
Watts Water Technologies, Inc.
815 Chestnut Street
North Andover, MA 01845
Facsimile: (978) 688-2976
Attention:
 
or to such other address as may have been furnished in the same manner by any party to the others.
 
22.           Governing Law; Consent to Jurisdiction; Service of Process .  This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware without regard to its rules of conflict of laws.  Each of the Company and the Indemnitee hereby irrevocably and unconditionally consents to submit to the exclusive jurisdiction of the Court of Chancery of the State of Delaware and the courts of the United States of America located in the State of Delaware (the “Delaware Courts”) for any litigation arising out of or relating to this Agreement and the transactions contemplated hereby (and agrees not to commence any litigation relating thereto except in such courts), waives any objection to the laying of venue of any such litigation in the Delaware Courts and agrees not to plead or claim in any Delaware Court that such litigation brought therein has been brought in an inconvenient forum.  Each of the parties hereto agrees, (a) to the extent such party is not otherwise subject to service of process in the State of Delaware, to appoint and maintain an agent in the State of Delaware as such party’s agent for acceptance of legal process, and (b) that service of process may also be made on such party by prepaid certified mail with a proof of mailing receipt validated by the United States Postal Service constituting evidence of valid service.  Service made pursuant to (a) or (b) above shall have the same legal force and effect as if served upon such party personally within the State of Delaware.  For purposes of implementing the parties’ agreement to appoint and maintain an agent for service of process in the State of Delaware, each such party does hereby appoint The Corporation Trust Company, 1209 Orange Street, Wilmington, New Castle County, Delaware 19801, as such agent and each such party hereby agrees to complete all actions necessary for such appointment.
 
23.           [Prior Agreement .  This Agreement supersedes and replaces in its entirety the Indemnification Agreement between the Indemnitee and the Company dated as of              ,      .]

 
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.

 	WATTS WATER TECHNOLOGIES, INC.	

 	By:	 	 	
 	 	Name:	
 	 	Title:	

 	INDEMNITEE	

 	 	 	
 	Name:	

 
Schedule of Omitted Information

Name of Indemnitee	 	Date of Agreement	 	Date of Prior
Agreement
(Section 23)	 	Person Signing on
behalf of the Company	 	
Roger A. Young	 	February 10, 2004	 	November 5, 2003	 	Patrick S. O’Keefe
Chief Executive Officer	 	
Daniel J. Murphy, III	 	February 10, 2004	 	November 5, 2003	 	Patrick S. O’Keefe
Chief Executive Officer	 	
Gordon W. Moran	 	February 10, 2004	 	November 5, 2003	 	Patrick S. O’Keefe
Chief Executive Officer	 	
Kenneth J. McAvoy	 	February 10, 2004	 	November 5, 2003	 	Patrick S. O’Keefe
Chief Executive Officer	 	
John K. McGillicuddy	 	February 10, 2004	 	November 5, 2003	 	Patrick S. O’Keefe
Chief Executive Officer	 	
Timothy P. Horne	 	February 10, 2004	 	August 7, 2002	 	Patrick S. O’Keefe
Chief Executive Officer	 	
Patrick S. O’Keefe	 	February 10, 2004	 	November 5, 2003	 	William C. McCartney
Chief Financial Officer	 	
William J. Merchant	 	February 10, 2004	 	November 5, 2003	 	Patrick S. O’Keefe
Chief Executive Officer	 	
Lester J. Taufen	 	February 10, 2004	 	November 5, 2003	 	Patrick S. O’Keefe
Chief Executive Officer	 	
Kenneth R. Lepage	 	February 10, 2004	 	November 5, 2003	 	Patrick S. O’Keefe
Chief Executive Officer	 	
William C. McCartney	 	February 10, 2004	 	November 5, 2003	 	Patrick S. O’Keefe
Chief Executive Officer	 	
Timothy MacPhee	 	February 10, 2004	 	Not Applicable	 	Patrick S. O’Keefe
Chief Executive Officer	 	
Ralph E. Jackson, Jr.	 	June 23, 2004	 	Not Applicable	 	Patrick S. O’Keefe
Chief Executive Officer	 	
William D. Martino	 	October 31, 2005	 	Not Applicable	 	Patrick S. O’Keefe
Chief Executive Officer	 	

 
Exhibit 31.1
 
CERTIFICATION PURSUANT TO
 
SECTION 302 OF
 
THE SARBANES-OXLEY ACT OF 2002
 
I, Patrick S. O’Keefe, certify that:
 
1.             I have reviewed this quarterly report on Form 10-Q of Watts Water Technologies, Inc.;
 
2.             Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.             Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.             The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
(a)           Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
(b)           Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
(c)           Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
(d)           Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.             The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
(a)           All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
(b)           Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 7, 2005	 	
 	/s/ Patrick S. O’Keefe	
 	Patrick S. O’Keefe	
 	Chief Executive Officer	
 
1

Exhibit 31.2
 
CERTIFICATION PURSUANT TO
 
SECTION 302 OF
 
THE SARBANES-OXLEY ACT OF 2002
 
I, William C. McCartney, certify that:
 
1.              I have reviewed this quarterly report on Form 10-Q of Watts Water Technologies, Inc.;
 
2.              Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.              Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.              The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
(a)            Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
(b)            Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
(c)            Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
(d)            Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.              The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
(a)            All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
(b)            Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 7, 2005	 	
 	/s/ William C. McCartney	
 	William C. McCartney	
 	Chief Financial Officer	
 
1

Exhibit 32.1
 
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
The undersigned officer of Watts Water Technologies, Inc. (the “Company”) hereby certifies that the Company’s quarterly report on Form 10-Q to which this certification is attached (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.  This certification is provided solely pursuant to 18 U.S.C. Section 1350 and Item 601(b)(32) of Regulation S-K (“Item 601(b)(32)”) promulgated under the Securities Act of 1933, as amended (the “Securities Act”), and the Exchange Act.  In accordance with clause (ii) of Item 601(b)(32), this certification (A) shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and (B) shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.

Date: November 7, 2005	 	
 	/s/ Patrick S. O’Keefe	 	
 	Patrick S. O’Keefe	
 	Chief Executive Officer	
 
1

Exhibit 32.2
 
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
The undersigned officer of Watts Water Technologies, Inc. (the “Company”) hereby certifies that the Company’s quarterly report on Form 10-Q to which this certification is attached (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.  This certification is provided solely pursuant to 18 U.S.C. Section 1350 and Item 601(b)(32) of Regulation S-K (“Item 601(b)(32)”) promulgated under the Securities Act of 1933, as amended (the “Securities Act”), and the Exchange Act.  In accordance with clause (ii) of Item 601(b)(32), this certification (A) shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and (B) shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.

Date: November 7, 2005	/s/ William C. McCartney	
 	William C. McCartney	
 	Chief Financial Officer	
 
1