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 first quarter ended data contained in this Quarterly Report on Form 10-Q reflects the results of operations for the 13-week period ended on the Sunday nearest March 31 of the respective year.

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

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

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

† drainage products for industrial, commercial, marine and residential applications;

† water supply products for commercial and residential applications;

† temperature and pressure relief valves for water heaters, boilers and associated systems;

† thermostatic mixing valves for tempering water in commercial and residential applications;

† systems for under-floor radiant applications and hydraulic pump groups for gas boiler manufacturers and renewable energy applications, including solar and heat pump control packages;

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

† large diameter butterfly valves for use in China's water infrastructure.

Our business is reported in three geographic segments: North America, Europe and China. We distribute our products through three primary distribution channels:
wholesale, do-it-yourself (DIY) and original equipment manufacturers (OEMs). Interest rates have an indirect effect on the demand for our products due to the effect such rates have on the number of new residential and commercial construction starts and remodeling projects. All three of these activities have an impact on our levels of sales and earnings. An additional factor that has had an effect on our sales is fluctuation in foreign currencies, as a portion of our sales and certain portions of our costs, assets and liabilities are denominated in currencies other than the U.S. dollar.

Our sales in the first quarter continued to be affected by downward pressure from a receding U.S. commercial construction marketplace. In addition, U.S. residential construction activity is at historically low levels. We also saw a marked reduction in European sales as the European economy has migrated into recession. Presently, we believe sales in 2009 will continue to trend down when compared to 2008 as a result of the recessionary pressures. Operating results in the first quarter of 2009, were affected by plant under-absorption and negative foreign currency movements. Plant under-absorption costs were partially offset by our cost saving initiatives. Foreign currency movements, mainly related to the strengthening of the U.S. dollar against the euro and Canadian dollar, negatively impacted the first quarter of 2009 earnings per share by $0.04 compared to the first quarter of 2008. Additionally, the credit market crisis continues to create concerns for our performance in 2009. In response to these concerns, we are taking steps to ensure we remain on a firm fiscal platform. In the latter half of 2008, we announced a reduction of the United States workforce, implemented a nine-month salary freeze in North America and are reviewing discretionary spending in detail to reduce operating expenses. In 2009, we have expanded our cost savings programs on a worldwide basis. We have or will be initiating salary reductions, worker furloughs and other cost reductions in an effort to leverage our costs against anticipated lower sales volumes. Additionally, in February 2009, we expanded our restructuring program to consolidate our manufacturing footprint in North America and China. Savings from this program will not be realized until sometime in 2010. However, we did record a $3.9 million tax charge in the first quarter of 2009 for the expected tax recapture from previously awarded tax holiday programs. Lastly, we are continuing our implementation of lean manufacturing and six sigma disciplines to partially offset any negative pressures to operating income.

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

industrial and oil and gas business in 1999. Our acquisition strategy focuses on businesses that manufacture preferred brand name products that address our themes of water quality, water conservation, water safety and water flow control and related complementary markets. We target businesses that will provide us with one or more of the following: an entry into new markets, an increase in shelf space with existing customers, a new or improved technology or an expansion of the breadth of our water quality, water conservation, water safety and water flow control products for the residential and commercial markets.

Products representing a majority of our sales are subject to regulatory standards and code enforcement, which typically require that these products meet stringent performance criteria. Together with our commissioned manufacturers' representatives, we have consistently advocated for the development and enforcement of such plumbing codes. We are focused on maintaining stringent quality control and testing procedures at each of our manufacturing facilities in order to manufacture products in compliance with code requirements and take advantage of the resulting demand for compliant products. We believe that the product development, product testing capability and investment in plant and equipment needed to manufacture products in compliance with code requirements, represent a barrier to entry for competitors. We believe there is a demand among consumers for products to ensure water quality, which creates growth opportunities for our products.

We require substantial amounts of raw materials to produce our products, including bronze, brass, cast iron, steel and plastic, and substantially all of the raw materials we require are purchased from outside sources. The commodity markets have experienced tremendous volatility over the past several years, particularly copper. The market prices of many commodities began dropping in October 2008, and more recently they have increased. Bronze and brass are copper-based alloys. The price of copper during the first three months of 2009 increased approximately 35.6%. We typically carry several months of inventory primarily due to the significant extent of our international sourcing.

Historically, a risk we face is our ability to deal effectively with increases in raw material costs. We manage this risk by monitoring related market prices, working with our suppliers to achieve the maximum level of stability in their costs and related pricing, seeking alternative supply sources when necessary, implementing cost reduction programs and passing increases in costs on to our customers. During 2008, we entered into a series of copper swaps to fix the price per pound of copper. These financial instruments are classified as economic hedges, as more fully explained in the Notes to the Consolidated Financial Statements. For the period ended March 29, 2009, the changes in fair market value associated with these copper swaps recorded in other expenses were immaterial. If copper prices continue to increase or decrease, the open copper swap contracts will result in additional income or losses which may occur in a period different from when that cost is recovered.

Another risk we face in all areas of our business is competition. We consider brand preference, engineering specifications, code requirements, price, technological expertise, delivery times and breadth of product offerings to be the primary competitive factors. As mentioned previously, we believe that the product development, product testing capability and investment in plant and equipment needed to manufacture products in compliance with code requirements, represent a barrier to entry for competitors. We are committed to maintaining our capital equipment at a level consistent with current technologies, and thus we expect to spend approximately $27.0 million in 2009.

Recent Developments

During the quarter ended March 29, 2009, we were notified by our investment advisor that UBS has challenged our investment advisor's participation in the settlement as an "eligible holder," as defined. Our investment advisor has responded to UBS and believes that its participation as an eligible holder is supported and legally enforceable. We have continued to account for the ARS and the related rights issued by UBS as though our investment advisor's participation has not changed. If ultimately a court were to decide that our investment advisor cannot participate in the settlement, we would no longer have an investment in the $1.6 million rights issued by UBS but would retain our $6.4 million investments in the ARS.

Results of Operations

First Quarter Ended March 29, 2009 Compared to First Quarter Ended March 30, 2008

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 first quarters of 2009 and 2008 were as follows:

                  First Quarter Ended        First Quarter Ended                % Change to
                     March 29, 2009             March 30, 2008                  Consolidated
                Net Sales      % Sales     Net Sales      % Sales     Change     Net Sales
                                           (dollars in millions)
North America   $    177.5          60.2 % $    211.4          61.4 % $ (33.9 )         (9.9 )%
Europe               109.6          37.2        122.7          35.7     (13.1 )         (3.8 )
China                  7.8           2.6          9.9           2.9      (2.1 )         (0.6 )
Total           $    294.9           100 % $    344.0           100 % $ (49.1 )        (14.3 )%

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

                                                                           Change                                Change
                                                              As a % of Consolidated Net Sales         As a % of Segment Net Sales
                    North                                   North                                      North
                   America    Europe    China     Total    America      Europe     China    Total     America       Europe     China
                                                                 (dollars in millions)
Organic            $  (30.8 ) $ (16.5 ) $ (0.8 ) $ (48.1 )     (9.0 )%     (4.8 )%  (0.2 )% (14.0 )%     (14.6 )%     (13.5 )%  (8.1 )%
Foreign exchange       (3.1 )   (13.5 )    0.3     (16.3 )     (0.9 )      (3.9 )    0.1     (4.7 )       (1.5 )      (11.0 )    3.0
Acquisitions              -      16.9        -      16.9          -         4.9        -      4.9            -         13.8        -
Disposal                  -         -     (1.6 )    (1.6 )        -           -     (0.5 )   (0.5 )          -            -    (16.1 )
Total              $  (33.9 ) $ (13.1 ) $ (2.1 ) $ (49.1 )     (9.9 )%     (3.8 )%  (0.6 )% (14.3 )%     (16.1 )%     (10.7 )% (21.2 )%

The organic decline in net sales in North America was primarily due to decreased unit sales of our plumbing and heating and backflow product lines. Organic sales into the North American wholesale market in the first quarter of 2009 declined by 18.2% compared to the first quarter of 2008. This was primarily due to decreased unit sales across most of our product lines. Organic sales into the North American DIY market in the first quarter of 2009 were flat compared to the first quarter of 2008 primarily due to decreased unit sales, offset by incremental product line penetration at certain retail customers, selected market share gains and new product roll-outs.

Organic net sales declined in Europe due to decreased sales in the European wholesale and OEM markets. Our sales into the European wholesale market in the first quarter of 2009 decreased by 9.8% and our sales into the European OEM market decreased by 17.1% compared to the first quarter of 2008. Export sales to Eastern Europe were particularly weak. Acquired sales growth in Europe was due to the inclusion of Blücher Metal A/S (Blücher) acquired on May 30, 2008.

Organic net sales declined in China primarily due to decreased sales in the Chinese export markets. China sales were also negatively affected as compared to 2008 from the disposal of Tianjin Tanggu Watts Valve Co. Ltd. (TWT) during the fourth quarter of 2008.

The decreases in net sales due to foreign exchange in North America and Europe were primarily due to the depreciation of the Canadian dollar and the euro, respectively, against the U.S. dollar. We cannot predict whether these currencies 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.

Gross Profit. Gross profit and gross profit as a percent of net sales (gross margin) for the first quarters of 2009 and 2008 were asfollows:

First Quarter Ended

               March 29,      March 30,    Point
                  2009          2008       Change
                 (dollars in millions)
Gross profit   $     97.2    $     114.4
Gross margin         33.0 %         33.2 %   (0.2 )%

Gross margin remained relatively flat in the first quarter of 2009 compared to first quarter of 2008. The North American margin decreased to 32.8% for the first quarter of 2009 from 34.5% for the first quarter of 2008 due to plant under absorption issues, partially offset by cost savings initiatives. The European margin increased to 32.8% for the first quarter of 2009 from 31.5% for the first quarter primarily due to the inclusion of higher margin Blücher sales in the first quarter of 2009 and to cost saving measures offset partially by plant under absorption issues. Excluding Blücher, Europe gross margins were relatively flat with the comparable period last year. Our China segment's gross margin remained relatively flat excluding the gross profit of TWT.

Selling, General and Administrative Expenses. Selling, General and Administrative, or SG&A, expenses for the first quarter of 2009 decreased $6.1 million, or 7.0%, compared to the first quarter of 2008. The decrease in SG&A expenses was attributable to the following:

                    (in millions)    % Change

Organic            $          (6.3 )     (7.2 )%
Foreign exchange              (3.4 )     (3.9 )
Acquisitions                   5.4        6.2
Disposal                      (1.8 )     (2.1 )
Total              $          (6.1 )     (7.0 )%

The organic decrease in SG&A expenses was primarily due to decreased variable selling expenses due to lower shipments and cost savings measures partially offset by increased legal costs. The decrease in SG&A expenses from foreign exchange was primarily due to the depreciation of the euro against the U.S. dollar. The increase in SG&A expenses from acquisitions was due to the inclusion of Blücher. The reduction due to the disposal relates to the sale of TWT. Total SG&A expenses, as a percentage of sales, were 27.5% in the first quarter of 2009 compared to 25.3% in the first quarter of 2008.

Restructuring and Other Charges. In the first quarter of 2009, we recorded $1.5 million primarily for severance, relocation costs and assets impairment in Europe and North America. In the first quarter of 2008, we recorded $1.0 million for severance and relocation costs in North America and China.

Operating Income. Operating income (loss) by geographic segment for the first quarters of 2009 and 2008 was as follows: