item 14 exhibits financial statement schedules reports form 8k a1 financial statements response portion item 14 submitted separate section annual report a2 schedules response portion item 14 submitted separate section annual report a3 exhibits 101 106 108 1024 constitute management contracts compensation plans arrangements company required filed exhibits annual report signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized watts industries inc timothy p horne timothy p horne chairman board president chief executive officer dated september 23 1994 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated annual report form 10k item 14a1 2 c list financial statements financial statement schedules certain exhibits financial statement schedules year ended june 30 1994 watts industries inc north andover massachusetts form 10kitem 14a1 2 watts industries inc subsidiaries list financial statements financial statement schedules following consolidated financial statements watts industries inc subsidiaries included annual report registrant shareholders year ended june 30 1994 incorporated reference item 8 consolidated balance sheetsjune 30 1994 1993 statements consolidated earningsyears ended june 30 1994 1993 1992 statements consolidated stockholders equityyears ended june 30 1994 1993 1992 statements consolidated cash flowsyears ended june 30 1994 1993 1992 notes consolidated financial statementsjune 30 1994 following consolidated financial statement schedules watts industries inc subsidiaries included item 14d schedule imarketable securitiesother investments schedule iiamounts receivable related parties underwriters promoters employees related parties schedule vproperty plant equipment schedule viaccumulated depreciation depletion amortization property plant equipment schedule viiivaluation qualifying accounts schedule xsupplementary income statement information schedules provision made applicable accounting regulation securities exchange commission required related instructions inapplicable therefore omitted supplemental reports independent auditors schedule imarketable securitiesother investments watts industries inc subsidiaries june 30 1994 dollar amounts thousands schedule imarketable securitiesother investments continued watts industries inc subsidiaries june 30 1994 dollar amounts thousands schedule imarketable securitiesother investments continued watts industries inc subsidiaries june 30 1994 dollar amounts thousands schedule iiamounts receivable related parties underwriters promoters employees related parties watts industries inc subsidiaries dollar amounts thousands schedule vproperty plant equipment watts industries inc subsidiaries dollar amounts thousands schedule viaccumulated depreciation depletion amortization property plant equipment watts industries inc subsidiaries dollar amounts thousands schedule viiivaluation qualifying accounts watts industries inc subsidiaries dollar amounts thousands schedule xsupplementary income statement information watts industries inc subsidiaries amounts thousands exhibit 11 computation net earnings per common share watts industries inc amounts thousands except per share information exhibit 11 computation net earnings per common share continued watts industries inc amounts thousands except per share information exhibit 231consent independent auditors consent incorporation reference annual report form 10k watts industries inc report dated august 5 1994 included 1994 annual report shareholders watts industries inc audits also included financial statements schedules watts industries inc listed item 14a schedules responsibility companys management responsibility express opinion based audits audit financial statements watts industries europe bv consolidated subsidiary statements reflect total assets 107729000 100219000 june 30 1994 1993 total revenues 79709000 57645000 years ended furnished report deloitte touche respect schedules v vi viii x watts industries europe bv opinion based audits report auditors financial statement schedules referred considered relation basic consolidated financial statements taken whole present fairly material respects information set therein also consent incorporation reference registration statements posteffective amendment 1 form s8 3330377 pertaining 1986 incentive stock option plan form s8 3337926 pertaining nonqualified stock option plan watts industries inc related prospectuses report dated august 5 1994 respect consolidated financial statements incorporated herein reference report included preceding paragraph respect financial statement schedules included annual report form 10k watts industries inc ernst young boston massachusetts september 19 1994 independent auditors report board directors watts industries europe bv audited accompanying financial statements including consolidatedcombined financial statements watts industries europe bv eerbeek fiscal years ended june 30 1994 1993 separately presented herein expressed dutch guilders financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance auditing standards generally accepted netherlands united states america standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatements audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidatedcombined financial statements referred present fairly material respects consolidatedcombined financial position watts industries europe bv june 30 1994 1993 results operations fiscal years ended conformity generally accepted accounting principles netherlands generally accepted accounting principles netherlands vary certain significant respects generally accepted accounting principles united states application latter would affected determination consolidatedcombined net earnings years ended june 30 1994 1993 determination stockholders equity june 30 1994 1993 extent summarized note g leiden netherlands august 5 1994 deloitte touche registeraccountants signature pc spaargaren ra report independent auditors board directors watts industries inc audited financial statements including consolidatedcombined financial statements watts industries europe bv wholly owned subsidiary watts industries inc june 30 1994 1993 years ended issued report thereon dated august 5 1994 audits also included financial statement schedules v vi viii x watts industries europe bv presented separately herein included related schedules watts industries inc form 10k financial statement schedules responsibility companys management responsibility express opinion based audits opinion financial statement schedules watts industries europe bv referred considered relation basic financial statements taken whole present fairly material respects information set forth therein leiden netherlands august 5 1994 deloitte touche registeraccountants signature pc spaargaren ra exhibit 232 consent independent auditors consent incorporation reference registration statements posteffective amendment 1 form s8 3330377 pertaining 1986 incentive stock option plan form s8 3337926 pertaining nonqualified stock option plan watts industries inc related prospectuses report dated august 5 1994 respect consolidated combined financial statements watts industries europe bv included herein report dated august 5 1994 repect financial statement schedules watts industries europe bv included herein leiden netherlands september 19 1994 deloitte touche registeraccountants signature pc spaargaren ra exhibit index listed indexed exhibits filed part report certain exhibits incorporated reference documents previously filed company securities exchange commission pursuant rule 12b32 securities exchange act 1934 amendeditem 14exhibits financial statement schedules reports form8k a1 financial statements response portion item 14 submitted separate section annual report a2 schedules response portion item 14 submitted separate section annual report a3 exhibits 101106 108 1022 constitute management contracts compensation plans arrangements company required filed exhibits annual report exhibit nodescription 31 restated certificate incorporation amended 32 amended restated bylaws 1 91 horne family voting trust agreement1991 dated october 31 1991 2 92 amendment dated february 3 1995 horne family voting trust agreement1991 dated october 31 1991 101 employment agreement dated may 1 1993 registrant timothy p horne 11 102 supplemental compensation agreement dated may 1 1993 registrant timothy p horne 11 103 deferred compensation agreement registrant timothy p horne amended 4 104 1986 incentive stock option plan amended including form option agreement 3 105 1989 nonqualified stock option plan including form option agreement 3 106 watts industries inc retirement plan salaried employees dated december 30 1994 amended restated effective january 1 1994 107 registration rights agreement dated july 25 1986 5 108 executive incentive bonus plan amended 109 indenture dated december 1 1991 registrant first national bank boston trustee including form 838 note due 2003 8 1010 loan agreement mortgage among industrial development authority state new hampshire watts regulator co arlington trust company dated august 1 1985 4 1011 amendment agreement relating watts regulator co canaan franklin new hampshire facilities financing dated december 31 1985 4 1012 sale agreement village walden industrial development agency spence engineering company inc dated june 1 1994 12 1013 letter credit reimbursement guaranty agreement dated june 1 1994 among registrant spence engineering company inc first union national bank north carolina 12 1014 trust indenture village walden industrial development agency first national bank boston trustee dated june 1 1994 12 1015 loan agreement hillsborough county industrial development authority leslie controls inc dated july 1 1994 12 1016 letter credit reimbursement guaranty agreement dated july 1 1994 among registrant leslie controls inc first union national bank north carolina 12 1017 trust indenture hillsborough county industrial development authority first national bank boston trustee dated july 1 1994 12 1018 loan agreement rutherford county industrial facilities pollution control financing authority watts regulator company dated september 1 1994 1019 letter credit reimbursement guaranty agreement dated september 1 1994 among registrant watts regulator company first union national bank north carolina 1020 trust indenture rutherford county industrial facilities pollution control financing authority first national bank boston trustee dated september 1 1994 1021 amended restated stock restriction agreement dated october 30 1991 2 1022 watts industries inc 1991 nonemployee directors nonqualified stock option plan 7 1023 letters credit relating retrospective paid loss insurance programs 11 1024 form stock restriction agreement management stockholders 5 1025 revolving credit agreement dated december 23 1987 nederlandse creditbank nv watts regulator nederland bv related guaranty watts industries inc watts regulator co dated december 14 1987 6 1026 loan agreement dated september 1987 related mortgage nv sallandsche bank 6 1027 agreement plan merger dated august 22 1991 relating acquisition registrant henry pratt company 9 1028 agreement sale shares intermes spa riaf holding ag participations multiscope due srl dated november 6 1992 10 1029 revolving credit agreement dated august 30 1994 among watts investment company certain financial institutions first national bank boston agent registrant guarantor 12 11 statement regarding computation earnings per common share 13 1995 annual report stockholders report except portions thereof expressly incorporated reference report form 10k deemed filed securities exchange commission 21 subsidiaries 231 consent ernst young llp independent auditors 232 consent deloitte touche independent auditors 27 financial data schedule 1 incorporated reference relevant exhibit registrants current report form 8k filed securities exchange commission may 15 1992 2 incorporated reference relevant exhibit registrants current report form 8k filed securities exchange commission november 14 1991 3 incorporated reference relevant exhibit registrants annual report form 10k filed securities exchange commission september 28 1989 4 incorporated reference relevant exhibit registrants registration statement form s1 336515 filed securities exchange commission june 17 1986 5 incorporated reference relevant exhibit registrants registration statement form s1 336515 filed securities exchange commission part second amendment registration statement august 21 1986 6 incorporated reference relevant exhibit registrants registration statement form s1 3327101 filed securities exchange commission february 16 1989 7 incorporated reference relevant exhibit registrants amendment 1 form 10k fiscal 1992 filed securities exchange commission march 11 1993 8 incorporated reference relevant exhibit registrants annual report form 10k filed securities exchange commission september 16 1992 9 incorporated reference exhibit 1033 registrants annual report form 10k filed securities exchange commission september 24 1991 10 incorporated reference relevant exhibit registrants amendment 2 form 8k dated november 6 1992 filed securities exchange commission february 22 1993 11 incorporated reference relevant exhibit registrants annual report form 10k filed securities exchange commission september 24 1993 12 incorporated reference relevant exhibit registrants annual report form 10k filed securities exchange commission september 26 1994 filed herewith filed herewith separate section report breports form 8k registrant file reports form 8k last quarter period covered annual report c exhibits response portion item 14 submitted separate section annual report financial statement schedules response portion item 14 submitted separate section annual report signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized watts industries inc bys timothy p horne timothy p horne chairman board president chief executive officer dated september 27 1995 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated signature title date timothy p horne president chairman board september 27 1995 timothy p horne president chief executive officer principal executive officer director kenneth j mcavoy chief financial officer september 27 1995 kenneth j mcavoy treasurer principal financial accounting officer secretary director david bloss sr executive vice president september 27 1995 david bloss sr director frederic b horne corporate vice president september 27 1995 frederic b horne director noah herndon director september 27 1995 noah herndon wendy e lane director september 27 1995 wendy e lane gordon w moran director september 27 1995 gordon w moran daniel j murphy iii director september 27 1995 daniel j murphy iii annual report form 10k item 14a1 2 c list financial statements financial statement schedule certain exhibits financial statement schedule year ended june 30 1995 watts industries inc north andover massachusetts form 10kitem 14a1 2 watts industries inc subsidiaries list financial statements financial statement schedule following consolidated financial statements watts industries inc subsidiaries included annual report registrant shareholders year ended june 30 1995 incorporated reference item 8 consolidated balance sheetsjune 30 1995 1994 consolidated statements earningsyears ended june 30 1995 1994 1993 consolidated statements stockholders equityyears ended june 30 1995 1994 1993 consolidated statements cash flowsyears ended june 30 1995 1994 1993 notes consolidated financial statementsjune 30 1995 following consolidated financial statement schedule watts industries inc subsidiaries included item 14d schedule iivaluation qualifying accounts schedules provision made applicable accounting regulation securities exchange commission required related instructions inapplicable therefore omitted supplemental reports independent auditors schedule iivaluation qualifying accounts watts industries inc subsidiaries dollar amounts thousands column b column c additions balance charged beginning costs accounts description period expenses describe year ended june 30 1995 deducted asset account allowance doubtful accounts 4488 1418 11732 year ended june 30 1994 deducted asset account allowance doubtful accounts 3565 1726 137 2 year ended june 30 1993 deducted asset account allowance doubtful accounts 2586 1460 808 2 1 uncollectible accounts written net recoveries 2 balance acquired connection acquisition jameco anderson barrows 1995 ancon inc 1994 intermes 1993 schedule iivaluation qualifying accounts watts industries inc subsidiaries dollar amounts thousands column e deductions end description describe 1 period year ended june 30 1995 deducted asset account allowance doubtful accounts 1251 5828 year ended june 30 1994 deducted asset account allowance doubtful accounts 940 4488 year ended june 30 1993 deducted asset account allowance doubtful accounts 1289 3565 1 uncollectible accounts written net recoveries 2 balance acquired connection acquisition jameco anderson barrows 1995 ancon inc 1994 intermes 1993 exhibit 11 computation net earnings per common share watts industries inc amounts thousands except per share information fiscal year ended june 30 1995 1994 1993 fully diluted average shares outstanding class common stock par value 10 18118 17969 18404 class b common stock par value 10 11448 11488 11490 net effect dilutive stock optionsbased upon treasury stock method using ending market price higher average price 189 260 205 total 29755 29717 30099 earnings cumulative effect change accounting 45738 41010 30406 cumulative effect change accounting income taxes 3132 net earnings 45738 41010 27274 earnings per common share earnings cumulative effect change accounting 154 138 101 cumulative effect change accounting income taxes 10 net earnings 154 138 91 exhibit 11 computation net earnings per common share continued watts industries inc amounts thousands except per share information fiscal year ended june 30 1995 1994 1993 primary average shares outstanding class common stock par value 10 18118 17969 18404 class b common stock par value 10 11448 11488 11490 net effect dilutive stock optionsbased upon treasury stock method using average market price 139 217 196 total 29705 29674 30090 earnings cumulative effect change accounting 45738 41010 30406 cumulative effect change accounting income taxes 3132 net earnings 45738 41010 27274 earnings per common share earnings cumulative effect change accounting 154 138 101 cumulative effect change accounting income taxes 10 net earnings 154 138 91 exhibit 231consent independent auditors consent incorporation reference annual report form 10k watts industries inc report dated august 8 1995 included 1995 annual report shareholders watts industries inc audits also included financial statement schedule watts industries inc listed item 14a schedule responsibility companys management responsibility express opinion schedule based audits audit financial statements watts industries europe bv consolidated subsidiary statements reflect total assets 171700000 107700000 june 30 1995 1994 total revenues 108700000 fiscal year 1995 79700000 fiscal year 1994 57600000 fiscal year 1993 furnished report deloitte touche respect schedule ii watts industries europe bv opinion based audits report auditors financial statement schedule referred considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein also consent incorporation reference registration statements posteffective amendment 1 form s8 3330377 pertaining 1986 incentive stock option plan form s8 3337926 pertaining nonqualified stock option plan form s8 3369422 pertaining 1991 nonemployee directors nonqualified stock option plan wats industries inc related prospectuses report dated august 8 1995 respect consolidated financial statements incorporated herein reference report included preceding paragraph respect financial statement schedule included annual report form 10k watts industries inc ernst young llp september 22 1995 independent auditors report board directors watts industries europe bv audited financial statements including consolidatedcombined balance sheets watts industries europe bv eerbeek june 30 1995 1994 related consolidatedcombined statements earnings three years period ended june 30 1995 separately presented herein expressed dutch guilders financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance auditing standards generally accepted netherlands united states america standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatements audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidatedcombined financial statements referred present fairly material respects consolidatedcombined financial position watts industries europe bv june 30 1995 1994 results operations three years period ended june 30 1995 conformity generally accepted accounting principles netherlands generally accepted accounting principles netherlands vary certain significant respects generally accepted accounting principles united states application latter would affected determination consolidatedcombined net earnings years ended june 30 1995 1994 1993 determination stockholders equity june 30 1995 1994 extent summarized note g leiden netherlands august 8 1995 deloitte touche registeraccountants pc spaargaren ra report independent auditors board directors watts industries inc audited financial statements including consolidatedcombined balance sheets watts industries europe b v wholly owned subsidiary watts industries inc june 30 1995 1994 related consolidatedcombined statements earnings three years period ended june 30 1995 issued report thereon dated august 8 1995 audits also included financial statement schedule ii watts industries europe b v presented separately herein included related schedules watts industries inc form 10k financial statement schedule responsibility companys management responsibility express opinion based audits opinion financial statement schedule watts industries europe b v referred considered relation basic financial statements taken whole presents fairly material respects information set forth therein leiden netherlands august 8 1995 deloitte touche registeraccountants p c spaargaren ra exhibit 232 consent independent auditors consent incorporation reference registration statements posteffective amendment 1 form s8 3330377 3337926 69422 related prospectuses report dated august 8 1995 respect consolidatedcombined financial statements watts industries europe b v included herein report dated august 8 1995 respect financial statement schedule watts industries europe b v included herein leiden netherlands september 21 1995 deloitte touche registeraccountants p c spaargaren ra form 10k exhibit index listed indexed exhibits filed part report certain exhibits incorporated reference documents previously filed company securities exchange commission pursuant rule 12b32 securities exchange act 1934 amended exhibit description 31 restated certificate incorporation amended 32 mended restated bylaws 1 91 horne family voting trust agreement1991 dated october 31 1991 2 92 amendment dated february 3 1995 horne family voting trust agreement1991 dated october 31 1991 101 employment agreement dated may 1 1993 registrant timothy p horne 11 102 supplemental compensation agreement dated may 1 1993 registrant timothy p horne 11 103 deferred compensation agreement registrant timothy p horne amended 4 104 1986 incentive stock option plan amended including form option agreement 3 105 1989 nonqualified stock option plan including form option agreement 3 106 watts industries inc retirement plan salaried employees dated december 30 1994 amended restated effective january 1 1994 107 registration rights agreement dated july 25 1986 5 108 executive incentive bonus plan amended 109 indenture dated december 1 1991 registrant first national bank boston trustee including form 838 note due 2003 8 1010 loan agreement mortgage among industrial development authority state new hampshire watts regulator co arlington trust company dated august 1 1985 4 1011 amendment agreement relating watts regulator co canaan franklin new hampshire facilities financing dated december 31 1985 4 1012 sale agreement village walden industrial development agency spence engineering company inc dated june 1 1994 12 1013 letter credit reimbursement guaranty agreement dated june 1 1994 among registrant spence engineering company inc first union national bank north carolina 12 1014 trust indenture village walden industrial development agency first national bank boston trustee dated june 1 1994 12 1015 loan agreement hillsborough county industrial development authority leslie controls inc dated july 1 1994 12 1016 letter credit reimbursement guaranty agreement dated july 1 1994 among registrant leslie controls inc first union national bank north carolina 12 1017 trust indenture hillsborough county industrial development authority first national bank boston trustee dated july 1 199412 1018 loan agreement rutherford county industrial facilities pollution control financing authority watts regulator company dated september 1 1994 1019 letter credit reimbursement guaranty agreement dated september 1 1994 among registrant watts regulator company first union national bank north carolina 1020 trust indenture rutherford county industrial facilities pollution control financing authority first national bank boston trustee dated september 1 1994 1021 amended restated stock restriction agreement dated october 30 1991 2 1022 watts industries inc 1991 nonemployee directors nonqualified stock option plan 7 1023 letters credit relating retrospective paid loss insurance programs 11 1024 form stock restriction agreement management stockholders 5 1025 revolving credit agreement dated december 23 1987 nederlandse creditbank nv watts regulator nederland bv related guaranty watts industries inc watts regulator co dated december 14 1987 6 1026 loan agreement dated september 1987 related mortgage nv sallandsche bank 6 1027 agreement plan merger dated august 22 1991 relating acquisition registrant henry pratt company 9 1028 agreement sale shares intermes spa riaf holding ag participations multiscope due srl dated november 6 1992 10 1029 revolving credit agreement dated august 30 1994 among watts investment company certain financial institutions first national bank boston agent registrant guarantor 12 11 statement regarding computation earnings per common share 13 1995 annual report stockholders report except portions thereof expressly incorporated reference report form 10 k deemed filed securities exchange commission 21 subsidiaries 231 consent ernst young llp independent auditors 232 consent deloitte touche independent auditors 27 financial data schedule 1 incorporated reference relevant exhibit registrants current report form 8k filed securities exchange commission may 15 1992 2 incorporated reference relevant exhibit registrants current report form 8k filed securities exchange commission november 14 1991 3 incorporated reference relevant exhibit registrants annual report form 10k filed securities exchange commission september 28 1989 4 incorporated reference relevant exhibit registrants registration statement form s1 336515 filed securities exchange commission june 17 1986 5 incorporated reference relevant exhibit registrants registration statement form s1 336515 filed securities exchange commission part second amendment registration statement august 21 1986 6 incorporated reference relevant exhibit registrants registration statement form s1 3327101 filed securities exchange commission february 16 1989 7 incorporated reference relevant exhibit registrants amendment 1 form 10k fiscal 1992 filed securities exchange commission march 11 1993 8 incorporated reference relevant exhibit registrants annual report form 10k filed securities exchange commission september 16 1992 9 incorporated reference exhibit 1033 registrants annual report form 10k filed securities exchange commission september 24 1991 10 incorporated reference relevant exhibit registrants amendment 2 form 8k dated november 6 1992 filed securities exchange commission february 22 1993 11 incorporated reference relevant exhibit registrants annual report form 10k filed securities exchange commission september 24 1993 12 incorporated reference relevant exhibit registrants annual report form 10k filed securities exchange commission september 26 1994 filed herewith filed herewith separate section report form 10k exhibit index listed indexed exhibits filed part report certain exhibits incorporated reference documents previously filed company securities exchange commission pursuant rule 12b32 securities exchange act 1934 amended exhibit description 31 restated certificate incorporation amended 32 mended restated bylaws 1 91 horne family voting trust agreement1991 dated october 31 1991 2 92 amendment dated february 3 1995 horne family voting trust agreement1991 dated october 31 1991 101 employment agreement dated may 1 1993 registrant timothy p horne 11 102 supplemental compensation agreement dated may 1 1993 registrant timothy p horne 11 103 deferred compensation agreement registrant timothy p horne amended 4 104 1986 incentive stock option plan amended including form option agreement 3 105 1989 nonqualified stock option plan including form option agreement 3 106 watts industries inc retirement plan salaried employees dated december 30 1994 amended restated effective january 1 1994 107 registration rights agreement dated july 25 1986 5 108 executive incentive bonus plan amended 109 indenture dated december 1 1991 registrant first national bank boston trustee including form 838 note due 2003 8 1010 loan agreement mortgage among industrial development authority state new hampshire watts regulator co arlington trust company dated august 1 1985 4 1011 amendment agreement relating watts regulator co canaan franklin new hampshire facilities financing dated december 31 1985 4 1012 sale agreement village walden industrial development agency spence engineering company inc dated june 1 1994 12 1013 letter credit reimbursement guaranty agreement dated june 1 1994 among registrant spence engineering company inc first union national bank north carolina 12 1014 trust indenture village walden industrial development agency first national bank boston trustee dated june 1 1994 12 1015 loan agreement hillsborough county industrial development authority leslie controls inc dated july 1 1994 12 1016 letter credit reimbursement guaranty agreement dated july 1 1994 among registrant leslie controls inc first union national bank north carolina 12 1017 trust indenture hillsborough county industrial development authority first national bank boston trustee dated july 1 199412 1018 loan agreement rutherford county industrial facilities pollution control financing authority watts regulator company dated september 1 1994 1019 letter credit reimbursement guaranty agreement dated september 1 1994 among registrant watts regulator comapny first union national bank north carolina 1020 trust indenture rutherford county industrial facilities pollution control financing authority first national bank boston trustee dated september 1 1994 1021 amended restated stock restriction agreement dated october 30 1991 2 1022 watts industries inc 1991 nonemployee directors nonqualified stock option plan 7 1023 letters credit relating retrospective paid loss insurance programs 11 1024 form stock restriction agreement management stockholders 5 1025 revolving credit agreement dated december 23 1987 nederlandse creditbank nv watts regulator nederland bv related guaranty watts industries inc watts regulator co dated december 14 1987 6 1026 loan agreement dated september 1987 related mortgage nv sallandsche bank 6 1027 agreement plan merger dated august 22 1991 relating acquisition registrant henry pratt company 9 1028 agreement sale shares intermes spa riaf holding ag participations multiscope due srl dated november 6 1992 10 1029 revolving credit agreement dated august 30 1994 among watts investment company certain financial institutions first national bank boston agent registrant guarantor 12 11 statement regarding computation earnings per common share 13 1995 annual report stockholders report except portions thereof expressly incorporated reference report form 10k deemed filed securities exchange commission 21 subsidiaries 231 consent ernst young llp independent auditors 232 consent deloitte touche independent auditors 27 financial data schedule 1 incorporated reference relevant exhibit registrants current report form 8k filed securities exchange commission may 15 1992 2 incorporated reference relevant exhibit registrants current report form 8k filed securities exchange commission november 14 1991 3 incorporated reference relevant exhibit registrants annual report form 10k filed securities exchange commission september 28 1989 4 incorporated reference relevant exhibit registrants registration statement form s1 336515 filed securities exchange commission june 17 1986 5 incorporated reference relevant exhibit registrants registration statement form s1 336515 filed securities exchange commission part second amendment registration statement august 21 1986 6 incorporated reference relevant exhibit registrants registration statement form s1 3327101 filed securities exchange commission february 16 1989 7 incorporated reference relevant exhibit registrants amendment 1 form 10k fiscal 1992 filed securities nd exchange commission march 11 1993 8 incorporated reference relevant exhibit registrants annual report form 10k filed securities exchange commission september 16 1992 9 incorporated reference exhibit 1033 registrants annual report form 10k filed securities exchange commission september 24 1991 10 incorporated reference relevant exhibit registrants amendment 2 form 8k dated november 6 1992 filed securities exchange commission february 22 1993 11 incorporated reference relevant exhibit registrants annual report form 10k filed securities exchange commission september 24 1993 12 incorporated reference relevant exhibit registrants annual report form 10k filed securities exchange commission september 26 1994 filed herewith filed herewith separate section report exhibit 31 restated certificate incorporation watts industries inc pursuant sections 242 245 general corporation law state delaware watts industries inc hereinafter called corporation organized existing general corporation law state delaware certificate incorporation filed office secretary state delaware december 27 1985 recorded office recorder deeds new castle county state delaware december 27 1985 certificate incorporation amended pursuant certificate amendment filed office secretary state delaware june 13 1986 recorded office recorder deeds new castle county state delaware june 18 1986 hereby certify restated certificate incorporation duly adopted pursuant sections 242 245 general corporation law state delaware first name corporation watts industries inc second address corporations registered office state delaware 1209 orange street city wilmington county new castle name registered agent address corporation trust company 1209 orange street wilmington delaware third nature business purpose conducted promoted follows conduct engage lawful act activity corporations may organized general corporation law state delaware fourth total number shares capital stock corporation shall authority issue shall thirtyeight million 38000000 shares twenty million 20000000 shall class common stock par value 10 per share class common stock thirteen million 13000000 shall class b common stock par value 10 per share class b common stock five million 5000000 shall preferred stock par value 10 per share issuable series preferred stock date time restated certificate incorporation shall become effective laws state delaware effective time share common stock par value 100 per share old common stock issued outstanding immediately prior effective time shall automatically converted without act 330 fully paid non assessable shares class b common stock share class b common stock par value 100 per share old class b stock issued outstanding immediately prior effective time shall automatically converted without act 330 fully paid nonassessable shares class common stock share 10 preferred stock par value 10000 per share old preferred stock issued outstanding immediately prior effective time shall automatically converted without act number fully paid non assessable shares class b common stock equal fraction numerator whic h shall equal 100 plus number equal dollar value accrued unpaid dividends share denominator shall 165 provided however fractional shares shall issued account conversion old preferred stock cash shall paid lieu thereof presented surrendered cancellation certificate shares old common stock old class b stock old preferred stock respectively outstanding effective time shall deemed represent number shares class common stock class b common stock determined accordance paragraph upon presentation surrender holder certificate certificates old common stock old class b stock old preferred stock applicable shall entitled receive certificate number shares class common stock class b common stock except otherwise specifically stated article fourth shares class common stock shares preferred stock may issued corporation time approved board directors without approval stockholders subsequent effective time shares class b common stock may issued board directors without prior approval majority interest holders class b common stock class common stock voting separate classes except provided sections a3 a4 article fourth consideration issuance shares shall paid full issuance shall less par value per share consideration shares shall consideration lawful general corporation law state delaware time issue value property labor services determined board directors corporation shall conclusive upon payment consideration shares shall deemed fully paid nonassessable case stock dividend part surplus retained earnings corporation transferred stated capital upon issuance shares share dividend shall deemed consideration issuance description different classes corporations capital stock statement powers designations preferences relative participating optional specified rights class capital stock series thereof qualifications limitations restrictions appertaining thereto follows class common stock class b common stock 1 voting every meeting stockholders corporation respect action written consent lieu meeting stockholders share class common stock shall entitled one 1 vote whether voted person holder thereof proxy pursuant stockholders consent share class b common stock shall entitled ten 10 votes whether voted person holder thereof proxy pursuant stockholders consent voting together one class matters may lawfully submitted vote stockholders except extent otherwise required law except otherwise provided restated certificate incorporation amendment hereof b determining whether resolution adopted vote specified percentage holders shares corporation pursuant corporations laws otherwise percentage shall calculated percentage total number votes entitled cast holders class common stock class b common stock shares entitled vote thereon except extent holders vote separate classes required law otherwise provided restated certificate incorporation 2 conversion share class b common stock may time converted one 1 fully paid nonassessable share class common stock conversion right shall exercised surrender certificate representing share class b common stock converted record holder thereof time normal business hours principal executive offices corporation agent registration transfer shares class common stock duly appointed acting transfer agent office transfer agent accompanied written notice election record holder thereof convert required corporation transfer agent instruments transfer form satisfactory corporation transfer agent conversion shall deemed occurred close business date corporation transfer agent received prescribed written notice required certificate certificates instruments transfer provided however conversions within five 5 business days effective time shall deemed occurred time corporation transfer agent applicable receives documentation proper form corporation transfer agent shall deliver certificate certificates representing shares class common stock issuable upon conversion record holder requesting conversion soon practicable thereafter conversion shall made without charge stamp similar tax respect issuance certificate certificates shares class common stock issued connection conversion unless certificate certificates issued name record holder share shares class b common stock converted case record holder shall pay corporation transfer agent amount stamp similar tax may payable respect transfer involved conversion b corporation shall required convert class b common stock surrender class b common stock shall effective purpose stock transfer books corporation closed purpose valid presentation class b common stock conversion period books closed shall become effective conversion immediately upon reopening books conversion made date class b common stock surrendered c corporation covenants times reserve keep available solely purpose issuance upon conversion outstanding shares class b common stock number shares class common stock shall issuable upon conversion outstanding shares provided nothing contained herein shall construed preclude corporation satisfying obligations respect conversion outstanding shares class b common stock delivery shares class common stock held treasury corporation covenants shares class common stock required reserved purposes conversion hereunder require registration approval governmental authority federal state law shares class common stock may issued upon conversion corporation use best efforts cause shares duly registered approved case may corporation endeavor list shares class common stock required delivered upon conversion prior delivery upon national securities exchange listing service upon outstanding class common stock listed time delivery corporation covenants shares class common stock shall issued upon conversion shares class b common stock upon issuance fully paid nonassessable entitled preemptive rights time total number shares class b common stock issued outstanding shall constitute less five percent 5 aggregate number shares class common stock class b common stock issued outstanding shares class b common stock shall automatically converted without act equal number shares class common stock pursuant terms section a2 conversion shall deemed effective time regardless whether certificate certificates outstanding shares class b common stock shall duly surrendered conversion e shares class b common stock converted pursuant section a2 shall thereupon retired revert status authorized unissued shares may reissued except provided section a3 a4 article fourth 3 issuance authorization class b common stock following effective time additional shares class b common stock shall issued authorized without affirmative vote majority votes entitled cast holders class common stock class b common stock voting separate classes except provided section a4 article fourth 4 dividends may declared board directors upon paid holders class common stock class b common stock funds legally available therefor provided however dividends declared paid shall declared paid holders pro rata according number shares class common stock class b common stock held holder number shares outstanding class common stock class b common stock aggregated considered single class purpose provided however dividend distribution may declared upon class common stock whether payable cash shares class common stock otherwise unless comparable dividend shall declared upon class b common stock vice versa dividend declared upon class common stock payable shares class common stock comparable dividend declared upon class b common stock shall payable shares class b common stock vice versa dividend declared shares class common stock shall payable shares class b common stock vice versa 5 stock splits transactions shares class common stock class b common stock may split subdivided combined reclassified unless time shares class proportionately split subdivided combined reclassified manner maintains proportionate equity ownership ie proportion shares class common stock class b common stock held class holders class common stock class b common stock comprised record date transaction 6 liquidation rights event liquidation dissolution corporation winding affairs whether voluntary involuntary merger consolidation corporation payment provision payment debts liabilities corporation amounts holders preferred stock may entitled holders class common stock class b common stock shall entitled share ratably one class purpose ie equal amount assets share either class common stock class b common stock remaining assets corporation 7 restriction transfer class b common stock person holding shares class b common stock record hereinafter called class b holder may transfer corporation shall register transfer shares class b common stock whether sale assignment gift bequest appointment otherwise except permitted transferee hereinafter defined permitted transferee shall mean respect person time shown record holder shares class b common stock follows case class b holder natural person permitted transferee shall mean spouse class b holder lineal descendant grandparent class b holder spouse lineal descendant lineal descendants spouses class b holder spouse herein collectively referred class b holders family members b trustee trust benefit class b holder andor one permitted transferees described subclause clause subclause b provided trust may also grant general special power appointment one class b holders family members may permit trust assets used pay taxes legacies obligations trust estates one class b holders family members payable reason death family members c corporation beneficial ownership outstanding capital stock entitled vote election directors owned partnership beneficial ownership partnership interests entitled participate management partnership held class b holder permitted transferees determined clause provided reason change ownership stock partnership interests corporation partnership would longer qualify permitted transferee shares class b common stock held corporation partnership shall upon election corporation given written notice corporation partnership without act anyones part converted shares class common stock effective upon date giving notice stock certificates formerly representing shares class b common stock shall thereupon thereafter deemed represent like number shares class common stock estate class b holder e trustee trustees voting trust established one class b holders andor one permitted transferees described subclause clause subclause e ii case class b holder holding shares class b common stock question trustee pursuant trust including voting trust irrevocable trust provided subsection iii permitted transferee means person originally transferred class b common stock trust b permitted transferee transferor determined pursuant clause iii case class b holder holding shares class b common stock question trustee pursuant trust irrevocable permitted transferee means person whose benefit principal may distributed either end term trust whether power appointment otherwise b permitted transferee person determined pursuant clause iv case class b holder corporation partnership holding record beneficial ownership shares class b common stock question permitted transferee means person transferring shares class b common stock corporation partnership b permitted transferee transferor determined pursuant clause v case class b holder estate deceased class b holder estate bankrupt insolvent class b holder holds record beneficial ownership shares class b common stock question permitted transferee means permitted transferee deceased bankrupt insolvent class b holder determined pursuant clause ii iii iv case may b notwithstanding anything contrary set forth herein class b holder may pledge holders shares class b common stock pledgee pursuant bona fide pledge shares collateral security indebtedness due pledgee provided shares shall transferred registered name pledgee shall remain subject provisions section a7 event foreclosure similar action pledgee pledged shares class b common stock may transferred permitted transferee pledgor converted shares class common stock pledgee may elect c purposes section a7 relationship person derived legal adoption shall considered natural one ii joint owner shares class b common stock shall considered class b holder shares iii minor shares class b common stock held pursuant uniform gifts minors act similar law shall considered class b holder shares iv unless otherwise specified term person means natural persons legal entities v without derogating election conferred upon corporation pursuant subclause c clause reference corporation shall include successor corporation resulting merger consolidation reference partnership shall include successor partnership resulting death admission withdrawal partner transfer shares class b common stock permitted hereunder shall result automatic conversion shares class b common stock equal number shares class common stock without act effective date certificates representing shares presented transfer books corporation may connection preparing list stockholders entitled vote meeting stockholders condition transfer registration shares class b common stock corporations books require furnishing affidavits proof deems necessary establish person beneficial owner shares class b common stock permitted transferee e shares class b common stock shall registered names beneficial owners thereof street nominee name purpose beneficial owner shares class b common stock shall mean person entity possesses power either singly jointly direct voting disposition shares including voting trustee voting trust corporation shall note certificates shares class b common stock restrictions transfer registration transfer imposed section a7 otherwise b preferred stock board directors hereby authorized time provide resolution issuance shares preferred stock one series exceeding aggregate number shares preferred stock authorized restated certificate incorporation amended time determine respect series designations preferences relative participating optional special rights qualifications limitations restrictions appertaining thereto including without limiting generality foregoing voting rights appertaining shares preferred stock series may applicable generally upon happening continuance stated events conditions rate dividend holders preferred stock series may entitled may cumulative noncumulative rights holders preferred stock series event liquidation dissolution winding affairs corporation rights holders preferred stock series convert exchange shares preferred stock series shares class capital stock including determination price prices rate rates applicable rights convert exchange adjustment thereof time times right convert exchange shall applicable time times particular price rate shall applicable provided however corporation shall issue shares preferred stock carrying excess one vote per share preferred stock convertible class b common stock without prior approval majority interest holders class b common stock class common stock voting separate classes corporation shall issue shares preferred stock series certificate setting forth copy resolution resolutions board directors fixing powers designations preferences relative participating optional rights qualifications limitations restrictions appertaining shares preferred stock series number shares preferred stock series authorized board directors issued shall made seal corporation signed chairman board president vice president attested secretary assistant secretary acknowledged chairman board president vice president provided laws state delaware shall filed copy thereof recorded manner prescribed laws state delaware fifth furtherance limitation powers conferred statute provided 1 number directors shall fixed manner provided bylaws corporation 2 election directors need written ballot 3 board directors expressly authorized adopt amend repeal bylaws corporation extent specified therein sixth corporation perpetual existence seventh private property stockholders shall subject payment corporate debts extent whatever eighth whenever compromise arrangement proposed corporation creditors class andor corporation stockholders class court equitable jurisdiction within state delaware may application summary way corporation creditor stockholder thereof application receiver receivers appointed corporation provisions section 291 title 8 delaware code application trustees dissolution receiver receivers appointed corporation provisions section 279 title 8 delaware code order meeting creditors class creditors andor stockholders class stockholders corporation case may summoned manner said court directs majority number representing threefourths value creditors class creditors andor stockholders class stockholders corporation case may agree compromise arrangement reorganization corporation consequence compromise arrangement said compromise arrangement said reorganization shall sanctioned court said application made binding creditors class creditors andor stockholders class stockholders corporation case may also corporation ninth corporation reserves right time amend alter change repeal provision contained restated certificate incorporation provisions authorized laws state delaware time effect may added inserted manner hereafter prescribed statute rights preferences privileges whatsoever nature conferred upon stockholders herein granted subject reservation provided however provisions articles fourth ninth restated certificate incorporation shall modified revised altered amended repealed rescinded whole part except affirmative vote holders majority interest class corporations outstanding capital stock entitled vote generally election directors voting separate classes tenth director corporation shall personally liable corporation stockholders monetary damages breach fiduciary duty director provided however foregoing clause shall apply liability director breach directors duty loyalty corporation stockholders ii acts omissions good faith involve intentional misconduct knowing violation law iii section 174 general corporation law state delaware iv transaction director derived improper personal benefit article shall eliminate limit liability director act omission occurring prior effective date restated certificate incorporation laws state delaware witness whereof corporation caused corporate seal hereto affixed restated certificate incorporation signed chairman board attested secretary 28th day august 1986 watts industries inc timothy p horne chairman board attest kenneth j mcavoy secretary corporate seal certificate amendment restated certificate incorporation watts industries inc watts industries inc corporation organized existing laws state delaware corporation hereby certify follows 1 name corporation watts industries inc 2 first paragraph article fourth restated certificate incorporation corporation hereby amended restated read entirety follows fourth total number shares capital stock corporation shall authority issue shall fiftyeight million 58000000 shares forty million 40000000 shall class common stock par value 10 per share class common stock thirteen million 13000000 shall class b common stock par value 10 per share class b common stock five million 5000000 shall preferred stock par value 10 per share issuable series preferred stock 3 meeting duly held august 17 1990 notice duly given board directors corporation adopted resolutions declaring advisability foregoing amendment directing officers corporation submit amendment stockholders corporation approval 1990 annual meeting stockholders written consent stockholders 4 stockholders corporation approved foregoing amendment favorable votes holders majority issued outstanding shares class common stock corporation ii holders majority issued outstanding shares class b common stock corporation required article 4 section a3 companys restated certificate incorporation class securities corporation entitled vote foregoing amendment 5 amendment duly adopted accordance section 242 general corporation law state delaware 6 capital corporation reduced reason amendment witness whereof watts industries inc caused corporate seal affixed certificate signed behalf timothy p horne chairman board attested kenneth j mcavoy secretary hereby affirm facts stated therein true 18th day october 1990 attest watts industries inc corporate seal timothy p horne chairman board kenneth j mcavoy secretary certificate amendment restated certificate incorporation watts industries inc watts industries inc corporation organized existing general corporation law state delaware hereby certify first meeting board directors watts industries inc resolutions duly adopted setting forth proposed amendment restated certificate incorporation said corporation declaring said amendment advisable placing said amendment agenda next annual meeting stockholders said corporation consideration thereof resolution setting forth proposed amendment follows resolved restated certificate incorporation corporation amended changing section a7 article thereof numbered fourth amended said section a7 shall read follows 7 restriction transfer class b common stock person holding shares class b common stock record hereinafter called class b holder may transfer corporation shall register transfer shares class b common stock whether sale assignment gift bequest appointment otherwise except permitted transferee hereinafter defined permitted transferee shall mean respect person time shown record holder shares class b common stock follows case class b holder natural person permitted transferee shall mean spouse class b holder lineal descendant grandparent class b holder spouse lineal descendant lineal descendants spouses class b holder spouse herein collectively referred class b holders family members b trustee trustees trust benefit class b holder andor one permitted transferees described subclause clause subclause b provided trust may also grant general special power appointment one class b holders family members may permit trust assets used pay taxes legacies obligations trust estates one class b holders family members payable reason death family members c corporation beneficial ownership outstanding capital stock entitled vote election directors owned partnership beneficial ownership partnership interests entitled participate management partnership held class b holder permitted transferees determined clause provided reason change ownership stock partnership interests corporation partnership would longer qualify permitted transferee shares class b common stock held corporation partnership shall upon election corporation given written notice corporation partnership without act anyones part converted shares class common stock effective upon date giving notice stock certificates formerly representing shares class b common stock shall thereupon thereafter deemed represent like number shares class common stock private charitable foundation trustee trustees private charitable foundation event foundation organized trust trustee trustees charitable remainder trust foundation trust established one class b holders andor one permitted transferees described subclause clause subclause e estate class b holder f trustee trustees voting trust established one class b holders andor one permitted transferees described subclause clause subclause f ii case class b holder holding shares class b common stock question trustee trustees pursuant revocable trust purpose voting trust revocable consent trustee shall deemed constitute revocable trust charitable remainder trust permitted transferee means person originally transferred shares class b common stock trust event transferor trust revoked dissolved transferor shall deemed original settlor settlors trust b permitted transferee transferor determined pursuant section a7a iii case class b holder holding shares class b common stock question trustee trustees pursuant trust irrevocable charitable remainder trust permitted transferee means person whose benefit principal may distributed either end term trust whether power appointment otherwise b permitted transferee person determined pursuant section a7a iv case class b holder holding shares class b common stock question trustee trustees pursuant charitable remainder trust permitted transferee means person originally transferred shares class b common stock trust b permitted transferee transferor determined pursuant section a7a v case class b holder private charitable foundation corporation partnership holding record beneficial ownership shares class b common stock question permitted transferee means person transferring shares class b common stock private charitable foundation corporation partnership b permitted transferee transferor determined pursuant section a7a vi case class b holder estate deceased class b holder estate bankrupt insolvent class b holder holds record beneficial ownership shares class b common stock question permitted transferee means permitted transferee deceased bankrupt insolvent class b holder determined pursuant section a7a purposes applying provisions section a7a connection transfer shares class b common stock permitted transferee person deceased otherwise longer existence shall determined person living otherwise existence except contemplated clause iia section a7a ii determination permitted transferees person may made successive applications provisions section a7a provided herein case example determination permitted transferees trust involving analysis original transferor trust permitted transferees transferor b notwithstanding anything contrary set forth herein class b holder may pledge holders shares class b common stock pledgee pursuant bona fide pledge shares collateral security indebtedness due pledgee provided shares shall transferred registered name pledgee shall remain subject provisions section a7 event foreclosure similar action pledgee pledged shares class b common stock may transferred permitted transferee pledgor converted shares class common stock pledgee may elect c purposes section a7 relationship person derived legal adoption shall considered natural one ii joint owner shares class b common stock shall considered class b holder shares iii minor shares class b common stock held pursuant uniform gifts minors act similar law shall considered class b holder shares iv unless otherwise specified term person means natural persons legal entities v term class b common stock shall deemed include securities corporation predecessors respect class b common stock issued vi without derogating election conferred upon corporation pursuant subclause c clause reference corporation shall include successor corporation resulting merger consolidation reference partnership shall include successor partnership resulting death admission withdrawal partner transfer shares class b common stock permitted hereunder shall result automatic conversion shares class b common stock equal number shares class common stock without act effective date certificates representing shares presented transfer books corporation may connection preparing list stockholders entitled vote meeting stockholders condition transfer registration shares class b common stock corporations books require furnishing affidavits proof deems necessary establish person beneficial owner shares class b common stock permitted transferee e shares class b common stock shall registered names beneficial owners thereof street nominee name purpose beneficial owner shares class b common stock shall mean person entity possesses power either singly jointly direct voting disposition shares including voting trustee trustees voting trust corporation shall note certificates shares class b common stock restrictions transfer registration transfer imposed section a7 otherwise second thereafter pursuant resolution board directors annual meeting stockholders said corporation duly called held upon notice accordance section 222 general corporation law state delaware meeting necessary number shares required statute voted favor amendment third said amendment duly adopted accordance provisions section 242 general corporation law state delaware witness whereof said watts industries inc caused certificate signed charles w grigg president kenneth j mcavoy secretary 15th day october 1991 charles w grigg president attest kenneth j mcavoy secretary 212390c1 certificate amendment restated certificate incorporation watts industries inc watts industries inc corporation organized existing laws state delaware corporation hereby certify follows 1 name corporation watts industries inc 2 first paragraph article fourth restated certificate incorporation corporation hereby amended restated read entirety follows fourth total number shares capital stock corporation shall authority issue shall one hundred ten million 110000000 shares eighty million 80000000 shall class common stock par value 10 per share class common stock twentyfive million 25000000 shall class b common stock par value 10 per share class b common stock five million 5000000 shall preferred stock par value 10 per share issuable series preferred stock 3 meeting duly held august 9 1994 notice duly given board directors corporation adopted resolutions declaring advisability foregoing amendment directed officers corporation submit amendment stockholders corporation approval 1994 annual meeting stockholders annual meeting called held upon notice accordance section 222 general corporation law state delaware 4 stockholders corporation approved foregoing amendment favorable votes holders majority issued outstanding shares class common stock corporation ii holders majority issued outstanding shares class b common stock corporation required article fourth section a3 article ninth corporations restated certificate incorporation class securities corporation entitled vote foregoing amendment 5 amendment duly adopted accordance section 242 general corporation law state delaware 6 capital corporation reduced reason amendment witness whereof watts industries inc caused corporate seal affixed certificate signed behalf timothy p horne chairman board attested kenneth j mcavoy secretary hereby affirm facts stated therein true 18th day october 1994 attest watts industries inc corporate seal timothy p horne chairman board kenneth j mcavoy secretary exhibit 92 amendment voting trust agreement whereas timothy p horne frederic b horne trustees horne family voting trust agreement 1991 dated october 31 1991 agreement whereas timothy p horne effective date hereof gifted tara v horne judith rae horne trustee tiffany rae horne trust 1984 portion voting trust certificates issued agreement whereas trustees desire amend schedule agreement reflect gifts therefore parties hereby agree follows 1 schedule agreement hereby amended restated entirety read follows schedule stockholder shares class b cert timothy p horne 2751220 126 161 frederic b horne 1355166 129 159 george b horne 2000000 132 158 frederic b horne trustee peter w horne trust 1976 1285840 156 173 timothy p horne trustee deborah horne trust 1976 1335840 138 157 timothy p horne trustee daniel w horne trust 1980 1335840 134 155 tara v horne 50000 126 judith rae horne trustee tiffany rae horne trust 1984 50000 126 adjusted reflect twoforone stock split effected means stock dividend payable march 15 1994 2 except hereinabove provided parties ratify confirm agreement respects parties hereto executed amendment agreement one counterparts seal february 3 1995 timothy p horne trustee horne family voting trust 1991 frederic b horne trustee horne family voting trust 1991 exhibit 106 watts industries inc retirement plan salaried employees amended restated effective january 1 1994 december 1994 page introduction article definitions 101 accumulated contributions account 1 102 actuarial equivalent 1 103 actuary 2 104 affiliated employer 2 105 beneficiary 2 106 board directors 2 107 code 2 108 committee 3 109 compensation 3 110 contingent annuitant 3 111 covered compensation 4 112 disqualifying break service 4 113 effective date 4 114 eligible employee 4 115 employee 4 116 employer 5 117 erisa 5 118 fiduciary 5 119 final average compensation 5 120 highly compensated employee 5 121 limitation year 7 122 maximum offset allowance 8 123 normal retirement age 8 124 participant 8 125 plan 8 126 plan administrator 8 127 plan year 9 128 prior plan 9 129 retired participant 9 130 social security benefit 9 131 social security compensation 10 132 social security retirement age 10 133 social security taxable wage base 10 134 sponsoring employer 10 135 terminated participant 10 136 trust 10 137 trust fund 11 138 trustee 11 article 2 service page 201 service prior january 1 1985 12 202 hour service defined 12 2021 break service defined january 1 1985 13 2022 crediting service january 1 1985 14 2023 recrediting service upon reemployment 14 203 hour service defined 14 204 benefit service prior january 1 1985 15 205 benefit service january 1 1985 15 article 3 participation 301 participation requirements 17 302 years service 19 303 participation upon reemployment 20 article 4 retirement dates 401 normal retirement date 23 402 early retirement date 23 403 deferred retirement date 23 article 5 retirement benefits 501 form normal retirement benefit 24 502 spouse joint survivor annuity 24 5021 amount spouse joint survivor annuity 24 5022 election spouse joint survivor annuity 24 5023 information furnished participant 25 5024 spousal consent required 26 503 amount normal retirement benefit 26 5031 minimum benefit participants january 1 1979 30 5032 accrued normal retirement benefit 31 504 maximum retirement benefits 31 5041 limitation applicable defined contribution plan participants 35 5042 affiliated employees 37 505 early retirement benefit 38 5051 social security option 38 506 deferred retirement benefit 39 507 suspension benefit distributions 40 508 nonduplication benefits 42 509 retirement prior january 1 1985 42 510 participants attained normal retirement age retired prior january 1 1986 42 article 5 retirement benefits continued page 511 disability retirement benefit certain participants participated pension plan salaried employees spence engineering company inc december 31 1991 42 article 6 termination service 601 requirements vested benefits 44 602 vested benefits 44 6021 computation vested benefit 44 6022 early commencement vested benefit 45 article 7 death participant 701 death prior retirement 46 702 surviving spouse benefit 46 703 amount surviving spouse benefit 46 704 death commencement benefits normal retirement age 48 article 8 optional forms benefit 801 time election 49 802 contingent annuitant option 49 803 ten year certain life annuity option 49 804 five year certain life annuity option 50 805 refund accumulated contribution account 50 806 option effective 51 807 beneficiary 52 808 limitation election option 52 809 spousal consent requirement 52 article 9 change status transfer 901 change status eligible employee noneligible employee 53 902 change status noneligible employee eligible employe 53 9021 nonduplication benefits 53 903 transfer employment 54 9031 employment affiliated employer 54 904 employment watts fluidair co 54 905 employment spence engineering company inc 55 article 10 administration page 1001 allocation responsibility among fiduciaries plan trust administration 56 1002 indemnification 56 1003 appointment committee 57 1004 records reports 57 1005 committee powers duties 58 1006 rules decisions 59 1007 committee procedures 59 1008 authorization benefit payments 60 1009 application forms payment 60 1010 claims procedure 60 1011 appeal review procedure 61 1012 evidence 61 article 11 funding plan 1101 medium funding 62 1102 contributions 62 1103 fund exclusive benefit participants 62 1104 forfeitures 62 1105 interests participants trust fund 62 1106 payment expenses 62 article 12 payment retirement benefits 1201 payment small amounts 64 1202 deemed distribution 64 1203 payments incapacitated persons 64 1204 spendthrift 65 1205 payment qualified domestic relations orders 65 1206 latest commencement benefits 65 1207 commencement benefits prior normal retirement age 66 1208 distribution benefits beginning death 67 1209 direct rollover distributions 67 article 13 amendments termination plan 1301 rights employer amend terminate 70 1302 termination plan 70 1303 limitations benefits upon termination 71 1304 allocation assets 71 1305 distribution media 73 article 14 distribution limitations early termination provisions 1401 distribution limitations 74 1402 early termination provisions 76 article 15 topheavy provisions 1501 article controls 79 1502 definitions 79 1503 topheavy status 83 1504 termination topheavy status 86 article 16 miscellaneous 1601 rights employer 87 1602 return contributions 87 1603 merger 88 1604 leased employees 88 1605 applicable law 89 1606 headings 89 1607 gender number 89 91497salpdt3 introduction watts industries inc retirement plan salaried employees previously known watts regulator co retirement plan salaried employees hereinafter plan established effective january 1 1985 successor continuation retirement plan salaried employees watts regulator co retirement plan employees webster foundry division hereinafter prior plans effective december 31 1991 pension plan employees spence engineering company inc hereinafter spence plan merged plan assets liabilities spence plan becoming assets liabilities plan effective october 1 1993 henry pratt company retirement plan salaried employees hereinafter henry pratt plan merged plan assets liabilities henry pratt plan becoming assets liabilities plan watts industries inc hereinafter sponsoring employer hereby amending restating plan hereinafter set forth unless specifically stated otherwise effective january 1 1994 comply tax reform act 1986 omnibus budget reconciliation acts 1986 1987 1989 1993 technical miscellaneous revenue act 1988 unemployment compensation amendments 1992 intention employer plan herein amended restated shall continue recognized qualified pension plan sections 401a 501a internal revenue code provisions plan set forth plan document shall apply eligible employee terminates employment effective date provision set forth herein rights benefits employee terminated employment prior effective date provision set forth herein shall determined accordance provisions plan effect date employment terminated article definitions following words phrases shall defined stated unless different meaning plainly required context 101 accumulated contributions account means sum amounts contributed prior january 1 1987 participant pension plan employees spence engineering company plus ii 5 interest per year december 31 1987 rates provided section 411c2ciii code january 1 1988 first day calendar month coincident immediately following date withdrawal date benefit commencement 102 actuarial equivalent term similar import wherever used plan means benefit equivalent value determined follows purposes section 504 section 1502e actuarial equivalents determined using 5 interest rate up1984 mortality table employees up1984 mortality table set back three years beneficiaries b purposes section 5021 5051 801 802 803 805 except respect lump sum payments 1503b actuarial equivalents calculated using 7 interest rate up1984 mortality table employees up1984 mortality table set back three years beneficiaries c purposes section 805 respect lump sum payments actuarial equivalents shall determined b except interest rate immediate annuities set pension benefit guaranty corporation month payment used purposes section 1201 actuarial equivalents determined b except interest rate immediate annuities set pension benefit guaranty corporation month payment lump sum payments used e purposes article 13 section 1402iv actuarial equivalents determined specified regulations promulgated pension benefit guaranty corporation 103 actuary means actuarial consultant actuarial consultants designated time make actuarial computations connection plan 104 affiliated employer means following employer corporation member controlled group corporations includes employer determined provisions section 414b code b trade business common control defined section 414c code employer c organization member affiliated service group defined section 414m code includes employer entity required aggregated employer pursuant regulations section 414o code corporation trade business member affiliated service group shall treated affiliated employer member controlled group 105 beneficiary means person contingent annuitant entitled receive death benefits payable upon death participant 106 board directors board means board directors watts industries inc successor thereto 107 code means internal revenue code 1986 amended time reference specific provision code shall include provision valid regulation ruling promulgated thereunder provision future law amends supplements supersedes provision 108 committee means pension plan committee appointed administer plan set forth article 10 109 compensation shall mean total compensation payable employee employer reportable federal government income tax purposes form w2 form prescribed internal revenue service take place excluding stock option rights compensation also includes contributions made behalf employee employer pursuant salary deferral agreement section 401k code andor salary reduction agreement pursuant cafeteria plan established section 125 code event shall participants compensation taken account plan year exceed 200000 150000 plan years commencing january 1 1994 amount secretary treasury may determine plan year accordance section 401a17 code change dollar amount set forth adjusted secretary treasury accordance section 401a17 code shall apply compensation taken account plan years beginning plan year change effective first adjustment effective january 1 1990 determining compensation participant purposes dollar limitation rules section 414q6 code shall apply except applying rules term family shall include spouse participant lineal descendants participant attained age 19 close year result applying rules dollar limitation exceeded limitation shall prorated among affected family members proportion eachsuch individuals compensation determined section application dollar limitation 110 contingent annuitant means person designated participant receive benefit contingent annuitant option following death participant accordance article 8 111 covered compensation means plan year average without indexing social security taxable wage bases effect beginning plan year section 230 social security act calendar year 35year period ending last day calendar year participant attains attain social security retirement age determining participants covered compensation plan year social security taxable wage base current plan year subsequent plan year shall assumed effect plan year determination made participants covered compensation plan year 35year period participants covered compensation plan year participant attained social security retirement age participants covered compensation shall automatically adjusted plan year accordance rules 112 disqualifying break service occurs employee met requirements vested benefit section 602a commencement break service incurs break service equals exceeds greater five years b aggregate number years service employee completed prior recent break service 113 effective date means january 1 1994 restated plan original effective date plan january 1 1985 114 eligible employee means person employee employer paid salaried basis including officer director engaged capacity solely director term employee shall include person employed employer covered collective bargaining agreement provide plan employee leased employee within meaning section 414n2 code 115 employee means person currently employed employer affiliated employer term employee also includes leased employees employer affiliated employer within meaning section 414n2 code extent employees deemed employees accordance provisions section 1604 116 employer means watts industries inc successor thereto entity hereafter affiliated watts industries inc adopts plan vote board consent watts industries inc term employer also includes foregoing context may require january 1 1994 following entities affiliated watts industries inc adopted plan therefore considered employer watts regulator company spence engineering co inc kf industries inc leslie controls inc rudolph labranche inc watts automatic control valve company inc circle seal controls inc nicholson steam trap inc james jones company kf sales corp ancon usa inc henry pratt company 117 erisa means employee retirement income security act 1974 amended time reference specific provision erisa shall include provision valid regulation filing promulgated thereunder provision future law amends supplements supersedes provision 118 fiduciary means employer committee trustee andor parties named fiduciaries pursuant section 101 respect specific responsibilities plan trust administration described article 10 119 final average compensation means average employees compensation sixty 60 consecutive months last one hundred twenty 120 months service prior normal retirement date defined section 401 received highest total compensation participant completed least sixty 60 months service employer final average compensation shall average compensation period service employer 120 highly compensated employee means respect plan year employee performs services employer affiliated employer determination year lookback year 5 owner within meaning section 416ilbi code time year b received compensation employer affiliated employer excess 75000 adjusted pursuant section 415d code c received compensation employer affiliated employer excess 50000 adjusted pursuant section 415d code among top 20 employees ranked basis compensation paid lookback year excluding however employees less six months eligibility service ii age 21 iii ordinarily work less six months per year iv ordinarily work less 1712 hours per week v included unit employees covered collective bargaining agreement 90 employers employees covered collective bargaining agreements plan covers employees covered agreements officer employer affiliated employer received compensation lookback year 50 dollar limitation effect section 415b1a code 50 employees fewer greater 3 employees 10 employees shall treated officers officer satisfied requirement lookback year highest paid officer year shall treated highly compensated employee determination year either 5 owner time year satisfies requirements paragraphs b c officer satisfies requirements paragraph year highest paid officer year ii among top 100 employees ranked compensation determination year shall treated highly compensated employee term highly compensated employee shall also include former highly compensated employee terminated employment employer affiliated employer prior determination year performs services employer affiliated employer determination year highly compensated employee either year termination employment determination year ending attainment age 55 employee determination year lookback year member family within meaning section 414q6b code 5 owner one ten highly compensated employees ranked basis compensation paid year individual shall treated separate employee compensation received individual contribution benefit individual shall aggregated compensation contribution benefit 5 owner highly compensated employee purposes determining employees compensation section compensation shall mean employees section 415 compensation defined section 504c including amounts contributed behalf employee employer affiliated employer pursuant salary deferral agreement plan cash deferred arrangement described section 401k code salary reduction agreement pursuant cafeteria plan established section 125 code towards purchase annuity described section 403b code purposes section look back year means period twelve consecutive months immediately preceding determination year determining identity highly compensated employee committee may elect lookback year shall calendar year ending within determination year also purposes section determination year means plan year tested purposes determining employee highly compensated employee 121 limitation year means calendar year 122 maximum offset allowance means social security retirement age ii iii whichever applicable participants social security retirement age 65 0075 social security compensation ii participants social security retirement age 66 0068 social security compensation iii participants social security retirement age 67 higher 00625 social security compensation multiplied years benefit service maximum 25 years b retirement social security retirement age 34 1 factor shall adjusted required comply section 4011 code regulations thereunder notwithstanding foregoing maximum offset allowance shall exceed 12 benefit determined without regard offset based lesser social security compensation final average compensation 123 normal retirement age means participants age later participants 65th birthday b earlier five years service ii fifth anniversary date participant began participation plan except respect participant december 31 1991 participating spence plan october 1 1993 participating henry pratt plan term normal retirement age means participants 65th birthday 124 participant means employee satisfied eligibility requirements participation plan set forth article 3 participant hereof 125 plan means watts industries inc retirement plan salaried employees described instrument may amended hereafter 126 plan administrator means committee notwithstanding fact certain administrative functions respect plan may delegated person persons entity 127 plan year means twelvemonth period beginning january 1 ending following december 31 128 prior plan means context may require following retirement plan salaried employees watts regulator co b retirement plan employees webster foundry division 129 retired participant means former participant retired terms plan become eligible receive benefits plan 130 social security benefit means primary insurance benefit payable annually employee title ii social security act effect date terminates employment normal retirement date defined section 401 earlier computed without regard reduction loss benefits may result due income delay making application reason provided however case employee terminates employment prior attainment age sixty five social security benefit shall computed accordance following provisions employee satisfied eligibility requirements early retirement section 402 prior termination social security benefit based assumption received compensation termination date reached age sixtyfive b employee satisfied requirements early retirement section 402 prior termination social security benefit based assumption remained service employer reached age sixtyfive continued receive rate compensation employer effect termination date reached age sixtyfive income used purposes computing participants social security benefit portion annual compensation treated wages purposes social security act participants income earned prior first full year employment employee estimated applying 6 salary scale projected backwards first full year employment employer event participant furnishes committee documentation social security administration actual salary history year byyear basis participants social security benefit adjusted accordingly participant must make application social security administration information reasonable period time longer six 6 months later date participant ceases working company ii date participant notified benefit plan participants benefit adjusted accordance section 130 adjusted benefit commence date participant furnishes committee documentation actual salary history 131 social security compensation means lesser participants covered compensation average participants compensation three year period ending plan year termination retirement determining participants compensation year earnings excess social security taxable wage base effect year shall disregarded 132 social security retirement age means persons born prior 1938 age 65 b persons born 1938 later prior 1955 age 66 c persons born 1955 later age 67 133 social security taxable wage base means contribution benefit limit effect section 230 social security act first day plan year 134 sponsoring employer means watts industries inc successor thereto 135 terminated participant means former participant ceased employee prior normal retirement date defined section 401 reason death retirement accordance terms plan 136 trust means agreement employer trustee constitutes part plan trust created agreement employer trustee named therein shall also constitute part plan may amended time 137 trust fund trust means watts industries inc master trust maintained accordance terms agreement trust established may amended time 138 trustee means person persons entity named trustee successor office article 2 service 201 service prior january 1 1985 respect employment prior january 1 1985 service shall mean service defined prior plans 202 service january 1 1985 respect employment january 1 1985 service shall mean purposes determining eligible employees eligibility participate plan eligibility receive benefits plan eligible employees recent period employment employer affiliated employer prior normal retirement date defined section 401 date termination service earlier employee break continuity service total period service shall aggregated extent provided section 2023 employee terminates service incur break service pursuant section 2021 total period service shall aggregated service shall considered broken event service armed forces united states america provided employee returns active service employer affiliated employer prior termination reemployment rights federal laws b authorized leave absence excess one year due sickness cause approved employer according rules uniform application employees similarly situated provided employee returns employment employer expiration absence c illness injury excess one year layoff excess one year e absence period participant receiving disability benefits employers long term disability program provided participant eligible receiving disability benefits title ii social security act participant shall continue accrue benefits plan period long term disability based annual compensation immediately preceding date commencement disability participants long term disability continues normal retirement date defined section 401 normal retirement benefit plan shall commence date accordance normal form benefit described section 501 502 whichever applicable optional retirement benefit elected participant set forth article 8 2021 break service defined january 1 1985 service shall considered broken following provided ser vice broken plan year employee completes 500 hours service voluntary quit b discharge c illness injury excess one year layoff excess one year e authorized leave absence excess one year f failure return service employer upon expiration authorized leave absence within period time entitling employee reemployment rights discharge armed forces united states america purposes plan one year break service shall deemed occurred end plan year employee fails accumulate 500 hours service 2022 crediting service january 1 1985 employee must accumulate least 1000 hours service plan year order credited year service event shall em ployee credited service plan year failed accumulate least 1000 hours service provided however employee 1000 hours service plan year either enters following break service reenters employment employer first day plan year b terminates employment retires reaches normal retirement date defined section 401 prior end plan year shall deemed accrued partial year service plan year ratio hours service year bears 1000 2023 recrediting service upon reemployment participant whose service broken subsequently reemployed thereafter meets definition eligible employee completes one year service provided section 303 prior service shall reinstated date reemployment 203 hour service defined hour service means hour employee directly indirectly paid entitled payment performance duties employer affiliated employer hours credited computation period duties performed b hour employee directly indirectly paid entitled payment account period time duties performed employer affiliated employer irrespective whether employment relationship terminated due vacation holiday illness incapacity including disability layoff jury duty military duty leave absence excluding payments made due plan maintained solely purpose complying workmens compensation unemployment compensation disability insurance laws provided however 501 hours shall credited employee paragraph b account single continuous period absence c hour credited b absence listed section 202 break service provided employee retires returns employ employer affiliated employer upon expiration absence hour counted paragraphs b c back pay irrespective mitigation damages awarded agreed employer affiliated employer hours credited computation period back pay award agreement applicable e hours credited paragraphs b c shall computed basis number hours employee would compensated continued work regular work schedule period absence provided however case hours credited paragraph b number hours shall less number hours employee would receive computation made accordance provisions section 2530200b2b c labor department regulations incorporated herein reference 204 benefit service prior january 1 1985 respect employment prior january 1 1985 benefit service shall mean benefit service defined prior plans 205 benefit service january 1 1985 respect employment january 1 1985 benefit service purposes determining eligible employees benefit plan means period service eligible employee employer prior normal retirement date defined section 401 excluding service prior twentyfirst birthday provided however service unpaid absence active employment due military service shall cluded determining eligible employees benefit service extent required law article 3 participation 301 participation requirements subject provisions paragraph b eligible employee participant december 31 1993 shall continue participate plan january 1 1994 accordance provisions restated plan ii eligible employee attained age 21 completed least one year service effective date shall become participant effective date iii eligible employee shall become participant first day month coinciding next following date attained age 21 completed least one year service provided eligible employee b notwithstanding provision plan contrary following provisions shall apply effective january 1 1988 employee performs hour service january 1 1988 hired attaining age 60 shall eligible participate plan later january 1 1988 first day month coinciding next following date completed least one year service employee shall credited service purposes determining eligibility receive benefits amount benefit plan date employment including service earned prior january 1 1988 ii effective january 1 1987 nonunion employee james jones company december 19 1986 shall eligible join plan first day month coinciding next following date attains age 21 completes one year service subject rules plan service james jones company later december 31 1969 date hire james jones company prior january 1 1987 shall recognized vesting eligibility purposes service benefit accrual purposes shall begin january 1 1987 iii effective january 1 1989 eligible employee kf industries inc leslie controls inc rudolph labranche inc watts automatic control valve company inc shall eligible join plan first day month coinciding next following date attains age 21 completes one year service subject rules plan service kf industries inc leslie controls inc rudolph labranche inc watts automatic control valve company inc prior january 1 1989 shall recognized vesting eligibility purposes service benefit accrual purposes shall begin january 1 1989 iv effective july 19 1990 eligible employee nicholson steam trap inc shall eligible join plan first day month coinciding next following date attains age 21 completes one year service subject rules article ii plan service nicholson steam trap inc prior july 19 1990 shall recognized vesting eligibility purposes service benefit accrual purposes shall begin july 19 1990 v effective september 7 1990 eligible employee circle seal controls inc shall eligible join plan first day month coinciding next following date attains age 21 completes one year service subject rules plan service circle seal controls inc prior september 7 1990 shall recognized vesting eligibility purposes service benefit accrual purposes shall begin september 7 1990 vi effective january 1 1993 eligible employee contromatics inc shall eligible join plan first day month coinciding next following date attains age 21 completes one year service subject rules plan service contromatics inc prior january 1 1993 shall recognized vesting eligibility purposes service benefit accrual purposes shall begin january 1 1993 vii effective december 31 1991 eligible employee spence engineering company inc shall eligible join plan first day month coinciding next following date attains age 21 completes one year service subject rules plan service spence engineering company inc prior january 1 1992 shall recognized vesting eligibility purposes service benefit accrual purposes shall begin january 1 1992 viii effective october 1 1993 eligible employee henry pratt company shall eligible join plan first day month coinciding next following date attains age 21 completes one year service subject rules plan service henry pratt company prior october 1 1993 shall recognized vesting eligibility purposes service benefit accrual purposes shall begin october 1 1993 302 years service purposes article 3 employee shall credited one year service computation period herein defined completes least 1000 hours service computation period shall initially twelvemonth period commencing employees date employment reemployment applicable subsequent computation periods shall based plan year commencing first plan year begins date employment reemployment 303 participation upon reemployment subject provisions paragraph b participant reemployed following break service pursuant section 2021 shall participate reemployment date provided met requirements section 2023 b participants participated spence plan december 31 1991 reemployment terminated participant vested retirement benefit event reemployment terminated participant met requirements vested benefit section 602a terminated participant shall entitled participate plan immediately upon reemployment terminated participant received refund balance accumulated contributions account benefit service termination employment fully restored combined subsequent benefit service calculate benefit plan upon subsequent retirement termination employment terminated participant received refund balance accumulated contribution account may repay amount employer pursuant requirements set forth subparagraph iii repays amount benefit service termination employment fully restored combined subsequent benefit service calculate benefit plan upon subsequent retirement termination employment repay amount upon subsequent retirement termination employment shall entitled receive benefit equal benefit provided section 503 initial termination date plus benefit calculated using benefit service credited date reemployment subsequent retirement termination employment ii reemployment terminated participant vested retirement benefit event reemployment terminated participant met requirements vested benefit section 602a incurred disqualifying break service participant shall treated new employee terminated participant receive balance accumulated contribution account upon prior termination service shall entitled receive benefit equal actuarial equivalent balance accumulated contribution account b event reemployment terminated participant incurred disqualifying break service met requirements vested benefit section 602a terminated participant shall entitled participate plan immediately upon reemployment 1 terminated participant received refund balance accumulated contribution account benefit service termination employment combined subsequent benefit service calculate benefit plan upon subsequent retirement termination employment 2 terminated participant received refund balance accumulated contribution account may repay amount employer pursuant requirements set forth subparagraph iii repays amount benefit service termination employment combined subsequent benefit service calculate benefit plan upon subsequent retirement termination employment terminated participant repay amount upon subsequent retirement termination employment shall entitled benefit calculated using benefit service credited date reemployment subsequent retirement termination employment iii repayment terminated participant received refund balance accumulated contribution account subsequently resumed employment prior incurring five consecutive oneyear breaks service may repay employer credit fund full amount cash settlement interest compounded annually rate 5 per annum rate may prescribed secretary treasury date cash settlement determined date repayment must made prior occurrence earlier five consecutive oneyear breaks service five years date reemployment article 4 retirement dates 401 normal retirement date normal retirement date participant shall first day month coinciding next following normal retirement age 402 early retirement date participant excluding former participant spence plan henry pratt plan hired prior january 1 1992 reached fiftyfifth birthday also completed least five years service may elect upon written notice committee early retirement date may first day month subsequent date election prior normal retirement date effective january 1 1992 participant hired january 1 1992 reached fiftyfifth birthday also completed least ten years service may elect upon written notice committee early retirement date may first day month subsequent date election prior normal retirement date 403 deferred retirement date participant remains service employer affiliated employer normal retirement date deferred retirement date shall first day month coincides next follows date actual retirement article 5 retirement benefits 501 form normal retirement benefit except provided section 502 participants normal retirement benefit plan shall annuity life payable monthly commencing participants normal retirement date defined section 401 terminating monthly payment preceding death 502 spouse joint survivor annuity lieu life annuity payable section 501 participant married benefit commencement date shall receive retirement benefit form spouse joint survivor annuity described section 5021 provided made election section 5022 benefit paid life annuity form described section 501 optional form described section 5051 article 8 5021 amount spouse joint survivor annuity spouse joint survivor annuity shall reduced amount payable participant lifetime provision continuation 50 reduced amount participants spouse duration spouses lifetime death participant amounts shall actuarial equivalent benefits set forth hereafter article 5 payable single life basis 5022 election spouse joint survivor annuity married participant may elect pursuant section 5024 receive benefit form spouse joint survivor annuity delivering committee election period described written election benefits paid form described section 501 optional form described section 5051 article 8 election period respect life annuity form described section 501 spouse joint survivor annuity shall ninety 90 day period ending participants benefit commencement date participant may revoke election filing written revocation committee time election period election married participant optional form described section 5051 article 8 shall made accordance provisions section 5024 section 5051 article 8 whichever applicable 5023 information furnished participant fewer 30 days 90 days participants benefit commencement date committee shall furnish participant general information spouse joint survivor annuity general information shall writing shall include terms conditions spouse joint survivor annuity b participants right elect effect electing waive spouse joint survivor annuity c rights spouse right revoke effect revoking election waive spouse joint survivor annuity e eligibility conditions material features optional forms payment available plan f relative values optional forms payment available plan g information may required applicable regulations committee shall also furnish participant upon written request made within sixty 60 days following date furnished general information additional information explaining financial effect upon pension terms dollars per pension payment making election additional information shall furnished participant within thirty 30 days following date participants written request received committee notice described required actuarial equivalent value participants nonforfeitable accrued benefit less equal 3500 participants benefit commencement date 5024 spousal consent required notwithstanding anything herein contrary election mar ried participant optional form described article 8 section 5051 normal form described section 501 shall take effect unless surviving spouse consents writing election specifies beneficiary form benefit payment elected participant lieu spouse joint survivor annuity consent acknowledges effect election witnessed plan representative notary public b established satisfaction committee consent required may obtained spouse cannot located participant show court order legally separated spouse abandoned spouse within meaning local law due circumstances secretary treasury may prescribe consent spouse determination committee respect spouse b shall effective respect spouse 503 amount normal retirement benefit subject provisions section 5031 504 annual normal retirement benefit payable participant retired plan january 1 1985 normal retirement date prior january 1 1986 shall amount equal forty percent 40 final average compensation less fifty percent 50 social security benefit multiplied fraction exceed one numerator years fractions thereof benefit service denominator 30 b subject provisions section 5031 504 annual normal retirement benefit payable participant retired plan january 1 1986 normal retirement date prior january 1 1989 shall amount equal fortyfive percent 45 final average compensation less fifty percent 50 social security benefit multiplied fraction exceed one numerator years fractions thereof benefit service denominator 25 c subject provisions paragraphs e sections 5031 504 annual normal retirement benefit payable participant retires plan january 1 1989 normal retirement date shall amount equal greater ii iii 167 times participants final average compensation less maximum offset allowance result multiplied years benefit service maximum 25 years ii 100 times participants final average compensation multiplied years benefit service maximum 25 years iii participants accrued benefit december 31 1988 march 15 1990 dependent upon whether participant super highly compensated employee defined section 414q1a b code participants participated spence plan december 31 1991 notwithstanding foregoing provisions section respect participant participated spence plan december 31 1991 retires plan january 1 1994 annual normal retirement date annual normal retirement benefit shall equal sum b equal sum 1 2 3 4 1 58 1 participants final average compensation multiplied years benefit service earned prior june 1 1975 spence plan 2 34 1 participants final average compensation multiplied years benefit service earned june 1 1975 may 31 1980 spence plan 3 78 1 participants final average compensation multiplied years benefit service earned june 1 1980 may 31 1985 spence plan 4 1 participants final average compensation multiplied years benefit service earned june 1 1985 december 31 1986 spence plan amount benefit calculated accordance paragraph dia shall actuarially increased reflect change normal form benefit payment 5 year certain continuous annuity single life annuity b equal greater 1 2 1 167 times participants final average compensation less maximum offset allowance result multiplied years benefit service earned spence plan january 1 1987 prior january 1 1992 benefit service earned plan january 1 1992 maximum 25 years 2 100 participants final average compensation multiplied years benefit service earned spence plan january 1 1987 years benefit service earned january 1 1992 plan maximum 25 years notwithstanding foregoing participant credited 1000 hours service spence plan twelve month period beginning june 1 1985 ending may 31 1986 twelvemonth period beginning january 1 1986 ending december 31 1986 shall credited 2 years benefit service purposes section 503dia4 reflect change spence plans plan year calendar year e participants participated henry pratt plan september 30 1993 notwithstanding foregoing provisions section respect participant participated henry pratt plan september 30 1993 retires plan september 30 1993 annual normal retirement date normal retirement benefit shall amount based maximum 25 years combined total benefit service defined equal sum ii participants accrued benefit earned henry pratt plan september 30 1993 multiplied fraction numerator equals participants final average compensation determined retirement date denominator equals participants final average compensation determined december 31 1993 ii participants accrued benefit determined accordance section 503c years benefit service earned october 1 1993 plan purposes determining participants accrued benefit paragraph ei following shall apply participant hired henry pratt company september 7 1988 shall credited service henry pratt plan beginning september 7 1988 ending september 30 1993 service shall counted years completed months b participant hired henry pratt company september 7 1988 shall credited service henry pratt plan beginning date employment ending september 30 1993 service shall counted years completed months purposes section 503e combined total benefit service means service earned henry pratt plan benefit service earned plan event participants combined total benefit service exceeds twentyfive 25 years date retirement employer participants normal retirement benefit shall determined decreasing years service earned henry pratt plan number years exceeds twentyfive 25 benefit calculated paragraph ei shall recalculated using participants accrued benefit september 30 1993 5031 minimum benefit participants january 1 1979 annual normal retirement benefit participant employee january 1 1979 shall event less amount equal sum b year benefit service 1 portion compensation calendar year subject taxes federal insurance contributions act adjusted regulation year plus b 2 portion compensation calendar year excess amount subject taxes federal insurance contributions act adjusted regulation year 5032 accrued normal retirement benefit determine participants accrued normal retirement benefit section 503a b time prior normal retirement date shall first determined amount normal retirement benefit participant would received remained employ employer normal retirement date based final average compensation social security benefit date benefit determined amount shall multiplied fraction numerator number years benefit service including fractions thereof participant completed denominator number years benefit service including fractions thereof participant would completed remained employ employer normal retirement date 504 maximum retirement benefits plan years beginning 1986 actual projected annual amount participants benefit payable within limitation year shall exceed lesser ii 90000 ii 100 participants average annual section 415 compensation defined paragraph c three consecutive calendar years period employment less three years entire period employment participant received greatest aggregate section 415 compensation b event shall limitations paragraph less 10000 participant time participated defined contribution plan maintained employer affiliated employer c term section 415 compensation means wages salaries fees professional services amounts received employer affiliated employers limitation year without regard whether amount paid cash personal services actually rendered course employment employer extent amounts includable gross income including limited overtime pay tips bonuses commissions paid salesmen compensation services basis percentage profits commissions insurance premiums fringe benefits reimbursements expense allowances excluding following amounts contributed employer affiliated employer behalf employee pursuant salary deferral agreement plan cash deferred arrangement described section 401k code salary reduction agreement pursuant cafeteria plan established section 125 code plan deferred compensation includable employees gross income taxable year contributed distributions plan deferred compensation ii amounts realized exercise nonqualified stock option restricted stock property held employee either becomes free transferable longer subject substantial risk forfeiture iii amounts realized respect sale exchange disposition stock acquired qualified stock option iv amounts receive special tax benefits contributions made employer whether salary reduction agreement towards purchase annuity described section 403b code whether amounts excludable employees gross income limitation years beginning december 31 1991 purposes applying limitations section term section 415 compensation means compensation actually paid includable employees gross income limitation year dollar limitation described paragraph ai shall increased cost living adjustment factor prescribed secretary treasury section 415d code adjustment factor shall applied participants including participants beneficiaries receiving benefits plan items secretary shall prescribe e benefit payable participant commences prior participants social security retirement age date attains age 62 maximum annual amount determined paragraph ai shall reduced follows participants social security retirement age 65 59ths 1 month commencement payment benefits precedes month attains age 65 ii participants social security retirement age 66 67 59ths 1 first 36 months 512ths 1 additional month commencement payment benefits precedes month attains social security retirement age benefit payable participant commences age 62 maximum annual amount determined paragraph ai shall reduced accordance applicable regulations actuarial equivalent amount applied benefit beginning age 62 purposes paragraph actuarial equivalent shall determined using greater 5 interest rate specified section 102a purposes paragraph e benefit paid contingent annuity form participants spouse beneficiary spouse joint survivor annuity form payment benefit shall treated paid normal form payment adjustment maximum benefit need made f payment benefits participant commences social security retirement age maximum annual amount determined paragraph ai shall increased actuarial equivalent 90000 benefit multiplied adjustment factor specified paragraph e payable normal form participants social security retirement age purposes paragraph actuarial equivalent shall determined using lesser 5 interest rate specified section 102a g annual benefit retirement benefit plan payable annually form single life annuity except provided benefit payable form single life annuity must adjusted actuarially equivalent single life annuity applying limitations article interest rate assumption used determine actuarial equivalence greater interest rate specified section 102a plan 5 benefit payable participant normal form payment form spouse joint survivor annuity maximum annual amount determined paragraph shall reduced accordance applicable regulations actuarial equivalent amount payable normal form h participant completed less 10 years plan participation maximum annual amount determined paragraph ai shall adjusted multiplying amount fraction numerator participants number years plan participation parts thereof denominator 10 extent provided regulations guidance issued internal revenue service preceding sentence shall applied separately respect change benefit structure plan participant completed less 10 years service maximum amount determined section paragraph aii without regard paragraph ai shall adjusted multiplying amount fraction numerator participants number years service parts thereof denominator 10 extent provided regulations guidance issued internal revenue service preceding sentence shall applied separately respect change benefit structure plan j event shall provisions paragraph h paragraph reduce limitations paragraph amount less onetenth limitations determined without regard provisions paragraph h paragraph k participant ever covered one defined benefit plan maintained employer sum participants annual benefits plans may exceed maximum permissible amount l transitional rule notwithstanding foregoing provisions section 504 maximum limitation annual benefits respect person participant prior january 1 1983 whose annual benefit determined without regard changes plan july 1 1982 without regard costofliving adjustments occurring july 1 1982 december 31 1982 exceeds limitations set forth section 504 shall participants annual benefit december 31 1982 provided participants annual benefit exceed maximum limitation thereon december 31 1982 5041 limitation applicable defined contribution plan participants participant also participant defined contribution plan maintained employer affiliated employer sum defined benefit plan fraction defined contribution plan fraction year shall exceed 10 provided section 415e code regulations issued thereunder b defined benefit fraction limitation year fraction numerator sum participants projected annual benefits defined benefit plans whether terminated maintained employer denominator lesser 125 times dollar limit determined sections 415b 415d code adjusted accordance section 504h limitation year 14 times 100 participants highest average annual section 415 compensation including adjustments section 415b code three consecutive years notwithstanding participant first day first limitation year beginning december 31 1986 one defined benefit plans maintained employer existence may 6 1986 denominator fraction less 125 times sum annual benefits plans participant accrued close last limitation year beginning january 1 1987 disregarding changes terms conditions plan may 5 1986 preceding sentence applies defined benefit plans individually aggregate satisfied requirements section 415 code limitation years beginning january 1 1987 c defined contribution plan fraction limitation year fraction numerator sum annual additions participants accounts defined contribution plans whether terminated maintained employer current prior limitation years including annual additions attributable participants nondeductible employee contributions defined benefit plans whether terminated maintained employer annual additions attributable welfare benefit funds defined section 419e code individual medical accounts defined section 415l2 code maintained employer denominator sum maximum aggregate amounts current prior limitation years service employer regardless whether defined contribution plan maintained employer maximum aggregate amount limitation year lesser 125 times dollar limitation determined sections 415b 415d code effect section 415c1a code 35 participants section 415 compensation defined section 504c limitation year purposes calculating numerator defined contribution plan fraction participants aftertax payroll deduction contributions made 1987 shall taken account extent contributions exceed lesser 6 participants section 415 compensation defined section 504c limitation year ii 50 amount payroll deduction contributions limitation year employee participant end first day first limitation year beginning december 31 1986 one defined contribution plans maintained employer existence may 6 1986 numerator fraction adjusted sum fraction defined benefit fraction would otherwise exceed 10 terms plan adjustment amount equal product 1 excess sum fractions 10 times 2 denominator fraction permanently subtracted numerator fraction adjustment calculated using fractions would computed end last limitation year beginning january 1 1987 disregarding changes terms conditions plan made may 5 1986 using section 415 limitation applicable first limitation year beginning january 1 1987 purpose determining denominators preceding two fractions maximum benefit allowable maximum annual additions shall deemed equal lesser 140 percentage limits ii 125 dollar limits provided sections 415b 415c code year e adjustment necessary comply limitations section shall made participants benefit payable relevant defined benefit plan circumstances may accrued benefit participant defined benefit plan decrease result plan amendment change combined plan limits 5042 affiliated employers purposes sections 504 5041 employer affiliated employers shall considered one employer limitations shall applicable total benefits received employer affiliated employers determining affiliated employer purposes sections phrase 50 shall substituted least 80 place appears section 1563a1 code 505 early retirement benefit early retirement benefit participant elects retire early retirement date defined section 402 january 1 1985 shall benefit computed b elected participant benefit commencing normal retirement date defined section 401 amount equal accrued normal retirement benefit determined accordance provisions section 503 5031 whichever applicable section 5032 b reduced benefit commencing early retirement date first day month thereafter prior normal retirement date elected participant benefit shall computed reduced 59 1 first sixty months commencement benefits precedes normal retirement date 518 1 month thereafter commencement benefits precedes normal retirement date notwithstanding foregoing provisions section 505 respect participant september 30 1993 participating henry pratt plan early retirement benefit shall less benefit could received retired early retirement provisions henry pratt plan september 30 1993 5051 social security option participant entitled receive early retirement benefit elected benefit commence prior date entitled receive benefits title ii social security act may elect receive social security option receive larger monthly benefit prior date first entitled receive benefits title ii social security act smaller benefit first entitled receive benefits title ii social security act extent possible participant receive level monthly income payments plan income title ii social security act taken account provided however payments social security option actuarial equivalent early retirement benefit would received elected option participant elects benefit section benefits payable anyone upon death 506 deferred retirement benefit retirement prior age 70 12 participant continues employ employer affiliated employer attaining normal retirement age retires prior age 70 12 shall entitled upon actual retirement receive monthly deferred retirement benefit deferred retirement benefit payable paragraph shall determined accordance section 503 5031 whichever applicable based participants years benefit service including fractions thereof retirement date rate benefit effect plan retirement date b commencement benefits actively employed deferred retirement benefit payable participant attains age 70 12 continues employee shall equal participants accrued benefit determined earlier participants deferred retirement date defined section 403 ii last day plan year participant attains age 70 12 deferred retirement benefit payable paragraph b determined accordance section 503 5031 whichever applicable monthly benefit participant begun receiving benefits continues employee attainment age 70 12 shall adjusted effective january 1 following plan year participants benefit commenced succeeding january 1 prior participants deferred retirement date reflect effect changes participants accrued benefit since previous january 1 final adjustment shall made participants deferred retirement date adjustments required paragraph shall include reduction equal actuarial equivalent benefit payments already made respect participant event however benefit payable participant reduced result paragraph furthermore operation paragraph affect form benefit payment previously elected participant 507 suspension benefit distributions conditions suspension participant reemployed employer affiliated employer benefit commencement date age 7012 participant continues employment employer affiliated employer normal retirement date defined section 401 benefit payable calendar month permanently withheld participant completes 40 hours service calendar month four five week payroll period ending calendar month benefit permanently withheld actual amount scheduled paid calendar month conditions suspension met b redetermination benefits upon subsequent termination employment participant eligible begin receiving payments plan prior termination employment date whether benefit payments actually commenced participants retirement benefit shall redetermined accordance provisions plan applicable subsequent termination employment date prior benefit payments made retirement benefit redetermined shall reduced actuarial equivalent benefit payments previously made participant prior normal retirement date ii case lump sum payment actuarial equivalent payment portion payment attributable period participants normal retirement date reemployment commencement date form payment retirement benefit may thereafter become entitled shall determined accordance provisions article 5 time subsequently retires without regard form benefit previously paid participants retirement benefit redetermined shall less retirement benefit prior suspension payments c resumption benefits case participant receiving benefit payments prior reemployment payment benefits shall resume later first day third calendar month following month participant ceases satisfy conditions suspension described paragraph period suspension less three months participants benefit shall continue paid form payment effect suspension amount participants benefit shall redetermined taking account increased service benefits paid suspension shall less amount benefit participant receiving prior suspension notice suspension participant continues employed reemployed employer affiliated employer normal retirement date defined section 401 commencement benefit payments delayed case reemployment suspended accordance provisions paragraph committee shall give written notice participant required department labor regulations 2530203 3b4 later end first calendar month payroll period payment benefits would commenced participant remained returned employment 508 nonduplication benefits except otherwise provided article 9 participant plan shall receive benefits plan covering period service benefits paid qualified defined benefit plan employer contributes contributed behalf 509 retirement prior january 1 1985 except specified otherwise herein monthly retirement benefit participant retired service employer prior january 1 1985 shall determined accordance applicable provisions prior plan effect date retirement 510 participants attained normal retirement age retired prior january 1 1986 commencing january 1 1986 monthly retirement benefit active participant attained normal retirement age prior january 1 1986 retired participant retired prior january 1 1986 shall increased 25 year date active participant attained normal retirement age date retired participant retired anniversary date occurs 1986 provided participant retired participant shall entitled monthly benefit increase least 1000 511 disability retirement benefit certain participants partici pated spence plan december 31 1991 participant december 31 1991 participated pension plan salaried employees spence engineering company inc met requirements monthly disability benefit thereunder shall continue receive disability benefit plan monthly disability benefit terminate last payment due preceding earliest following occur tenth day trustee receives notice employer participant ceased entitled disability benefits social security act b date participants death c participants normal retirement date elected participants early retirement date article 6 termination service 601 requirements vested benefits payable plan participants employment terminated prior date entitled retire receive benefit plan except provided section 703d 805 article 6 602 vested benefits participant whose employment terminates january 1 1989 ceases employee prior normal retirement age reason except death retirement plan shall entitled deferred vested benefit commencing normal retirement date defined section 401 equal accrued normal retirement benefit determined accordance provisions section 6021 multiplied vesting percentage accordance following schedule years service vesting percentage less 5 years 0 5 years 100 b participant shall fully vested accumulated contribution account times 6021 computation vested benefit amount deferred vested benefit payable terminated participant section 602a shall equal normal retirement benefit would entitled section 503 continued employ employer normal retirement date benefit based final average compensation social security benefit termination date based benefit service would completed normal retirement date multiplied fraction numerator benefit service termination date denominator benefit service would completed normal retirement date notwithstanding foregoing amount deferred vested benefit payable terminated participant employee january 1 1979 shall event less accrued normal retirement benefit determined accord ance provisions section 5031 b amount deferred vested benefit payable terminated participant section 602b shall equal actuarial equivalent balance accumulated contribution account 6022 early commencement vested benefit terminated participant entitled vested benefit section 602 may elect benefit commence time reaches fiftyfifth birthday provided completed least 10 years service case subject provisions paragraph b benefit shall computed section 6021 shall reduced 59 1 first sixty 60 months benefit commencement date precedes normal retirement date 518 1 month thereafter benefit commencement date precedes normal retirement date b vested benefit participant september 30 1993 participating henry pratt plan elects early commencement described paragraph shall less benefit could received elected early commencement benefit vested retirement provisions henry pratt plan september 30 1993 article 7 death participant 701 death prior retirement death benefits payable plan event death participant retired participant terminated participant prior commencement retirement benefits plan except may provided surviving spouse benefit described section 702 may provided section 704 702 surviving spouse benefit effective august 23 1984 spouse participant terminated participant shall eligible receive surviving spouse benefit participants terminated participants death participant terminated participant fulfilled following requirements date death legally married spouse throughout twelve month period ending date death b met requirements vested benefit section 602 c attained normal retirement age commenced receiving benefits plan 703 amount surviving spouse benefit participant terminated participant dies fulfilling requirements section 702 spouse shall entitled lifetime benefit plan surviving spouse participant terminated participant consents benefit shall commence first day month following later participants terminated participants death date participant terminated participant would met requirements early retirement section 402 surviving spouse consent receive benefits described benefits shall commence first day month thereafter elected surviving spouse later date participant terminated participant would attained age 65 surviving spouse benefit shall equal b c participant terminated participant dies meeting requirements early retirement provided section 402 surviving spouse benefit shall equal amount would payable spouse participant terminated participant retired date preceding date death entitled spouse joint survivor annuity b participant terminated participant dies meeting requirements early retirement provided section 402 meeting requirements vested benefit section 602a surviving spouse benefit shall equal amount would payable spouse participant terminated participant terminated service date death ii survived earliest retirement age section 402 iii retired time entitled receive spouse joint survivor annuity iv died day following attainment earliest retirement age c participants terminated participants surviving spouse elects benefit commencement date first day month following date participants terminated participants death date participant terminated participant would met requirements early retirement section 402 surviving spouse benefit b whichever applicable shall actuarially adjusted reflect actual date benefit commencement participants participated spence plan participant terminated participant dies meeting requirements early retirement provided section 402 meeting requirements vested benefit section 602a meeting requirements vested benefit section 602b surviving spouse benefit shall equal actuarial equivalent balance participants terminated participants accumulated contribution account shall paid spouse life annuity 704 death commencement benefits normal retirement age death benefits payable plan upon death participant normal retirement age participant commenced receiving benefits plan except follows participant receiving spouse joint survivor annuity described section 502 benefits becoming due paid accordance terms spouse joint survivor annuity b participant elected optional benefit article 8 benefits becoming due paid accordance terms option c participant dies attaining normal retirement age benefit commencement date married date death spouse joint survivor annuity described section 502 shall deemed effect behalf participant provided made election section 5022 receive benefits another form payment article 8 optional forms benefit 801 time election subject restrictions set forth section 808 lieu receiving life annuity referred section 501 spouse joint survivor annuity referred section 502 participant may elect written application filed committee retirement benefit paid one forms benefit set forth article 8 provided election made prior actual retirement plan accordance procedures set forth section 5024 participant married article 8 neither section 501 section 502 shall apply effective election made article provided however married participant may time election period established committee section 5022 rescind election option article 8 receive retirement benefit form annuity life section 501 spouse joint survivor annuity section 502 met requirements therefor 802 contingent annuitant option participant may elect option accordance section 502 option receive actuarially reduced benefit lifetime retirement 100 6623 50 reduced amount continued person designated participant time election option referred contingent annuitant duration contingent annuitants lifetime 803 ten year certain life annuity option participant may elect option accordance section 502 option receive actuarially reduced benefit lifetime retirement provision dies normal retirement age commencement benefit payments prior receiving one hundred twenty 120 monthly retirement payments balance one hundred twenty 120 monthly retirement payments shall paid participants beneficiary 804 five year certain life annuity option participant spence plan employed spence engineering company inc prior january 1 1987 may elect option least ninety days prior benefit commencement date option receive actuarially equivalent benefit lifetime retirement provision dies normal retirement age commencement benefit payments prior receiving sixty 60 monthly retirement payments balance sixty 60 monthly retirement payments shall paid participants beneficiary 805 refund accumulated contribution account section shall apply participant participated spence plan december 31 1991 made employee contributions spence plan prior january 1 1987 refund accumulated contribution account retirement termination employment participant may elect receive date retirement termination employment benefit commencement date refund balance accumulated contribution account participant elects refund accumulated contribution account section 805a normal retirement benefit provided section 503 shall reduced actuarial equivalent accumulated contribution account accumulated contribution account shall reduced zero notwithstanding foregoing provisions section 805a actuarial equivalent value participants entire nonforfeitable benefit exceeds 3500 participants spouse must consent participants election withdraw balance accumulated contribution account purpose spousal consent valid made earlier 90 days date withdrawal effective received committee must writing form provided committee ii acknowledge effect consent iii witnessed notary public plan representative consent valid respect spouse signs consent spousal consent required however participant establishes satisfaction committee spouse cannot located participant show court order legally separated abandoned spouse within meaning local law otherwise permitted applicable regulations spouse legally incompetent give consent spouses legal guardian may participant may consent withdrawal b refund accumulated contributions upon cessation benefit payments upon death notwithstanding contrary provisions plan upon cessation benefit payments provisions plan respect participant received refund balance accumulated contribution account including payments spouse contingent annuitant beneficiary upon death participant respect benefits payable excess balance participants accumulated contribution account aggregate benefit payments made hereunder respect participant shall paid beneficiary single lump sum suspension benefits section 507 shall deemed cessation section 806 option effective participant elects option article 8 dies prior normal retirement age prior date benefits commence earlier election shall void benefit paid option participants contingent annuitant beneficiary applicable dies prior commencement retirement benefits participant prior participants normal retirement age participant may either designate another contingent annuitant beneficiary applicable prior normal retirement age b receive form benefit retirement would payable option elected c elect another optional form benefit article 8 notwithstanding first sentence section 806 participant elected deferred retirement date participant dies normal retirement date deferred retirement date contingent annuitant benefici ary applicable shall receive reduced amount retirement benefit payable option participant elected deferred retirement date either contingent annuitant beneficiary applicable dies participants normal retirement date deferred retirement date election shall void participant receive benefit would payable option elected unless another option elected 807 beneficiary participant elects option section 803 804 shall designate form provided committee beneficiary receive death benefit may become payable designated option participant may change designation beneficiary time written notice filed committee designated beneficiary survives receive benefits may become due plan benefits becoming due shall paid one following classes successive beneficiaries surviving participant participants spouse b issue c parents brothers sisters e executors administrators 808 limitation election option shall effective article anticipated effect would extend period payments beyond joint life expectancy participant contingent annuitant beneficiary would violate minimum distribution incidental benefit requirement section 1401a92 proposed regulations provision future law amends supplements supersedes provision 809 spousal consent requirement notwithstanding anything herein contained contrary election married participant optional form benefit shall take effect unless requirements set forth section 5024 satisfied article 9 change status transfer 901 change status eligible employee noneligible employee participant included plan part period employment employer affiliated employer loses status eligible employee defined plan accrue benefits plan however service employer affiliated employer taken account determining eligibility rights receive benefits previously accrued plan event employee loses status eligible employee benefit shall determined using final average compensation covered compensation years benefit service date ceases eligible employee employees status changes becomes eligible employee resumes participation plan years benefit service shall aggregated benefit shall determined using final average compensation covered compensation latest date ceases eligible employee 902 change status noneligible employee eligible employee participant included plan period service employer eligible employee defined plan service employer affiliated employer counted purposes determining eligibility participate plan rights receive benefits plan 9021 nonduplication benefits otherwise payable account one period employment employer affiliated employer plan another qualified defined benefit plan toward employer contributes contributed benefits payable plan account period shall reduced benefits payable plan account period however plan provides similar reduction benefits section shall disregarded respect eligible employee whose recent period membership plan earlier recent period membership plan 903 transfer employment purposes determining vested benefits eligibility direct transfer employment employer wholly owned subsidiary employer whether adopts plan shall deemed effect break service eligible employee participant transferring long retains status eligible employee subsidiary benefit service subsidiary prior date adoption plan shall counted purposes plan extent specified vote board directors subsidiary adopting plan eligible employee participant shall lose right benefit service accrued employer prior date transfer employment subsidiary provided shall duplication benefits based benefit service 9031 employment affiliated employer purposes determining participants eligibility participate plan right vested benefit section 602 employment affiliated employer shall treated service employer service determined committee accordance service provisions article 2 applied uniform nondiscriminatory manner participants based employment records affiliated employer event shall person completed service enter plan prior employment employer accrue benefits plan respect service except provided section 903 904 employment watts fluidair co participant included one prior plans lost status employee defined prior plan prior july 1 1981 entered employment became included pension plan watts fluidair co formerly known watts fluid power co accrue benefits plan however service earned watts fluidair co taken account determining eligibility rights receive benefits previously accrued prior plan participant transferred employment watts regulator co watts fluidair co prior july 1 1981 included plan period employment watts fluidair co service watts fluidair co counted purposes determining eligibility participate plan eligibility rights receive benefits plan counted purposes determining benefit service hereunder benefit plan shall reduced benefits payable watts fluidair co plan 905 employment spence engineering company inc employee transfers spence engineering company inc watts regulator co prior december 31 1987 total service spence engineering company inc counted purposes determining eligibility participate plan eligibility receive benefits plan counted purposes determining benefit service hereunder article 10 administration 1001 allocation responsibility among fiduciaries plan trust administration fiduciaries shall powers duties responsibilities obligations specifically given plan trust power duty responsibility obligation relating control management administration plan trust fund specifically allocated fiduciary respect allocation doubt shall deemed allocated employer general employer shall sole responsibility making contributions specified article 11 subject provisions article 11 necessary provide benefits plan sponsoring employer action board shall sole authority appoint remove trustee members committee amend terminate whole part plan trust committee shall sole responsibility administration plan specifically described plan trust trustee shall sole responsibility administration trust management trust assets except otherwise specifically provided plan trust sponsoring employer written instrument filed records plan may designate fiduciary capacities andor fiduciaries named herein fiduciary may serve one fiduciary capacity respect plan fiduciary shall authority delegate responsibilities provided may employ one parties render advice regard responsibility plan 1002 indemnification employer shall indemnify member former member committee employee officer director former employee officer director employer claims loss damage expense liability amounts paid settlement approved employer reasonably incurred connection action failure act may party reason membership committee performance authorized duty responsibility behalf employer pursuant plan trust unless determined result individuals gross negligence willful misconduct indemnification employer shall made extent expense liability payable behalf person liability insurance coverage ii trust precluded assuming expense liability operations erisa section 410 applicable law foregoing right indemnification shall addition rights person may entitled matter law 1003 appointment committee plan shall administered committee consisting least three 3 persons shall appointed serve pleasure board person selected member committee also may serve one fiduciary capacities respect plan may participant board shall right remove member committee time member may resign time written resignation board may fill appointment vacancy membership committee usual reasonable expenses committee incurred administration plan trust including limited fees expenses professional advisors referred shall paid trust fund unless expenses paid employer part expenses may paid employer shall obligation pay expenses members committee fulltime employees employer shall receive compensation respect services member committee 1004 records reports committee shall exercise authority responsibility deems appropriate order comply code erisa governmental regulations issued thereunder relating records participants service benefit service benefits notifications participants annual registration internal revenue service annual reports department labor employer committee shall keep cause kept employee participant data records shall reasonably give notice information shall proper necessary desirable effectuate purpose plan neither employer committee shall required duplicate records kept 1005 committee powers duties committee shall duties powers may necessary discharge duties hereunder including way limitation following construe interpret plan including supplying omissions accordance intent plan decide questions eligibility determine amount manner time payment benefits hereunder authorize payment benefits b prescribe forms procedures followed partic ipants spouses beneficiaries filing applications benefits c prepare distribute manner committee de termines appropriate information explaining plan receive employer participants informa tion shall necessary proper administration plan e furnish employer upon request annual reports respect administration plan reasonable appropriate f receive review keep file may deem convenient proper reports financial condition receipts disbursements trust fund trustee g appoint employ designate individuals assist administration plan agents deems advisable including legal actuarial counsel h make equitable practical adjustments may necessary correct mistakes fact errors exercise powers duties board may delegate committee may retain auditors accountants physicians actuaries legal counsel professional advisors selected opinion information data contained certificate report material prepared auditor physician actuary accountant legal counsel professional advisor shall full complete authority protection respect action taken suffered omitted committee fiduciary good faith accordance opinion information member committee fiduciary shall deemed imprudent reason action 1006 rules decisions committee may adopt rules deems necessary desirable appropriate proper efficient administration plan consistent provisions plan rules decisions committee shall discriminate favor officers directors highly compensated employees employer making determination calculation committee shall entitled rely upon information fur nished participant spouse contingent annuitant beneficiary em ployer legal counsel employer actuary consultant trustee committee shall exercise complete discretionary authority construe interpret apply terms plan including matters relating eligibility benefits amount time form benefits disputed allegedly doubtful plan terms construction administration interpretation application shall final binding conclusive upon persons including way limitation employees participants spouses contingent annuitants beneficiaries heirs personal representatives person claiming interest plan shall deemed imprudent exercising discretion committee shall give controlling weight intent plan 1007 committee procedures committee may act meeting writing without meeting decisions committee shall made vote majority including actions writing taken without meeting committee may adopt operating procedures regulations deems desirable conduct affairs may authorize member committee act behalf certain administrative matters deemed routine nature including execution documents committee member participant shall vote decision committee made uniquely respect committee member benefits hereunder 1008 authorization benefit payments committee shall issue directions trustee concerning benefits paid trust fund pursuant provisions plan certify directions accordance plan 1009 application forms payment committee shall require participant complete file committee application distribution benefits forms approved committee purpose furnish pertinent information requested committee may rely upon information furnished including participants current mailing address extent committee shall prescribe forms use participants former participants respective spouses contingent annuitants beneficiaries communicating employer committee case may shall establish periods communications may received employer shall respectively protected disregarding notice communication form shall prescribed shall made form notice communication receipt period shall established shall received period accepting notice communication shall made proper form andor received proper period employer committee shall respectively also protected acting upon notice communication purporting signed person reasonably believed genuine accurate shall deemed imprudent reason 1010 claims procedure committee shall notify participant entitlement receive benefits plan shall provide appropriate forms application benefits may made participant spouse contingent annuitant beneficiary claiming benefit plan must complete file application forms committee one committee member designee shall designated review applications benefits shall notify claimant writing decision within ninety 90 days receipt application special circumstances require extension time exceed ninety 90 days processing claim claimant notified writing extension prior expiration initial ninety 90 day period reviewing member committee shall make determinations behalf committee right person benefit denial reviewing committee member claim benefits shall stated writing delivered mailed claimant notice shall written best reviewing committee members ability manner may understood without legal actuarial counsel notice shall set forth specific reasons denial specific references pertinent plan provisions denial based explanation plans claim review procedures applicable description additional material information necessary claimant perfect claim reviewing committee member rejects application solely claimant failed furnish certain necessary material information notice shall explain additional material needed advise claimant may refile proper application claim procedure 1011 appeal review procedure claim denied reviewing committee member claimant may appeal denial within sixty 60 days receipt written notice thereof submitting writing committee request review denial claim claimant may also submit written statement issues comments concerning claim may request opportunity review plan trust pertinent documents shall made available committee within thirty 30 days receipt copy request convenient location regular business hours appeal made committee shall render final decision specific reasons therefor writing transmit claimant certified mail within 60 days receipt request review within 120 days event hearing granted 1012 evidence required anyone plan may given certificate affidavit document form person evidence given considers appropriate article 11 funding plan 1101 medium funding plan funded one trust funds established employer 1102 contributions employer shall make contributions trust fund time may necessary maintain plan sound actuarial basis meet funding requirements erisa determining contributions earnings trust fund amounts forfeited terminated participants shall considered part trust fund establishing cost maintaining plan 1103 fund exclusive benefit participants contributions made trust fund employer plan shall exclusive benefit participants retired participants terminated participants part trust fund shall revert employer except amounts may remain satisfaction liabilities participants retired participants terminated participants surviving spouses contingent annuitants beneficiaries upon termination plan 1104 forfeitures amounts forfeited terminated participants shall used reduce employers cost plan shall used increase benefits participants plan 1105 interests participants trust fund participant shall right title interest part assets trust fund except extent expressly provided plan 1106 payment expenses intended administrative expenses plan shall paid trust fund unless expenses paid employer part expenses may paid employer shall obligation pay expenses article 12 payment retirement benefits 1201 payment small amounts event actuarial equivalent value benefits plan would 3500 less amount provided applicable law regulation date distribution committee shall authorize payment actuarially equivalent amount lump sum distribution may made section 1201 participants benefit commencement date unless participant participants spouse participant died surviving spouse consents writing distribution 1202 deemed distribution actuarial equivalent vested portion participants accrued benefit zero participant shall deemed received single sum distribution vested portion accrued benefit date termination employment nonvested portion accrued benefit shall thereupon forfeited participant resumes employment covered plan date incurs break service january 1 1985 equals exceeds greater five years number years service employee completed prior break service nonvested portion accrued benefit forfeited pursuant section 1202 shall restored participants date reemployment 1203 payments incapacitated persons whenever committees opinion person entitled receive payment benefit installment thereof hereunder legal disability incapacitated way unable manage financial affairs committee may direct trustee make payments legal representative person payment benefit installment thereof accordance provisions section shall complete discharge liability making payment provisions plan beneficiary participant former participant shall minor trustee shall fully protected making payment required made minor person shall custodian guardian minor 1204 spendthrift except provided section 1205 benefit payable time plan shall subject manner alienation anticipation sale transfer assignment pledge attachment encumbrance kind benefit trust fund established connection plan shall manner subject debts liabilities person entitled benefit 1205 payment qualified domestic relations orders notwithstanding provision plan contrary entered qualified domestic relations order within meaning section 414p code erisa section 206d3b added retirement equity act 1984 affects payment benefits hereunder benefits shall paid accordance applicable requirements order 1206 latest commencement benefits case unless participant otherwise elects accordance section 401a14 code treasury regulations promulgated thereunder payment benefits participant commence later 60th day latest following close plan year participants normal retirement date defined section 401 ii close plan year occurs tenth anniversary year participant commenced participation plan iii close plan year participant terminates service employer affiliated employers b notwithstanding foregoing benefits plan shall begin later april 1 calendar year following calendar year participant attains age 70 12 except participants attained age 7012 prior january 1 1988 date benefits required begin shall determined accordance b 5 owner benefits plan participant 5 owner plan year beginning december 31 1979 shall begin first day april following later calendar year participant attains age 7012 ii earlier calendar year within ends plan year participant becomes 5 owner calendar year retires b non5percent owners benefits plan participant 5 owner shall begin first day april calendar year following calendar year participant attains age 70 12 terminates employment whichever occurs later c purposes paragraphs b participant shall treated 5 owner participant 5 owner defined section 416i code determined accordance section 416 without regard whether plan topheavy time plan year ending within calendar year owner attains age 66 12 subsequent plan year ii participants 5 owners attain age 70 12 1988 retired january 1 1989 benefits plan shall begin april 1 1990 1207 commencement benefits prior normal retirement age notwithstanding anything herein contrary except provided section 1201 benefit shall commence participant participants spouse prior date participant attains would attained normal retirement age without consent participant participants spouse required applicable law consent must obtained 90 days prior benefit commencement date 1208 distribution benefits beginning death distribution beginning death distribution participant begun participant dies entire vested benefit distributed remaining portion vested benefit shall distributed beneficiary contingent annuitant least rapidly method payment effect participants date death b distribution beginning death participant dies commencement vested benefit distribution participants entire vested benefit shall completed december 31 calendar year containing fifth anniversary participants death except participants designated beneficiary individual participants spouse participants interest may distributed life expectancy beneficiary beginning december 31 calendar year immediately following calendar year participant died ii participants designated beneficiary spouse participants interest may distributed life expectancy spouse beginning later december 31 calendar year next following calendar year participant died b december 31 calendar year participant would attained age 70 12 1209 direct rollover distributions notwithstanding provision plan contrary distribution distributee made january 1 1993 ii totals 200 iii constitutes eligible rollover distribution distributee may elect form provided committee part eligible rollover distribution paid direct rollover eligible retirement plan selected distributee purpose distributee eligible rollover distribution eligible retirement plan shall defined follows distributee includes employee former employee addition employees former employees surviving spouse employees former employees spouse former spouse alternate payee qualified domestic relations order defined section 414p code distributees regard interest spouse former spouse b eligible rollover distribution means distribution portion balance credit distributee except eligible rollover distribution include distribution one series substantially equal periodic payments less frequently annually made life expectancy distributee joint lives joint life expectancies distributee distributees designated beneficiary specified period ten years distribution extent distribution required section 401a9 code portion distribution includable gross income determined without regard exclusion net unrealized appreciation respect employer securities c eligible retirement plan means plan described individual retirement account described section 408a code ii individual retirement annuity endowment contract described section 408b code iii respect participants distributees alternate payees qualified defined contribution plan exempt trust described sections 401a 501a code respectively terms permit acceptance rollover contributions iv respect participants distributees alternate payees annuity plan described section 403a code election made part eligible rollover distribution paid direct rollover amount direct rollover must total 500 direct rollovers shall accomplished accordance procedures established committee article 13 amendments termination plan 1301 rights employer amend terminate intention employer continue plan indefinitely employer reserves right modify amend terminate plan whole part time instrument writing pursuant authority vote board directors provided however plan shall amended manner would cause permit part trust diverted purposes exclusive benefit participants retired participants terminated participants decrease participants accrued benefit eliminate optional form payment respect benefits accrued later date amendment adopted b date amendment becomes effective revert become property employer prior satisfaction liabilities plan respect participants retired participants terminated participants surviving spouses contingent annuitants beneficiaries b plan amendment changes vesting schedule set forth section 602 participant completed least three 3 years service effective date change vesting schedule shall vesting percentage computed accordance vesting schedule produces highest vested benefit 1302 termination plan upon termination plan due reason partial termination accordance regulations treasury department rights nonvested participants affected termination benefits accrued prior date termination shall nonforfeitable assets plan shall thereupon allocated accordance provisions sections 1303 1304 participant person shall right seek payment benefits directly employer persons shall look solely trust fund payment benefits payments shall made extent funds held trust suf ficient therefor except may otherwise guaranteed pension benefit guaranty corporation 1303 limitations benefits upon termination allocation amounts section 1304 shall based actuarial value benefit payable plan normal retirement age life annuity without death benefit excess lesser 100 participants monthly compensation averaged five consecutive years compensation highest b amount determined according regulations pension benefit guaranty corporation amount shall subject adjustment year reflect changes social security contribution benefit base adjustments shall accordance regulations issued pension benefit guaranty corporation 1304 allocation assets providing expenses incurred terminating plan assets shall used applied benefit retired participants including surviving spouses contingent annuitants beneficiaries participants terminated participants date retirement termination employment may entitled retirement benefits allocated following order first accrued benefit equal 10 participants accumulated contributions account plus 5 interest thereon date termination accrued age 65 b second assets remain allocation purposes paragraph assets shall allocated provide pensions life basis plan provisions effect beginning fiveyear period ending date plan termination retired participants including surviving spouses contingent annuitants beneficiaries receiving benefits receiving benefits three years prior date termination participants terminated participants met requirements normal early retirement benefit least three years prior date termination c third assets remain allocation purposes paragraphs b shall allocated provide benefit life basis plan provisions effect five years prior date plan termination retired participants including surviving spouses contingent annuitants beneficiaries receiving benefits participants terminated participants included paragraph met requirements normal early retirement vested benefit article 6 date termination fourth assets remain allocation purposes paragraphs b c shall allocated provide bene fit excess benefit provided allocations paragraphs b c necessary bring benefits retired participants including surviving spouses contingent annuitants beneficiaries participants terminated participants met requirements normal early retirement vested benefit article 6 date plan termination full amount accrued retirement benefit provided plan date plan termination benefits determined without regard maximum benefit stated section 1303 e fifth assets remain allocation purposes paragraphs b c shall allocated provide benefits participants plan date plan termination benefits determined without regard maximum benefit stated section 1303 f sixth assets remain complete allocation foregoing purposes article 13 shall returned employer allocable assets insufficient provide full al locations foregoing paragraphs provision allocations previous paragraphs allocation paragraph assets insufficient shall reduced prorata allocations made foregoing section respect benefits accrued plan secretary treasury issued notice plan meet requirements section 401a code 1305 distribution media allocations provision made article 13 may accomplished group contracts individual annuity contracts b cash c combination foregoing article 14 distribution limitations early termination provisions 1401 distribution limitations purposes section 1401 following terms shall indicated meaning benefits means sum participants accrued benefit benefits entitled plan excluding death benefit provided insurance participants life ii restricted participant means respect plan year highly compensated employee participant 25 highly compensated employees one 25 highly compensated employees highest total annual pay defined subparagraph iii individual restricted participant plan year shall restricted participant subsequent plan year satisfies conditions previous sentence subsequent plan year one individual total annual pay younger individual shall deemed higher total annual pay iii total annual pay means respect plan year case highly compensated employee currently employed employer affiliated employer greater section 415 compensation defined section 504c plan year ceased employed employer affil iated employer section 415 compensation plan year immediately preceding plan year b case highly compensated employee currently employed employer affiliated employer greater section 415 compensation plan year question prior plan year b subject paragraph c restricted participant may receive benefits plan form single lump sum payment benefit form payments single year would exceed annual payments would made behalf participant single life annuity actuarial equivalent benefits described paragraph ciii c limitation paragraph b shall apply payment value plan assets payment equals exceeds 110 value plans current liabilities within meaning section 41217 code ii value restricted participants benefit less 1 value current liabilities iii payment benefits attributable transferred balances defined contribution plans employee contributions event congress provides statute internal revenue service provides regulation ruling limitations set forth section 1401 necessary plan meet requirements section 401a applicable provisions code effect limitations shall become void shall longer apply without necessity amendment plan e notwithstanding foregoing limitations paragraph b shall apply restricted participant otherwise subject thereto enters prior written agreement committee effect plan terminated distribution benefits made participant regardless limitation paragraph b participant case death estate representatives shall repay trustee sum equal total amounts benefits plan shall exceed benefits determined preceding limitation restricted benefits 1402 early termination provisions section 1402 effective plan years beginning january 1 1994 employees affected time within ten years january 1 1979 effective date benefit increase plan retirement benefits provided employer contributions plan twentyfive highest paid employees employ employer effective date benefit increase excluding employees whose annual retirement benefits exceed 1500 subject conditions set forth paragraphs b c term benefit increase used herein means amendment plan increases amount benefits provided plan excepting however amendment internal revenue service determines effect substantially increasing possibility discrimination within meaning applicable treasury department regulations b amounts restricted purposes section 1402 unrestricted benefits time means benefits form called plan provided employer contributions exceeding largest following amounts amount could allocated participant plan prior plan continued without changes effective date increase benefits b 20000 c amount could allocated participant prior plan prior plan terminated effective date benefit increase plus amount computed multiplyin 20 first 50000 participants average annual compensation number years benefit increase date plan termination ii date benefits become payable participant tenyear period following benefit increase whichever date applicable amount equal actuarial equivalent date plan termination date benefit becomes payable earlier monthly benefit 168750 payable form life annuity age 65 dollar amount shall subject adjustment accordance pension benefit guaranty corporation regulations pursuant erisa section 4022 however participant owns 10 either voting stock employer limitation subsection shall exceed present value benefits guaranteed participant erisa section 4022 plan termination date plan terminated date benefit commences calculated plan terminated date c conditions plan terminated full current costs thereof met time within ten years effective date benefit increase retirement benefits participants referred paragraph may receive employer contributions including unrestricted benefits already received time shall exceed unrestricted benefits time provided restrictions section 1402 longer apply excess retirement income payments otherwise payable actual retirement income payments made period restrictions effect shall paid participant ii participant referred paragraph leaves service employer affiliated employer full current costs met retirement benefit may receive employer contributions including retirement benefits already received shall time within ten years effective date benefit increase exceed unrestricted benefits time iii foregoing conditions shall restrict current payment full retirement income benefits called plan retired participant terminated participant surviving spouse contingent annuitant beneficiary plan full effect full current costs met article 15 topheavy provisions 1501 article controls plan provisions contrary notwithstanding provisions article 15 shall control extent required cause plan comply requirements imposed section 416 internal revenue code 1502 definitions following words phrases appear article 15 shall respective meanings set forth unless context clearly indicates contrary account balance valuation date aggregate amount credited individuals account accounts qualified defined contribution plan excluding employee contributions deductible within meaning section 219 code rollover transfer contributions made behalf individual plan another qualified plan sponsored entity employer affiliated company increased aggregate distributions made individual plan five year period ending determination date ii amount contributions due determination date immediately following valuation date b accrued benefit valuation date present value computed basis assumptions cumulative accrued benefit excluding portion thereof attributable employee contributions deductible pursuant section 219 code rollover transfer contributions made behalf individual plan another qualified plan sponsored entity employer affiliated company proportional subsidies ancillary benefits individual qualified defined benefit plan increased aggregate distributions made individual plan fiveyear period ending determination date c affiliated company corporation business entity required aggregated employer reason section 414b 414c 414m code aggregation group qualified plans including terminated plans maintained within fiveyear period ending determination date maintained employer affiliated company consisting plan key employee participates plan enables plan key employee participates meet requirements section 401a4 410 code ii plan key employee participates plan enables plan key employee participates meet requirements sections 401a4 410 code plan employer elects include part group provided however employer may elect include plan group inclu sion would cause group fail meet requirements sections 401a4 410 code e assumptions purposes article 15 interest rate mortality assumptions specified section 102a plan f determination date first plan year plan last day plan year subsequent plan year plan last day preceding plan year g former key employee respect plan year individual key employee previous plan year key employee respect plan year purposes definition beneficiary would otherwise key employee deceased former key employee shall deemed former key employee substitution deceased former key employee h highest average compensation highest annual average taxable compensation paid employer employee five 5 consecutive plan years excluding plan years prior first plan year plan topheavy excluding plan years subsequent last plan year plan topheavy plan years employee received taxable compensation employer less five 5 key employee respect plan year individual time plan year four 4 plan years immediately preceding plan year officer employer affiliated company annual compensation greater 150 dollar limitation specified section 415bla code plan year ii one ten employees annual compensation greater dollar limitation specified section 415cla code plan year owning largest interests employer affiliated company owning greater 12 percent interest employer affiliated company iii owner five percent 5 outstanding stock employer affiliated company stock possessing five percent total combined voting power stock employer affiliated company iv employee whose remuneration plan year including determination date exceeded 150000 owner one percent outstanding stock employer affiliated company stock possessing one percent total combined voting power stock employer affiliated company 7purposes definition individual shall deemed stock owned individuals provided section 318 code substituting 5 50 subparagraph c section 318a2 code ii beneficiary would otherwise key employee deceased key employee shall deemed key employee substitution deceased key employee iii total number key employees officers employer affiliated companies shall limited total less thirty 30 employees employer affiliated companies three 3 total thirty 30 less five hundred 500 employees employer affiliated companies ten percent 10 total five hundred 500 employees employer affiliated companies fifty 50 j nonkey employee individual key employee k plan year respect plan annual accounting period used plan annual reporting purposes l remuneration individuals earned income wages salaries amounts actually paid made available employer affiliated company individual plan year personal services actually rendered course employment employer affiliated company subject exclusion amounts specified regulations promulgated section 415 code topheavy service year service excluding years service credited prior january 1 1984 years service respect plan years plan topheavy n valuation date respect plan year defined contribution plan recent date within twelve 12 month period prior determination date trust fund established plan valued net income loss thereof allocated participants accounts respect plan year defined benefit plan recent date within twelvemonth period prior determination date plan assets valued purposes computing plan costs purposes requirements imposed section 412 code 1503 topheavy status plan shall deemed top heavy plan year valuation date preceding applicable determination date sum 1 present value accrued benefits key employees plan defined benefit plans aggregation group 2 account balances key employees defined contribution plans aggregation group exceeds 60 sum 3 present value accrued benefits participants plan defined benefit plans aggregation group excluding participants former key employees 4 account balances participants defined contribution plans aggregation group purposes test following rules shall apply subject subparagraph ii distributions plan aggregation group accrued benefit distributed plan aggregation group five plan years ending determination date shall taken consideration ii benefits distributions former employees credited least one hour service period five years ending determination date shall disregarded provided however former employee completes hour service employer five year period former employees accounts shall taken consideration notwithstanding provision paragraph ii contrary plan year plan top heavy plan nonkey employee also covered defined contribution plan employer shall accrue minimum benefit provided plan iii employee key employee plan year containing determination date individual key employee previous plan year value benefits distributions shall taken consideration iv solely purposes determining plan required aggregation group top heavy plan year accrued benefits defined benefit plans employees key employees shall determined plan years beginning 1986 method uniformly applied accrual purposes defined benefit plans maintained employer affiliated employer method benefit accrued rapidly slowest accrual rate permitted section 411b1c code v determination account balances defined contribution plans aggregation group shall increased contributions due determination date extent required section 416 code vi determination present value accrued benefits defined benefit plans aggregation group shall based interest rate mortality table specified section 102a vii distributions rollovers trust transfers shall taken consideration extent required section 416 code calculation top heavy ratio shall made accordance provisions section 416 code b plan determined topheavy plan year annual retirement benefit participant nonkey employee shall less lesser ii two percent 2 participants highest average compensation multiplied participants years topheavy service ii twenty percent 20 participants highest average compensation minimum annual retirement benefit provided preceding sen tence means retirement benefit payable annually plan form single life annuity ancillary benefits beginning date participant attains normal retirement age participant actually receives benefit plan different form commencing different time benefit shall less actuarial equivalent using factors set forth section 101b foregoing minimum benefit c plan determined topheavy plan year vested benefit participant completes hour service plan year terminates service employer plan year shall determined accordance section 602 using following vesting schedule years vested service percentage less 2 years 0 2 years less 3 years 20 3 years less 4 years 40 4 years less 5 years 60 5 years 100 vesting schedule plan year shifts schedule plans top heavy status shift shall regarded amendment plans vesting schedule provisions section 1301b shall applied provisions paragraph c shall applied reduce participants vested percentage computed accordance provisions section 602 1504 termination topheavy status except specifically provided section 1503c plan deemed topheavy one plan years thereafter ceases topheavy provisions article 15 shall cease apply plan effective day following determination date determined longer topheavy provided however accrued benefit participant plan shall less minimum benefit participant accrued section 1503b last day last plan year plan topheavy article 16 miscellaneous 1601 rights employer neither establishment plan trust fund modification thereof payment benefits hereunder shall construed giving employee participant right retained service employer interfering right employer discharge employee time 1602 return contributions notwithstanding anything contrary elsewhere contained plan internal revenue service shall issue determination letter stating plan contained herein meet requirements section 401 internal revenue code employer shall entitled receive return contributions made hereunder b nothing herein shall prohibit return employer within one year payment excess sums contributed trust fund result mistake fact c employer contribution specifically conditioned deductibility contribution section 404 code extent contribution part thereof disallowed contribution part thereof disallowed shall returned employer within one year date disallowance return contribution employer pursuant paragraph b c shall permitted hereunder amount returned excess amount actually contributed amount would otherwise contributed ii include earnings attributable contribution iii reduced losses attributable contribution 1603 merger unless otherwise permitted law regulations plan shall merged consolidated shall assets liabilities transferred pension retirement plan circumstances resulting transfer assets liabilities plan unless immediately merger consolidation transfer employee would plan terminated receive benefit equal greater benefit would entitled receive immediately merger consolidation transfer plan terminated 1604 leased employees purposes plan term leased employee means person would otherwise considered employee pursuant agreement employer affiliated employer leasing organization within meaning section 414n2 code performed services employer affiliated employer substantially full time basis period least one year services type historically performed employees business field employer affiliated employer contributions benefits provided leased employee leasing organization attributable services performed employer affiliated employer shall treated provided employer affiliated employer leased employee shall considered employee individual covered money purchase pension plan providing nonintegrated employer contribution rate least ten percent section 415 compensation defined section 504c including amounts contributed pursuant salary reduction agreement includable gross income section 125 402a8 402h 403b code ii immediate participation iii full immediate vesting b leased employees constitute twenty percent less employers affiliated employers nonhighly compensated workforce within meaning section 414n5cii code 1605 applicable law provisions plan shall governed construed accordance laws commonwealth massachusetts 1606 headings plan inserted convenience reference shall effect upon meaning provisions hereof 1607 gender number wherever used instrument masculine person shall deemed include masculine feminine gender singular word shall deemed include singular plural cases context requires witness whereof watts industries inc caused instrument executed authorized officer seal affixed hereto day 1994 watts industries inc seal exhibit 108 watts industries inc executive incentive bonus plan amended purpose executive incentive bonus plan amended effective july 1 1995 plan intended promote interests watts industries inc offering incentive opportunity officers key executives employed thereby positions affect overall corporate operating results provide greatest opportunity contribute current earnings future success corporation ii definitions used plan terms shall following meanings ascribed base pay shall mean base salary fiscal year taxes social security deductions b committee shall mean stock option compensation committee board directors company c company shall mean watts industries inc including subsidiaries affiliates disability shall mean permanent disability would entitle employee benefits companys longterm disability plan e eligible employee shall mean person including officer director employed company full time salaried basis position primarily responsible achieving companys current fiscal year financial objectives f fiscal year shall mean companys current fiscal year commencing july 1st ending june 30th g participant shall mean eligible employee selected participate plan fiscal year iii administration plan shall administered committee member serving shall eligible receive award plan committee shall authority amend modify interpret plan make determinations relating plan may deem necessary advisable administration plan decisions committee matters relating plan shall binding conclusive parties including company participants iv participation participants fiscal year shall include chairmanceo president executive vice president chief financial officer officers key executives eligible employees committee may designate respect others committee shall make determinations based recommendations chairmanceo although committee shall final decision making power fiscal year committee elect add employees company promotion reasons warranting inclusion participants may excluded demotion reasons warranting exclusion v operation plan establishment goals start fiscal year soon thereafter practicable chairmanchief executive officer president chief financial officer officers designated chairman shall consultation committee establish certain goals participant generally assigned three goals consisting sales growth objective economic value added eva percentage inventory turns objective event participants position substantially tied subsidiary divisional level company three goals may relate performance subsidiary division rather corporation whole discretion committee participant may assigned alternative goals based individual performance objectives alternative business objectives b assignment incentive award maximum potential bonus percentage fiscal year percentage participants base pay shall assigned committee consultation chairmanceo three goals assigned participant shall carry percentage weight thirty three onethird percent 3313 maximum potential bonus potential percentage participants assigned alternative goals committee consultation chairmanceo shall determine relative percentage weight assigned achievement corporate individual goal participant shall notified hisher respective goals percentage assigned goal c potential earn additional bonus maximum percentage event participant achieves 100 goal three bonus objectives participant eligible receive additional bonus total 100 maximum potential bonus percentage employee achieves 100 goal three bonus objectives potential bonus percentage assigned goal may increased 3313 maximum potential bonus percentage prorata basis maximum 6623 example employee achieves 150 sales growth goal 100 eva inventory turns goals percentage assigned sales growth goal increased 3313 50 total bonus participant would eligible receive would equal 116 maximum potential bonus percentage participants assigned less three goals participant must achieve 100 goals assigned himher order eligible additional bonus amount additional bonus shall proportionately adjusted reflect number total goals assigned thereto vi payment bonus award soon practicable receipt audited financial statements fiscal year review performance participants completed appropriate bonus award recommendations determined chairmanceo consultation president officers company deemed appropriate chairman committee reviews recommendations chairmanceo determines appropriate bonus awards paid participants thereafter bonus awards approved committee shall paid participants cash less applicable taxes vii miscellaneous death disability termination event participants employment terminated fiscal year death permanent disability participant participants beneficiary shall receive prorated award based number months participant employed fiscal year provided participant would otherwise entitled receive bonus payment based achievement goals applicable participant remained companys employment end fiscal year event participants employment terminated fiscal year reason death permanent disability participant shall forfeit rights bonus award fiscal year provided however committee may permit payment part fiscal year participant employed fiscal year circumstances warrant exceptional treatment sole judgment committee payments may made participant terms provision shall made time payments made participants accordance provisions article vi hereof b tax withholding company shall deduct awards federal state local taxes required law withheld respect thereto c claim awards employee rights employee person shall right granted award plan neither plan action taken hereunder shall construed giving employee right retained company shall action taken hereunder construed entitling company services participant period time nontransferability persons rights interests plan including amounts payable may assigned pledged transferred e relationship benefits payment plan shall taken account determining benefits group insurance benefit plan company f applicable law plan shall construed governed accordance laws commonwealth massachusetts exhibit 1018 loan agreement rutherford county industrial facilities pollution control financing authority watts regulator co relating 5000000 rutherford county industrial facilities pollution control financing authority industrial development revenue refunding bonds watts regulator co project series 1994 note certain rights rutherford county industrial facilities pollution control financing authority loan agreement assigned subject security interest favor first national bank boston trustee owners bonds trust indenture even date herewith amended supplemented time information concerning security interest may obtained trustee 150 royall street canton massachusetts dated september 1 1994 page parties 1 recitals 1 article definitions rules construction 1 section 11 definitions 1 section 12 rules construction 7 article ii representations 8 section 21 representations issuer 8 section 22 representations warranties covenants company 9 article iii consent assignment 12 section 31 company consent assignment agreement execution indenture 12 article iv issuance bonds 12 section 41 agreement issue bonds 12 section 42 third party beneficiary 12 article v loan issuer company repayment 13 section 51 loan issuer repayment 13 section 52 setoff 13 section 53 prepayments 13 section 54 credits note 13 section 55 letter credit reimbursement agreement 14 section 56 company approval indenture 14 section 57 outstanding bonds 14 article vi operation taxes utility charges insurance eminent domain 15 section 61 maintenance modification plant company 15 section 62 taxes utility charges 15 section 63 insurance 16 section 64 eminent domain 16 section 65 application net proceeds insurance eminent domain 16 section 66 parties give notice 17 article vii special covenants 18 section 71 access project inspection 18 section 72 assurances corrective instruments 18 section 73 tax arbitrage covenants notice event taxability 18 section 74 certificate information 8038 form 20 section 75 payment rebate 20 section 76 recording filing instruments 20 section 77 administrative expenses 21 section 78 indemnity claims 21 section 79 release indemnification 21 section 710 default certificates 22 section 711 observe laws 22 section 712 election 22 section 713 warranty condition suitability issuer 23 section 714 redemption prior bonds 23 article viii assignment leasing selling 24 section 81 assignment loan agreement lease sale project company 24 section 82 restrictions transfer issuers rights 24 section 83 assignment issuer 24 section 84 merger issuer 25 article ix events default remedies 25 section 91 events default defined 25 section 92 remedies default 26 section 93 application amounts realized enforcement remedies 27 section 94 remedy exclusive 27 section 95 agreement pay attorneys fees expenses 27 section 96 correlative waivers 27 article x prepayments 28 section 101 optional prepayments 28 section 102 mandatory prepayments 28 section 103 mandatory prepayments 29 article xi rebate provisions 29 section 111 creation rebate fund 29 article xii miscellaneous 30 section 121 references bonds ineffective bonds paid 30 section 122 implied waiver 30 section 123 issuer representative 30 section 124 company representative 30 section 125 notices 30 section 126 payment performance date business day 31 section 127 binding effect 31 section 128 severability 32 section 129 amendments changes modifications 32 section 1210 execution counterparts 32 section 1211 applicable law 32 section 1212 charge issuer credit 32 section 1213 issuer directors members attorneys officers employees agents issuer governing body liable 32 section 1214 liability issuer charge issuers credit 33 section 1215 expenses 33 section 1216 amounts remaining trustee 34 manually renumber two execution lines necessary since theyre part generated tofc execution issuer 35 execution company 35 exhibit promissory note exhibit b project loan agreement loan agreement dated september 1 1994 rutherford county industrial facilities pollution control financing authority issuer public body corporate politic public instrumentality created pursuant laws state north carolina state watts regulator co company corporation organized existing laws state massachusetts w n e h consideration respective representations agreements contained herein parties hereto recognizing act hereinafter defined loan agreement shall way obligate state north carolina political subdivision thereof including without limitation rutherford county north carolina issuer raise money taxation use public moneys purpose relation project hereinafter defined neither state north carolina political subdivision thereof including without limitation rutherford county north carolina issuer shall pay promise pay debt meet financial obligation person time relation project except moneys received provisions loan agreement note credit facility issuer credit facility hereinafter defined derived exercise rights issuer thereunder agree follows article definitions rules construction tc article definitions rules construction section 11 definitions tc section 11 definitions l 2 addition words terms elsewhere defined loan agreement indenture following words terms shall following meanings act shall mean applicable provisions constitution laws state north carolina including without limitation industrial pollution control facilities financing act chapter 159c north carolina general statutes amended administrative expenses shall mean amounts payable pursuant section 75 hereof company account issuer provide payment reasonable costs expenses incurred issuer affiliate shall mean respect person directly indirectly controlling controlled direct indirect common control person purposes definition control used respect person means power direct management policies person directly indirectly whether ownership voting securities contract otherwise terms controlling controlled meanings correlative foregoing bond bonds shall mean rutherford county industrial facilities pollution control financing authority industrial development revenue refunding bonds watts regulator co project series 1994 authorized issued pursuant bond resolution accordance indenture aggregate principal amount 5000000 including bonds issued replacement mutilated destroyed lost stolen bonds pursuant section 210 indenture bond documents shall mean collectively indenture bonds loan agreement note letter credit documents tender agency agreement remarketing agreement bond resolution shall mean resolution adopted issuer august 30 1994 authorizing execution delivery issuer documents issuance bonds issuer cessation operation shall mean company ceased opinion issuer operate project industrial project industry within meaning act cessation operation shall deemed occurred 60 days shall elapsed written notice given company issuer operations project shall ceased company shall demonstrated satisfaction issuer company assignee lessee buyer pursuant section 81 loan agreement resumed operations project industrial project industry within meaning act company good faith seeking arrange resumption economically reasonable operation project industrial project industry provided temporary shutdown due strike labor dispute lack fuel similar occurrence shall deemed cessation operation closing date means date issuance delivery bonds code means internal revenue code 1986 amended including appropriate statutory predecessor code applicable regulations whether proposed temporary final code statutory predecessor code official rulings judicial determinations foregoing applicable bonds commission shall mean local government commission north carolina division department state treasurer successor successors thereto company shall mean watts regulator co massachusetts corporation successors assigns surviving resulting transferee corporation entity company representative shall mean one persons time designated act behalf company written certificate furnished issuer trustee containing specimen signatures persons signed behalf company president duly authorized officer company consistent basis shall mean reference application generally accepted accounting principles accounting principles observed period referred comparable material respects applied preceding period except changes consented credit facility issuer counsel shall mean attorney firm attorneys acceptable trustee may need counsel issuer company credit facility shall mean letter credit alternate credit facility delivered trustee pursuant article vi indenture credit facility issuer shall mean bank respect letter credit applicable institution issuing alternate credit facility determination taxability shall defined shall deemed occurred first occur following date company files statement supplemental statement tax schedule return document whether pursuant treasury regulations section 110310b2vi may amended supplemented otherwise discloses event taxability shall fact occurred ii date bondholder former bondholder notifies company trustee received approving written opinion bond counsel effect event taxability shall occurred unless within one hundred eighty 180 days receipt company notification trustee bondholder former bondholder company shall obtain deliver trustee favorable ruling determination letter issued behalf company commissioner district director internal revenue government official exercising substantially similar function time effect taking consideration facts form basis opinion event taxability occurred event taxability shall occurred iii date company shall advised writing commissioner district director internal revenue government official agent exercising substantially similar function time based upon filings company upon review audit company upon ground whatsoever event taxability shall occurred iv date company shall receive notice writing bondholder former bondholder trustee internal revenue service government agency exercising substantially similar function time assessed includable gross income bondholder former bondholder interest bondholders former bondholders bond due occurrence event taxability provided however determination taxability shall deemed occurred subparagraph iii iv hereof unless company afforded opportunity expense contest assessment unfavorable ruling determination taxability shall deemed occurred contest made finally determined eminent domain shall mean taking title temporary use project part thereof pursuant eminent domain condemnation proceedings voluntary conveyance part project pendency result threat proceedings event default shall meaning set forth section 91 hereof event taxability shall mean change law fact interpretation thereof occurrence existence fact event circumstance including without limitation issuance obligations incurring capital expenditures excess permitted section 103b6d 1954 code taking action company failure take action company making company misrepresentation herein certificate required given connection issuance sale delivery bonds effect causing interest paid payable bond become includable gross income bondholder former bondholder bond bondholder former bondholder substantial user related person terms used section 147a code financing statements means financing statements including continuation statements filed record time perfect security interests created assigned hereby indenture generally accepted accounting principles shall mean principles accounting set forth pronouncements financial accounting standards board predecessors pronouncements american institute certified public accountants principles accounting substantial authoritative support applicable circumstances date application principles time supplemented amended indenture shall mean trust indenture even date herewith issuer trustee together amendments supplements thereof permitted thereby issuer shall mean rutherford county industrial facilities pollution control financing authority successors assigns issuer documents shall mean collectively indenture loan agreement issuer representative shall mean one persons time designated act behalf issuer written certificate furnished company trustee containing specimen signatures persons signed behalf issuer chairman letter credit documents shall mean letter credit reimbursement agreement pledge agreement loan agreement shall mean loan agreement amendments supplements thereto permitted indenture net proceeds means proceeds received issuer sale bonds including earnings profits thereon excluding proceeds deposited reasonably required reserve replacement fund used respect insurance proceeds award resulting amount received connection eminent domain term net proceeds shall mean gross proceeds award amount less expenses including attorneys fees incurred realization thereof 1954 code shall mean internal revenue code 1954 amended august 15 1986 applicable regulations whether proposed temporary final thereunder official rulings determinations foregoing applicable bonds prior bonds note shall mean promissory note given company pursuant section 51 loan agreement substantially form exhibit attached hereto overdue rate shall mean prime rate plus two percent maximum contract rate permitted law whichever lower payment bonds shall mean payment principal interest bonds accordance terms whether payment maturity upon acceleration prepayment ii amounts due administrative expenses otherwise iii liabilities obligations arising indenture loan agreement case manner amounts due owing respect bonds shall paid permitted encumbrances shall mean particular time liens ad valorem special assessments delinquent contested good faith person shall mean individual partnership corporation trust unincorporated organization association joint venture jointstock company government agency political subdivision thereof placement agent agreement shall mean letter agreement dated september 29 1994 among issuer first union national bank north carolina placement agent company covering placement bonds placement agent plant shall mean companys manufacturing plant located 100 watts road spindale north carolina prime rate shall mean rate interest per annum announced first union national bank north carolina principal office charlotte north carolina time prime rate prior bonds shall mean issuers industrial development revenue bonds regtrol inc project series 1984 original aggregate principal amount 5000000 project shall mean land buildings improvements thereon machinery equipment apparatus office furnishings property financed whole part proceeds prior bonds particularly described exhibit b attached hereto reference made part hereof project site shall mean real property owned company located 100 watts road spindale north carolina rebate fund means fund name created pursuant section 504 indenture described section 111 hereof regulations shall mean applicable treasury regulations sections 103 141 150 code whether time proposed temporary final otherwise reimbursement agreement shall mean letter credit reimbursement guaranty agreement even date herewith among company watts industries inc guarantor bank supplements amendments thereto related person means related person within meaning section 103b6c 1954 code reference sections 267 707b 1563a 1954 code except fifty percent substituted eighty percent section 1563a security interest security interests shall refer security interests created indenture shall meaning set forth ucc state shall mean state north carolina tax regulatory certificates shall mean collectively certificate respect federal tax matters ii certificate nonarbitrage matters iii tax compliance agreement executed company andor issuer connection delivery bonds trustee shall mean banking institution time serving trustee indenture section 12 rules construction tc section 12 rules construction l 2 words masculine gender shall deemed construed include correlative words feminine neuter genders words neuter gender shall deemed construed include correlative words masculine feminine genders b table contents captions headings loan agreement convenience way define limit describe scope intent provisions sections loan agreement c references herein particular articles sections references articles sections loan agreement unless reference established accounting terms specifically defined herein shall construed accordance generally accepted accounting principles applied consistent basis e references herein company shall deemed refer persons one described term agreement obligation duty liability company shall joint several agreement obligation duty liability persons described term f terms defined herein defined bond documents shall meaning herein article ii representations tc article ii representations section 21 representations issuer tc section 21 representations issuer represents warrants follows issuer duly constituted public body corporate politic state created act b provisions act issuer duly authorized enter execute deliver bond documents party undertake transactions contemplated bond documents party carry obligations hereunder thereunder c issuer proposes issue bonds aggregate principal amount 5000000 finance portion refunding prior bonds duly adopted resolution issuer duly authorized execution delivery performance bond documents party including borrowing issuance performance bonds security bonds pledge note endorsed without recourse order trustee issuer also duly authorized execution delivery performance placement agent agreement approved section describes issuer private placement memorandum e bonds issued pursuant indenture mature bear interest terms provisions set forth provided indenture f execution delivery performance bond documents issuer party conflict constitute breach default require consent pursuant law regulation presently applicable issuer except consents approvals heretofore obtained bylaws issuer order court regulatory body arbitral tribunal agreement instrument issuer party bound g knowledge issuer judicial regulatory arbitral proceedings pending threatened issuer decided adversely issuer would material adverse effect issuance sale bonds transactions issuer connection therewith h duly executed delivered behalf issuer assuming due authorization execution delivery company loan agreement due authorization execution delivery trustee indenture bond documents issuer party shall constitute valid binding obligation issuer enforceable issuer accordance terms board commissioners rutherford county held public hearing project bonds following less 14 days prior public notice j issuer obtained board commissioners rutherford county approval issuance bonds required section 159c4d act secretary north carolina department commerce approval project required section 159c7 act local government commission state approvals required sections 159c6 8 9 act section 22 representations warranties covenants company tc section 22 representations warranties covenants company l 2 company makes following representations basis undertakings part herein contained corporate organization power company corporation duly organized validly existing good standing laws state massachusetts qualified business good standing laws state b pending litigation proceedings pending knowledge company threatened affecting company court governmental authority arbitration board tribunal likely material adverse effect ability company perform obligations loan agreement bond documents party c agreements legal authorized execution delivery company loan agreement note bond documents party compliance company provisions hereof thereof within corporate power company ii giving effect redemption prior bonds conflict result breach provisions constitute default agreement charter document bylaw instrument company party may bound iii duly authorized necessary corporate action part company defaults event occurred condition exists respect company would constitute event default loan agreement note bond documents party indenture lapse time giving notice would become event default loan agreement note indenture bond documents party e nature location project completed accordance project summary described exhibit b attached hereto made part hereof constitutes project within meaning act located wholly within geographic limits issuer f ownership operation project company presently intends operate project within meaning act date hereof expiration sooner termination agreement provided herein g disclosure documents except reflected referenced private placement memorandum dated september 29 1994 relating bonds including documents incorporated therein reference private placement memorandum changes assets liabilities financial condition company changes ordinary course business aggregate materially adverse respect companys ability perform obligations loan agreement bond documents party material liabilities contingent otherwise company reflected referenced private placement memorandum company entered commitments contracts since date private placement memorandum reflected referenced private placement memorandum ordinary normal course business might light fact condition presently known company materially adverse effect upon financial condition operations business company ability perform obligations hereunder thereunder h issuance private activity bonds company caused cause issuance private activity bonds defined code industrial development bonds defined 1954 code behalf jurisdiction united states 30day period commencing 15 days prior issuance bonds use proceeds bonds company shall permit proceeds bonds used manner shall make expenditures respect project perform permit act would cause bonds fail meet requirements section 147b code j approval authorization approval consent permit license regulatory body authority already obtained required part company valid lawful execution delivery loan agreement note k events best knowledge company event occurred lapse time giving notice would give creditor company right accelerate maturity partys outstanding indebtedness money borrowed l certificates documents certificates documents delivered company connection transactions contemplated loan agreement note bond documents party respective dates taken whole include untrue statement material fact omit state material fact necessary make statements herein therein light circumstances made misleading certificates documents delivered company representatives connection transactions contemplated loan agreement note bond documents party dates delivered true complete material respects use proceeds sale bonds applied redeem principal prior bonds redemption date thereof none proceeds sale bonds applied pay issuance costs bonds pay costs refunding n matters relating tax exemption company take omit take action would impair exclusion interest bonds gross income recipients thereof federal income tax purposes comply covenants agreements contained tax regulatory certificates certain arbitrage matters expiration applicable temporary period section 148d3 code time bond year aggregate amount gross proceeds bonds invested higher yielding investments within meaning section 148b code exceed one hundred fifty percent 150 debt service bonds bond year aggregate amount gross proceeds bonds invested higher yielding investments promptly appropriately reduced amount outstanding bonds reduced provided however foregoing shall require sale disposition investments higher yielding investments sale disposition would result loss exceeds amount would paid united states pursuant section 504 indenture sale disposition time sale disposition payment section 504 indenture due time funds constituting gross proceeds bonds used manner constitute failure compliance section 148 code terms bond year gross proceeds higher yielding investments yield debt service meanings assigned purposes section 148 code p tax regulatory certificates companys tax regulatory certificates executed delivered company concurrently issuance delivery bonds true accurate complete material respects date executed delivered article iii consent assignment tc article iii consent assignment section 31 company consent assignment agreement execution indenture tc section 31 company consent assignment agreement execution indenture l 2 company understands issuer security payment principal interest bonds assign pledge create security interest favor trustee pursuant indenture certain rights title interest loan agreement including pledged revenues reserving however rights pursuant loan agreement providing notices approvals consents requests communications given issuer b reimbursement payment costs expenses loan agreement c indemnification exemption liability individual corporate provided loan agreement company hereby agrees consents assignment pledge company acknowledges received copy indenture consents execution issuer article iv issuance bonds tc article iv issuance bonds section 41 agreement issue bonds tc section 41 agreement issue bonds l 2 provide funds redemption prior bonds issuer agrees authorize validate sell issue deliver bonds aggregate principal amount 5000000 manner set forth indenture cause proceeds bonds applied provided indenture section 42 third party beneficiary tc section 42 third party beneficiary l 2 specifically agreed parties executing loan agreement intended provisions part loan agreement create public member thereof may expressly provided herein contemplated indenture third party beneficiary hereunder authorize anyone party loan agreement maintain suit personal injuries property damage pursuant terms provisions loan agreement duties obligations responsibilities parties loan agreement respect third parties shall remain imposed law article v loan issuer company repayment tc article v loan issuer company repayment section 51 loan issuer repayment tc section 51 loan issuer repayment l 2 upon terms conditions loan agreement issuer shall lend company proceeds sale bonds loan shall evidenced repayable set forth note b consideration issuance bonds making loan company issuer company execute deliver loan agreement note form attached exhibit hereto issuer endorse note without recourse order pledge note assign loan agreement note trustee assignee issuer indenture contemporaneously issuance bonds company shall repay loan accordance provisions note loan agreement section 52 setoff tc section 52 setoff l 2 obligation company make payments required note shall absolute unconditional company pay without abatement diminution deduction whether taxes otherwise amounts regardless cause circumstance whatsoever including without limitation defense setoff recoupment counterclaim company may assert issuer trustee bondholder person section 53 prepayments tc section 53 prepayments l 2 company may prepay part amounts note obligates pay provided section 701 indenture respect prepayment bonds except provided section 53 sections 101 102 103 hereof company shall entitled prepay note cause bonds prepaid company shall prepay amounts required prepay provided sections 102 103 hereof section 54 credits note tc section 54 credits note l 2 extent principal interest bonds shall paid shall credited unpaid principal interest note case may amount equal principal interest bonds paid principal interest amounts payable bonds shall paid sufficiently payment bonds shall occurred note ipso facto shall deemed paid full companys obligations thereon shall discharged exception obligation company make certain payments may subsequently arise result determination taxability shall survive notwithstanding payment bonds note shall cancelled surrendered company section 55 letter credit reimbursement agreement tc section 55 letter credit reimbursement agreement l 2 condition issuers making loan hereunder company shall cause letter credit issued delivered trustee security bonds times bonds outstanding company shall cause credit facility meeting requirements indenture maintained trustee b enter reimbursement agreement bank form substance satisfactory bank execute deliver letter credit documents required bank section 56 company approval indenture tc section 56 company approval indenture copy indenture submitted company examination review execution agreement company acknowledges approved agreed bound provisions indenture company agrees trustee officers attorneys agents employees shall entitled enforce benefit terms conditions agreement relate persons notwithstanding fact signatories hereto section 57 outstanding bonds tc section 57 outstanding bonds promptly june 30 company shall notify commission issuer first class mail aggregate principal amount bonds outstanding close business june 30 article vi operation taxes utility charges insurance eminent domain tc article vi operation taxes utility charges insurance eminent domain section 61 maintenance modification plant company tc section 61 maintenance modification plant company agrees payment bonds shall made expense keep plant project site cause plant project site kept reasonably safe condition operations shall permit ii make cause made time necessary repairs thereto renewals replacements thereof otherwise keep plant good repair good operating condition iii permit suffer others commit nuisance plant project site company shall pay cause paid costs expenses operation maintenance plant company may expense make time additions modifications improvements plant may deem desirable business purposes materially impair effective use decrease value project section 62 taxes utility charges tc section 62 taxes utility charges l 2 company shall pay respectively become due 1 taxes assessments levies claims charges kind whatsoever may time lawfully assessed levied respect project including without limiting generality foregoing tax upon respect income profits issuer project paid would become charge payments made loan agreement note prior parity charge thereon created indenture including ad valorem sales excise taxes assessments charges upon companys interest project 2 utility charges incurred operation maintenance use occupancy upkeep project 3 assessments charges lawfully made governmental body public improvements may secured lien portion project b company may expense contest good faith levy tax assessment claim charge company may permit items contested remain undischarged unsatisfied period contest appeal therefrom company shall notify issuer trustee opinion counsel nonpayment items rights trustee respect loan agreement note created assignment indenture rights assigned loan agreement part payments made loan agreement note materially endangered project part thereof subject loss forfeiture company unable deliver opinion counsel company shall promptly pay bond cause satisfied discharged unpaid items furnish expense company indemnity satisfactory trustee provided tax assessment charge levy claim shall paid forthwith upon commencement proceedings foreclose lien securing issuer trustee expense company cooperate fully permitted contest company shall fail pay foregoing items issuer trustee may shall obligation pay amounts advanced therefor issuer trustee shall become additional obligation company one making advancement amounts together interest thereon overdue rate maximum contract rate permitted law whichever lower date payment company agrees pay demand therefor c company shall furnish issuer trustee upon request proof payment taxes governmental charges utility charges insurance premiums charges required paid company loan agreement section 63 insurance tc section 63 insurance l 2 payment bonds shall made company keep project properly continuously insured risks customarily insured businesses like size type engaged similar manufacturing operations business interruption insurance section 64 eminent domain tc section 64 eminent domain l 2 unless company shall prepaid note pursuant provisions article x hereof event title temporary use project part thereof shall taken eminent domain company shall obligated continue make payments required made pursuant note net proceeds received result eminent domain shall applied provided section 65b hereof section 65 application net proceeds insurance eminent domain tc section 65 application net proceeds insurance eminent domain l 2 net proceeds insurance carried respect project shall applied company toward extinguishment defect claim satisfaction liability respect insurance proceeds may paid b net proceeds insurance carried respect project excluding net proceeds business interruption insurance shall paid company net proceeds resulting eminent domain except hereinafter provided shall paid trustee applied follows 1 amount net proceeds exceed 500000 net proceeds shall paid company shall applied repair replacement renewal improvement project companys election paid trustee applied provided 2b 2 amount net proceeds exceeds 500000 net proceeds shall paid held trustee special trust fund invested accordance section 602 indenture provisions article xi hereof pending receipt written instructions company option company exercised within period ninety 90 days receipt trustee net proceeds company shall advise trustee company use net proceeds repair replacement renewal improvement project funds delivered trustee company b net proceeds shall applied prepayment bonds provided article x hereof company advise trustee within said period ninety 90 days elects proceed clause use net proceeds repair replacement renewal improvement project net proceeds shall applied repayment bonds pursuant article x hereof prepayment pursuant preceding sentence shall effected next interest payment date less thirty 30 days expiration said period ninety 90 days without election company notwithstanding foregoing long credit facility effect event inconsistency terms contained agreement contained reimbursement agreement provisions reimbursement agreement deemed control accordance terms c company agrees shall elect use moneys paid trustee pursuant subsection b2 section 65 repair replacement renewal improvement project restore project cause done condition substantially equivalent condition prior occurrence event net proceeds attributable extent net proceeds sufficient restore replace project company shall use funds restore replace project balance remaining application net proceeds shall paid company shall entitled net proceeds insurance resulting eminent domain relating property company included project providing security note loan agreement section 66 parties give notice tc section 66 parties give notice l 2 case material damage destruction part project company shall give prompt notice thereof issuer credit facility issuer trustee case taking proposed taking part project right therein eminent domain company shall give prompt notice thereof issuer credit facility issuer trustee notice shall describe generally nature extent damage destruction taking loss proceeding negotiations article vii special covenants tc article vii special covenants section 71 access project inspection tc section 71 access project inspection l 2 trustee issuer shall right reasonable times upon furnishing reasonable notice company circumstances enter upon project site examine inspect project section 72 assurances corrective instruments tc section 72 assurances corrective instruments l 2 subject provisions indenture issuer company agree time execute acknowledge deliver cause executed acknowledged delivered supplements amendments hereto instruments may reasonably required correcting inadequate incorrect description project carrying intention facilitating performance loan agreement section 73 tax arbitrage covenants notice event taxability tc section 73 tax arbitrage covenants notice event taxability l 2 notwithstanding provision hereof company covenants agrees shall times perform refrain acts things necessary desirable within reasonable control order assure interest paid bonds shall purpose federal income taxation included gross income owners thereof except event owner substantial user related person within meaning section 147a code b neither company issuer shall take action fail take action company covenants approve trustees taking action failing take action making investment use proceeds bonds action use failure would adversely affect excludability gross income interest bonds section 103 code cause bonds arbitrage bond within meaning section 148 code treasury regulations may applicable bonds time action investment use c company shall give prompt written notice issuer trustee filing company statement tax schedule return document internal revenue service discloses event taxability shall occurred receipt written advice internal revenue service event taxability shall occurred company acknowledges examined executed delivered tax regulatory certificates terms relating compliance code shall comply covenants instructions guidelines contained tax regulatory certificates companys obligation make payments rebate amounts defined tax regulatory certificates required tax regulatory certificates prepare furnish issuer trustee statements forms described therein shall survive payment full bonds notwithstanding provision loan agreement contrary e company issuer furnish accurate information necessary enable bond counsel make certifications might required regulations f whenever issuer shall required file deliver execute produce reports notices documents code regulations respect bonds without regard whether bonds still outstanding company shall furnish cause proper person furnish due time issuer attorney issuer completed form report notice required document together certification company proper person required provide information document accurate b requested issuer otherwise required herein indenture opinion bond counsel addressed issuer report document violation provision law issuer documents constituting part transcript proceedings relating issuance bonds report notice required document meets legal requirements filing delivery execution event failure refusal company proper person comply provision company agrees pay statement attorneys fees administrative time presented issuer filing delivering executing report documents statement paid within thirty 30 days written notice company issuer order insure interest bonds become includable gross income federal income tax purposes result failure bonds satisfy requirement section 149e code company covenants issuer trustee date issuance bonds supply issuer trustee information required internal revenue service form 8038 information return private activity bond issues form 8038 including without limitation following date issue amount lendable proceeds issue stated interest rate term face amount obligation part issue b name applicable elected representative approved issue description voter referendum issue approved c description property financed proceeds issue company covenants due date thereof cause form 8038 completed executed filed appropriate office internal revenue service section 74 certificate information 8038 form tc section 74 certificate information 8038 form l 2 company hereby represents information contained certificates letters representation company respect compliance requirements section 103 code including information form 8038 excluding issue number employer identification number issuer filed issuer respect bonds project true correct material respects section 75 payment rebate tc section 75 payment rebate l 2 company shall sole expense take action required section 148 code treasury regulations thereunder prevent loss exclusion gross income federal income tax purposes interest bonds section including limited calculating paying behalf issuer rebatable arbitrage amount united states america accordance requirements set forth treasury regulations 11480 11501 amended complying requirements section 504 indenture including making annual calculations deposits required therein company shall provide trustee within 30 days end fifth bond year shall year beginning september 29 1994 ending september 1 1995 beginning year begins september 29 1994 certificate containing amounts calculated section rebatable arbitrage amount certificate shall pay amount shown certificate trustee company shall upon request issuer provide copy rebatable arbitrage amount certificate issuer company shall also comply similar requirements contained treasury regulations adopted place treasury regulations 11480 11501 amended requirements treasury regulations extent applicable bonds section 76 recording filing instruments tc section 76 recording filing instruments l 2 company covenants expense cause counsel state take steps reasonably necessary render opinion issuer trustee earlier sixty 60 later thirty 30 days prior anniversary date occurring fiveyear intervals issuance bonds effect financing statements continuation statements notices instruments required applicable law recorded filed rerecorded refiled manner places required law order fully preserve protect rights trustee granting issuer certain rights issuer pursuant indenture loan agreement note b company issuer shall execute deliver instruments shall furnish information evidence deemed necessary advisable counsel enable render opinion referred subsection section company shall file refile record rerecord cause filed refiled recorded rerecorded instruments required filed refiled recorded rerecorded pursuant opinion counsel shall continue cause continued liens instruments long bonds shall outstanding except otherwise required loan agreement section 77 administrative expenses tc section 77 administrative expenses l 2 company shall pay account issuer within thirty 30 days notice thereof reasonable costs expenses incurred issuer connection financing administration project including without limitation costs administering loan agreement fees expenses trustee attorneys consultants others section 78 indemnity claims tc section 78 indemnity claims l 2 company pay discharge indemnify hold harmless issuer members governing body commission trustee taxes assessments impositions charges respect project claim thereof asserted lien charge upon payments taxes assessments impositions charges sought imposed issuer commission case may give prompt written notice company trustee provided however failure provide notice relieve company companys obligations liability section give rise claim liability issuer company shall sole right duty assume shall assume defense thereof counsel acceptable person behalf company undertakes defense full power litigate compromise settle sole discretion section 79 release indemnification tc section 79 release indemnification l 2 company shall times protect indemnify hold issuer members governing body commission members officers employees agents attorneys agents employees issuer trustee officers attorneys agents employees harmless liability losses damages costs expenses taxes causes action suits claims demands judgments nature arising connection project financing project including without limitation claims liability resulting arising connection acceptance administration bond documents trusts thereunder performance duties bond documents loss damage property injury death person may occasioned cause whatsoever pertaining project use thereof including without limitation lease thereof assignment interest agreement indemnification include reasonable costs expenses defending investigating claim liability reasonable expenses attorneys fees incurred issuer governing body respective directors members officers attorneys agents employees commission members officers employees attorneys agents trustee officers attorneys agents employees connection therewith provided benefits section 77 shall inure person issuer governing body respective directors members officers attorneys agents employees commission members officers employees attorneys agents trustee officers attorneys agents employees provided loss damage death injury claims demands causes shall resulted gross negligence willful misconduct issuer directors member officer attorneys agent employee trustee officers attorneys agents employees obligations company section 77 shall survive termination loan agreement indenture section 710 default certificates tc section 710 default certificates l 2 company shall deliver trustee forthwith upon obtaining knowledge event default hereunder note indenture reimbursement agreement certificate company specifying nature period existence thereof action company proposes take respect thereto section 711 observe laws tc section 711 observe laws l 2 company shall observe applicable laws regulations valid requirements regulatory authority respect operations project section 712 election tc section 712 election l 2 issuer hereby elects provisions sections 144a4 code apply bonds support election issuer states follows name issuer rutherford county industrial facilities pollution control financing authority address co walter h dalton esq rutherford county courthouse main street rutherfordton north carolina 28139 b principal user project watts regulator co employer identification number 042108284 c bonds principal amount 5000000 issued september 29 1994 except prior bonds paid full redeemed within ninety 90 days date issuance bonds outstanding prior issues proceeds used primarily respect facilities located county principal users company related persons section 103b6d capital expenditures issuer term defined regulations paid incurred three 3 years preceding date issuance prior bonds facilities located rutherford county principal user company related person except described tax regulatory certificates company e except bonds prior bonds outstanding issue qualified small issue bonds term used section 141e1d code issued behalf company proceeds issued primarily respect 1 facility located whole part county 2 contiguous integrated facility within meaning section 110310b2iie regulations respect facility located whole part county section 713 warranty condition suitability issuer tc section 713 warranty condition suitability issuer l 2 issuer makes warranty either express implied condition title design operation merchantability fitness project suitable companys purposes needs section 714 redemption prior bonds tc section 714 redemption prior bonds l 2 company hereby undertakes refund prior bonds date issuance bonds pursuant section 401 indenture connection refunding company watts industries inc shall pay additional amounts sufficient pay principal interest prior bonds date redemption thereof pay directly fees charges expenses holders prior bonds prior trustee connection redemption prior bonds article viii assignment leasing selling tc article viii assignment leasing selling section 81 assignment loan agreement lease sale project company tc section 81 assignment loan agreement lease sale project company l 2 prior written consent credit facility issuer rights company loan agreement may assigned project may leased sold whole part without necessity obtaining consent trustee subject however following conditions without prior written consent credit facility issuer assignment transfer sale lease shall relieve company primary liability obligations hereunder assignment transfer sale lease occurs company shall continue remain primarily liable payments specified herein note performance observance agreements part herein provided performed observed company shall also provide trustee prior approving opinion bond counsel effect assignment transfer sale lease adversely affect excludability gross income interest bonds federal income tax purposes b assignee lessee purchaser shall assume obligations company hereunder extent interest assigned leased sold c company shall within thirty 30 days delivery thereof furnish cause furnished issuer trustee true complete copy assignment instrument transfer lease sale agreement case may together instrument assumption section 82 restrictions transfer issuers rights tc section 82 restrictions transfer issuers rights l 2 except assignment made pursuant indenture certain rights loan agreement pledge note endorsed without recourse order trustee security pursuant indenture issuer term loan agreement sell assign transfer convey interests loan agreement note section 83 assignment issuer tc section 83 assignment issuer l 2 understood agreed acknowledged issuer security payment principal interest bonds grant trustee pursuant indenture inter alia certain right title interest loan agreement reserving certain rights particularly described indenture pledge note endorsed aforesaid trustee security company hereby assents assignment pledge section 84 merger issuer tc section 84 merger issuer l 2 nothing contained loan agreement shall prevent consolidation issuer merger issuer transfer title project political subdivision provided 1 taxexempt status interest bonds shall adversely affected thereby 2 upon consolidation merger transfer due punctual performance observance agreements conditions loan agreement kept performed issuer shall expressly assumed writing political subdivision resulting consolidation surviving merger made b within thirty 30 days consummation consolidation merger transfer title issuer shall give notice thereof reasonable detail company trustee issuer promptly shall furnish additional information respect transaction company trustee reasonably may request article ix events default remedies tc article ix events default remedies section 91 events default defined tc section 91 events default defined l 2 term event default shall mean one following events failure company pay cause paid due payment principal interest amount payable note b failure issuer pay cause paid due payment principal interest amount payable bonds c failure company perform obligations section 73 hereof occurrence event default event default bond documents e representation warranty company contained section 22 hereof article xi hereof document instrument certificate delivered pursuant hereto indenture connection issuance sale bonds shall false misleading incomplete material respect date made f failure company observe perform covenant condition agreement part company note loan agreement referred preceding paragraphs section 91 period thirty 30 days written notice specifying failure requesting remedied given company issuer trustee g commencement company involuntary case federal bankruptcy laws constituted hereafter amended applicable federal state bankruptcy insolvency similar law action proceeding appointment receiver liquidator assignee custodian trustee sequestrator similar official company substantial part property windingup liquidation affairs continuance case action proceeding unstayed effect period thirty 30 consecutive days h commencement company voluntary case federal bankruptcy laws constituted hereafter amended applicable federal state bankruptcy insolvency similar law consent acquiescence appointment taking possession receiver liquidator assignee trustee custodian sequestrator similar official company substantial part property making consent assignment benefit creditors failure company generally pay debts become due taking action company furtherance foregoing section 92 remedies default tc section 92 remedies default l 2 payment bonds shall made whenever event default referred section 91 hereof shall happened shall waived 1 issuer may written notice declare installments principal repayable pursuant note remainder term thereof immediately due payable whereupon together accrued interest thereon provided note shall become immediately due payable without presentment demand protest notice whatsoever hereby expressly waived company provided however amounts shall automatically become immediately due payable without notice upon occurrence event described section 91g 91h hereof notice company hereby expressly waives 2 issuer may take whatever action law equity may appear necessary desirable collect amounts payable pursuant note due thereafter become due enforce performance observance obligation agreement covenant company loan agreement bond documents b enforcement remedies provided section 92 issuer may treat reasonable expenses enforcement including without limitation legal accounting advertising fees expenses additional amounts payable company due owing company agrees pay additional amounts upon demand section 93 application amounts realized enforcement remedi tc section 93 application amounts realized enforcement remedies l 2 amounts collected pursuant action taken section 92 hereof shall paid trustee applied payment first costs expenses fees incurred issuer trustee result taking action second extent permitted law interest shall accrued overdue interest accrued interest overdue principal bonds rate set forth bonds third overdue interest bonds fourth overdue principal bonds fifth outstanding principal balance bonds payment bonds shall made remaining moneys shall applied accordance section 911b indenture section 94 remedy exclusive tc section 94 remedy exclusive l 2 remedy herein conferred upon reserved issuer intended exclusive available remedy remedies every remedy shall cumulative shall addition every remedy given loan agreement hereafter existing law equity statute delay omission exercise right power accruing upon occurrence event default shall impair right power shall construed waiver thereof right power may exercised time often may deemed expedient section 95 agreement pay attorneys fees expenses tc section 95 agreement pay attorneys fees expenses l 2 connection event default issuer trustee employs attorneys incurs expenses collection amounts payable hereunder enforcement performance observance covenants agreements part company herein contained company agrees demand therefor pay issuer trustee reasonable fees attorneys reasonable expenses incurred issuer trustee section 96 correlative waivers tc section 96 correlative waivers l 2 event default section 901 indenture shall cured waived remedial action trustee rescinded correlative default loan agreement shall deemed cured waived article x prepayments tc article x prepayments section 101 optional prepayments tc section 101 optional prepayments l 2 company hereby granted shall option prepay unpaid principal note whole part accordance set forth section 701 indenture respect prepayment bonds provided prepayments shall made immediately available funds interest accrued date prepayment note part shall applied unpaid installments principal inverse order maturity prepayment pursuant subsection shall made company taking causing issuer take actions required 1 payment bonds case prepayment note whole 2 effect prepayment less bonds according terms case partial prepayment note b event damage destruction condemnation project part thereof company may option pursuant section 65 hereof without penalty premium prepay note whole part provided prepayment shall made immediately available funds interest accrued date whole partial prepayment pursuant subsection b shall made company taking causing issuer take actions required full partial prepayment bond provided subsection hereof c exercise option granted subsection b section 101 company shall give written notice issuer trustee shall specify therein 1 date intended prepayment note shall less thirty 30 sixty 60 days date notice mailed 2 principal amount note prepaid given notice shall irrevocable company section 102 mandatory prepayments tc section 102 mandatory prepayments l 2 event determination taxability company shall 1 date selected company one hundred eighty 180 days following date determination taxability prepay entire unpaid principal balance note full interest thereon without premium provided therein immediately upon occurrence determination taxability company shall notify issuer trustee date selected payment pursuant section 102 b event credit facility renewed alternate credit facility provided accordance section 603 indenture company shall interest payment date occurring closest fifteen 15 days prior expiration date current credit facility prepay entire unpaid principal balance note full company shall promptly notify issuer trustee date selected payment c bonds shall subject mandatory redemption whole date prior maturity redemption price equal 100 principal amount thereof payable redemption date without redemption premium accrued interest thereon redemption date redemption date shall 90 days following occurrence cessation operation section 103 mandatory prepayments tc section 103 mandatory prepayments l 2 amounts required applied prepayment note sections 53 65 hereof shall applied company prepay together accrued interest portion unpaid principal note prepayment shall made company taking causing issuer take actions required payment bonds whether redemption prior maturity payment maturity b effect purchase redemption payment maturity less installments principal bonds inverse order maturities article xi rebate provisions tc article xi rebate provisions section 111 creation rebate fund tc section 111 creation rebate fund l 2 issuer shall create establish trustee special trust fund name issuer designated trustee referred herein rebate fund rebate fund shall held invested expended accounted accordance loan agreement b moneys rebate fund shall held trust trustee subject section 73 hereof shall held benefit united states contemplated provisions loan agreement shall considered held benefit issuer company trustee owners bonds article xii miscellaneous tc article xii miscellaneous section 121 references bonds ineffective bonds paid tc section 121 references bonds ineffective bonds paid l 2 upon payment bonds references loan agreement bonds shall ineffective issuer owner bonds shall thereafter rights hereunder excepting reporting payment rebate payments section 73 hereof rights issuer indemnification payment expenses contained without limitation sections 75 76 77 hereof section 122 implied waiver tc section 122 implied waiver l 2 event agreement contained note loan agreement breached either party thereafter waived party waiver shall limited particular breach waived shall deemed waive breach thereunder hereunder neither failure delay part trustee exercise right power privilege hereunder shall operate waiver thereof shall single partial exercise right power privilege preclude exercise thereof exercise right power privilege section 123 issuer representative tc section 123 issuer representative l 2 whenever provisions loan agreement approval issuer required issuer required take action request company approval shall made action shall taken issuer representative company trustee bondholders shall authorized rely approval action section 124 company representative tc section 124 company representative l 2 whenever provisions loan agreement approval company required company required take action request issuer approval shall made action shall taken company representative issuer trustee bondholders shall authorized act approval action section 125 notices tc section 125 notices l 2 notices certificates communications hereunder shall sufficiently given shall deemed given delivered hand delivery mailed first class postage prepaid registered certified mail sent nationallyrecognized overnight courier addressed follows 1 issuer rutherford county industrial facilities pollution control financing authority co walter h dalton esq rutherford county courthouse main street rutherfordton north carolina 28139 2 company watts regulator co watts industries inc 815 chestnut street north andover 01845 attention william c mccartney corporate controller copy john r leclaire pc goodwin procter hoar exchange place boston 02109 3 trustee first national bank boston 150 royall street mail stop 450215 canton 02021 attention corporate trust division b issuer company trustee may notice given hereunder designate time different addresses subsequent notices certificates communications shall sent section 126 payment performance date business day tc section 126 payment performance date business day l 2 specified last date making payment performance act exercising right provided loan agreement shall day business day payment may made act performed right exercised next succeeding business day provide interest shall accrue period payment shall occur section 127 binding effect tc section 127 binding effect l 2 loan agreement shall inure benefit shall binding upon issuer company respective successors assigns subject provisions section 83 hereof section 128 severability tc section 128 severability l 2 event provision loan agreement note shall held invalid unenforceable court competent jurisdiction holding shall invalidate render unenforceable provision hereof thereof section 129 amendments changes modifications tc section 129 amendments changes modifications l 2 subsequent issuance bonds prior payment bonds loan agreement bond documents may effectively amended changed modified altered terminated except accordance indenture loan agreement may executed several counterparts shall original shall constitute one instrument one counterpart need executed parties section 1211 applicable law tc section 1211 applicable law l2 loan agreement shall governed construed accordance laws state section 1212 charge issuer credit tc section 1212 charge issuer credit l 2 provision hereof shall construed impose charge general credit issuer personal pecuniary liability upon member official employee agent issuer section 1213 issuer directors members attorneys officers employees agents issuer governing body liable tc section 1213 issuer directors members attorneys officers employees agents issuer governing body liable l 2 extent permitted law recourse shall enforcement obligation promise agreement issuer contained herein bond documents issuer party claim based hereon thereon otherwise respect hereof thereof member governing body director officer agent attorney employee hisher individual capacity past present future issuer governing body successor entity either directly issuer governing body successor entity whether virtue constitutional provision statute rule law enforcement assessment penalty otherwise personal liability whatsoever shall attach incurred member governing body director officer agent attorney employee past present future issuer governing body successor entity either directly issuer governing body successor entity reason obligations promises agreements entered issuer company whether herein contained implied herefrom supplemental hereto personal liability character every member governing body director officer agent attorney employee execution loan agreement condition part consideration execution loan agreement expressly waived released notwithstanding provision loan agreement issuer shall liable company trustee person failure issuer take action loan agreement unless issuer requested writing appropriate person take action b assured payment reimbursement reasonable expenses action c afforded existing circumstances reasonable period take action acting loan agreement refraining acting loan agreement issuer may conclusively rely advice counsel section 1214 liability issuer charge issuers credit tc section 1214 liability issuer charge issuers credit l 2 obligation issuer created arising entered contemplation loan agreement including bonds shall impose debt pecuniary liability upon issuer state political subdivision thereof constitute charge upon general credit taxing powers foregoing obligation shall payable solely revenues moneys derived hereunder indenture credit facility except provided indenture loan agreement extent shall paid moneys attributable proceeds bonds income temporary investment thereof principal premium interest bonds shall payable solely funds pledged payment accordance indenture payments made pursuant credit facility section 1215 expenses tc section 1215 expenses l 2 company agrees pay reasonable fees expenses incurred connection preparation execution delivery modification waiver amendment loan agreement bond documents related documents fees expenses bond counsel issuer counsel trustee connection therewith connection transactions contemplated thereby company also agrees pay trustee become due reasonable fees services rendered expenses incurred trustee including reasonable fees counsel amounts company herein assumes agrees pay including costs expenses necessary cancel discharge indenture company also agrees pay expenses incurred trustee issuer collection indebtedness incurred hereunder event default company including reasonable attorneys fees section 1216 amounts remaining trustee tc section 1216 amounts remaining trustee l 2 amounts remaining bond fund otherwise trust trustee indenture loan agreement shall payment bonds administrative expenses accordance loan agreement disbursed trustee accordance provisions indenture otherwise may required law witness whereof issuer company caused loan agreement executed respective legal names duly authorized representatives date first written watts regulator co rutherford county industrial facilities pollution control financing authority endorsement note hereon provided note may assigned pledged endorsed otherwise transferred except successor trustee trust indenture referred loan agreement referred herein promissory note 5000000 september 1 1994 value received watts regulator co massachusetts corporation company promissory note promises pay order rutherford county industrial facilities pollution control financing authority issuer principal sum five million dollars 5000000 first business day september 2002 interest unpaid principal amount hereof date authentication delivery bonds defined loan agreement referred principal amount hereof interest thereon paid full interest payment dates defined indenture hereinafter described rate interest equal variable rate defined indenture fixed rate defined indenture promissory note referred loan agreement even date herewith loan agreement company issuer entitled benefits thereof subject conditions thereof terms otherwise defined herein shall definition set forth loan agreement loan agreement issuer loaned company proceeds 5000000 industrial development revenue refunding bonds watts regulator co project series 1994 used purpose refunding whole outstanding amount issuers 5000000 industrial development revenue bonds regtrol inc project series 1984 prior bonds proceeds used finance whole part cost expansion existing manufacturing facility located 100 watts road spindale rutherford county north carolina construction thereon approximately 25000 45000 square foot building addition acquisition installation therein certain machinery equipment including automatic screwing machines lathes assembly equipment ancillary machinery equipment project rutherford county bonds issued concurrently execution delivery note pursuant secured trust indenture even date herewith issuer first national bank boston trustee bonds bear interest variable rate prior conversion date fixed rate subsequent conversion date interest payable interest payment dates note shall bear interest variable rate fixed rate periods bonds unless otherwise defined herein capitalized terms used herein shall meanings assigned terms loan agreement indenture payment principal interest note sufficient enable issuer pay due total amount principal whether maturity upon acceleration otherwise premium interest bonds defined loan agreement extent principal premium interest bonds shall paid shall credited unpaid principal interest note case may amount equal principal interest bonds paid principal premium interest note payable immediately available funds coin currency united states america respective dates payment thereof shall legal tender payment public private debts company also agrees date payment purchase price required made respect bonds pursuant indenture pay cause paid amounts shall necessary enable tender agent pay purchase price bonds delivered purchase particularly described indenture provided however obligation company make payment shall reduced amount moneys available payment described section 301c indenture provided obligation company make payment hereunder shall deemed satisfied discharged extent corresponding payment made credit facility issuer credit facility obligation company make payments required hereunder shall absolute unconditional without defense recoupment right set reason default issuer loan agreement reason upon occurrence event default specified loan agreement unpaid principal hereof accrued interest additional interest hereon may become forthwith due payable provided loan agreement event company shall fail pay amount required paid promissory note due company shall pay interest amount rate per annum equal overdue rate defined loan agreement company may option may certain circumstances required prepay part unpaid principal note upon terms provided loan agreement company hereby promises pay costs collection including reasonable attorneys fees disbursements case default note loan agreement company hereby waives presentment protest notice protest dishonor note shall construed accordance laws state north carolina witness whereof company caused instrument executed corporate name duly authorized officer seal date first written watts regulator co endorsement pay order first national bank boston trustee benefit bondholders trust indenture dated september 1 1994 issuer trustee without recourse endorsement given made without warranty authority genuineness signature maker foregoing promissory note day september 1994 rutherford county industrial facilities pollution control financing authority attest exhibit b project consists expansion existing manufacturing facility located 100 watts road spindale rutherford county north carolina construction thereon approximately 25000 45000 square foot building addition acquisition installation therein certain machinery equipment including automatic screwing machines lathes assembly equipment ancillary machinery equipment exhibit 1019 letter credit reimbursement guaranty agreement dated september 1 1994 pages article definitions 3 article ii representations warranties guarantor 10 21 incorporation 10 22 power authority conflicts enforceability 10 23 financial condition 11 24 title property assets 11 25 litigation 11 26 taxes 11 27 trademarks franchises licenses 12 28 default 12 29 governmental authority 12 210 erisa requirements 12 211 pollution environmental control hazardous substances 12 212 capital structure 13 213 solvent financial condition 13 214 restrictions 13 215 full disclosure 13 216 labor relations 13 217 compliance laws 14 218 brokers 14 219 trade relations 14 220 investment company act 14 221 survival representations warranties 14 article iii representations warranties borrower 15 31 incorporation 15 32 power authority 15 33 governmental authority 15 34 project site 15 35 survival representatives warranties 16 article iv terms letter credit reimbursement payments guaranty 17 41 letter credit 17 42 reimbursement payments 17 43 tender advances 17 44 commission fee 19 45 increased costs 19 46 computation 19 47 payment procedure 19 48 business days 20 49 reimbursement expenses 20 410 expiration date 20 411 guaranty 20 412 obligations absolute 21 413 waiver guarantors rights 22 article v security insurance 24 51 security 24 52 casualty liability insurance required 24 53 notice casualty taking 24 article vi affirmative covenants 25 61 financial reports data information 25 62 books records inspections 26 63 maintenance property insurance 27 64 corporate franchises 27 65 compliance statutes etc 27 66 erisa 27 67 performance obligations 28 68 taxes liens 28 69 payment obligations 28 610 environmental matters 29 article vii negative covenants 30 71 negative pledge liens 30 72 consolidation merger 31 73 sale assets dissolution etc 31 74 loans investments 31 75 consolidated total liabilities consolidated tangible net worth 32 76 coverage ratio 32 77 current ratio 32 78 consolidated net worth 32 article viii conditions issuance letter credit 33 81 conditions issuance 33 82 additional conditions precedent issuance letter credit 34 83 conditions precedent tender advance 34 article ix default 36 91 events default 36 92 remedy exclusive 38 article x miscellaneous 39 101 indemnification 39 102 transfer letter credit 40 103 reduction letter credit 40 104 liability bank 40 105 successors assigns 41 106 notices 41 107 amendment 42 108 effect delay waivers 42 109 counterparts 42 1010 severability 42 1011 cost collection 42 1012 set 42 1013 governing law 43 1014 references 43 1015 consent jurisdiction venue 43 exhibit form letter credit exhibit b representations guarantor representations borrower exhibit c liens exhibit insurance exhibit e opinion counsel borrower guarantor exhibit f opinion bond counsel exhibit g reliance opinion bond counsel letter credit reimbursement guaranty agreement dated september 1 1994 among watts regulator co massachusetts corporation borrower watts industries inc delaware corporation guarantor first union national bank north carolina national banking association organized existing laws united states principal offices located charlotte north carolina bank w n e h whereas arrangements made pursuant trust indenture even date herewith indenture rutherford county industrial facilities pollution control financing authority issuer first national bank boston massachusetts trustee issuance sale issuer industrial development revenue refunding bonds watts regulator co project series 1994 original aggregate principal amount 5000000 bonds whereas bonds issued purpose refunding whole outstanding principal amount issuers industrial development revenue refunding bonds regtrol inc project series 1984 original aggregate principal amount 5000000 prior bonds proceeds used finance whole part cost acquiring constructing installing certain project rutherford county north carolina project owned operated borrower successor merger regtrol inc delaware corporation whereas order enhance marketability bonds borrower requested bank issue irrevocable direct pay letter credit form attached hereto exhibit letter credit successor substitute letter credit issued bank herein individually collectively called letter credit aggregate amount exceeding 5250000 5000000 shall support payment principal portion purchase price corresponding principal bonds b 250000 shall support payment 120 days interest portion purchase price corresponding interest bonds assumed interest rate 15 per annum whereas condition precedent issuance letter credit bank requested guarantor agreed unconditionally guarantee obligations borrower hereunder hereinafter provided therefore consideration premises good valuable consideration including covenants terms conditions hereinafter appearing induce bank issue letter credit borrower guarantor hereby covenant agree bank follows article definitions words terms defined article loan agreement shall meanings agreement unless otherwise specifically defined herein terms defined article purposes agreement meanings specified hereinabove article unless defined elsewhere herein context clearly requires otherwise 11 affiliate means person corporation association business entity directly indirectly controls controlled common control borrower guarantor 12 agreement shall mean letter credit reimbursement guaranty agreement may time amended modified supplemented accordance terms hereof 13 alternate credit facility means irrevocable direct pay letter credit insurance policy similar credit enhancement support facility benefit trustee terms alternate credit facility shall respects material registered owners bonds except term set forth alternate credit facility letter credit 14 bankruptcy code means 11 usc 101 et seq amended 15 bondholder bondholders means initial future registered owners bond bonds registered books records bond registrar pursuant section 204 indenture 16 bond documents means collectively loan agreement note remarketing agreement tender agency agreement indenture security instruments bonds may amended modified supplemented time accordance respective terms 17 borrower means watts regulator co massachusetts corporation 18 cash equivalents means person particular date aggregate amount items categorized cash equivalents balance sheet person determined accordance gaap 109 consistent basis means reference application gaap accounting principles observed period referred comparable material respects applied preceding period except changes consented bank 110 consolidated net income means consolidated gross revenues guarantor borrower subsidiaries period less expenses proper charges period including taxes measured income determined accordance gaap 111 consolidated net worth guarantor borrower subsidiaries shall mean time amount thereof determined sum net worth persons 112 consolidated subsidiaries means subsidiaries guarantor included audited consolidated financial statements guarantor time 113 consolidated tangible net worth guarantor borrower subsidiaries shall mean time amount thereof determined consolidated net worth less sum following without duplication deductions respect items already deducted arriving surplus retained earnings reserves except legal reserves contingency reserves ie reserves allocated specific purposes deducted assets properly treated appropriations surplus retained earnings b book value assets would treated intangibles gaap including without limitation capitalized expenses goodwill trademarks trade names franchises copyrights patents unamortized debt discount expense c treasury stock 114 consolidated total liabilities means sum total liabilities guarantor borrower subsidiaries time amount thereof determined 115 consultant means thirdparty architect engineer satisfactory bank 116 current assets means cash equivalents assets resources person expected realized cash sold ordinary course business consumed within one year determined accordance gaap 117 current liabilities means amount liabilities person terms payable within one year including indebtedness payable demand maturing one year date computation current portion longterm debt determined accordance gaap 118 default means event condition occurrence would lapse time giving notice become event default 119 distribution means respect corporation means includes payment dividends distributions capital stock corporation except distributions stock ii redemption acquisition securities unless made contemporaneously net proceeds sale securities 120 environmental laws means federal state local laws rules regulations ordinances programs permits guidances orders consent decrees relating health safety environmental matters including limited resource conservation recovery act comprehensive environmental response compensation liability act 1980 toxic substances control act amended clean water act river harbor act water pollution control act marine protection research sanctuaries act deepwater port act safe drinking water act superfund amendments reauthorization act 1984 federal insecticide fungicide rodenticide act mineral lands leasing act surface mining control reclamation act state federal superlien environmental cleanup programs laws us department transportation regulations 121 erisa means employee retirement income security act 1974 amended including rules regulations promulgated thereunder 122 erisa affiliate means person common control guarantor within meaning section 414c internal revenue code 1984 amended section 4001b erisa 123 event default means event default defined section 91 hereof 124 expiration date means september 29 1997 expiration date letter credit date may extended accordance terms section 410 hereof 125 gaap means principles accounting set forth pronouncements financial accounting standards board predecessors pronouncements american institute certified public accountants principles accounting substantial authoritative support applicable circumstances date application principles time supplemented amended 126 guarantor means watts industries inc delaware corporation 127 indebtedness means respect person indebtedness person borrowed money indebtedness person acquisition property purchase products merchandise ordinary course business indebtedness secured lien pledge encumbrance property person whether indebtedness assumed liability person way endorsements collection deposit ordinary course business guarantees indebtedness person including agreement contingent otherwise purchase obligation representing indebtedness property constituting security therefor advance supply funds purpose maintain working capital balance sheet income statement condition arrangement substance effecting foregoing leases items accordance gaap classified liabilities balance sheet provided event shall term indebtedness include capital stock surplus retained earnings minority interests common stock subsidiaries reserves deferred income taxes investment credits deferred credits reserves deferred compensation obligations 128 lien means interest property securing obligation owed claim person owner property whether interest based common law statute contract including limited security interest security title lien arising security agreement mortgage deed trust deed secure debt encumbrance pledge conditional sale trust receipt lease consignment bailment security purposes purpose agreement borrower guarantor respectively shall deemed owner property acquired holds subject conditional sale agreement arrangement pursuant title property retained vested person security purposes 129 material adverse effect means material adverse effect business operations financial condition guarantor subsidiaries applicable person taken whole 130 money borrowed applied indebtedness means indebtedness borrowed money ii indebtedness whether case borrowed money represented notes payable drafts accepted evidence extensions credit b constitutes obligations evidenced bonds debentures notes similar instruments c upon interest charges customarily paid accounts payable issued assumed full partial payment property iii indebtedness constitutes capitalized lease obligation iv indebtedness guaranty obligations would constitute indebtedness money borrowed clauses iii hereof 131 net worth means amount issued outstanding share capital plus amount additional paidin capital retained earnings case deficit minus amount deficit determined accordance gaap 132 obligations means loans advances debts liabilities obligations covenants duties owing arising due payable borrower bank kind nature present future whether evidenced note guaranty instrument whether arising agreement bond documents security instruments otherwise whether direct indirect including acquired assignment absolute contingent primary secondary due become due existing hereafter arising however acquired term includes without limitation interest charges expenses fees attorneys fees sums chargeable borrower bond documents security instruments 133 officers certificate means certificate chief financial officer controller borrower guarantor case shall approved bank 134 agreements means agreements instruments documents agreement security instruments heretofore hereafter executed borrower guarantor subsidiaries either delivered bank respect transactions contemplated agreement 135 permitted encumbrances means includes liens taxes assessments delinquent contested good faith appropriate proceedings adequate reserves provided books guarantor borrower applicable b workers mechanics materialmens liens similar liens incurred ordinary course business remaining undischarged unstayed longer 60 days following borrowers notice attachment thereof c attachments remaining undischarged unstayed longer 60 days making thereof liens respect final judgments awards remaining undischarged unstayed longer 60 days making thereof e liens respect pledges deposits workers compensation laws liens secure customs bonds unemployment insurance similar legislation respect pledges deposits secure bids tenders contracts payment money leases statutory obligations connection surety appeal similar bonds incidental conduct litigation f liens easements encumbrances rights way clouds title included within term permitted encumbrances defined deed secure debt security agreement 136 person means individual partnership corporation trust joint venture unincorporated organization association government agency political subdivision instrumentality thereof 137 plan means pension plan multiemployer pension plan defined section 337 erisa subject title iv erisa 138 pledge agreement means pledge agreement even date herewith borrower bank 139 prime rate means interest rate publicly announced time bank prime rate may necessarily best lending rate event bank shall abolish abandon practice announcing prime rate unascertainable bank shall designate comparable reference rate shall deemed prime rate agreement 140 private placement memorandum means private placement memorandum dated september 29 1994 relating bonds 141 prohibited transaction means transaction set forth section 406 erisa section 4975 internal revenue code 1984 amended time 142 project means manufacturing facility acquired constructed installed proceeds prior bonds owned operated borrower rutherford county north carolina 143 property means interest kind property asset whether real personal mixed tangible intangible 144 reportable event means events set forth section 4043b erisa events obligation notify pension benefit guaranty corporation pbgc waived 29 cfr part 2615 145 security means shall meaning section 21 securities act 1933 amended 146 security instruments means collectively pledge agreement agreements 147 solvent means person owns property whose fair saleable value greater amount required pay persons indebtedness including contingent debts ii able pay indebtedness matures iii capital sufficient carry business transactions business transactions engage 148 subsidiary subsidiaries means person corporation whether organized existing laws state united states including district columbia puerto rico laws foreign country 50 voting stock time owned controlled directly indirectly borrower guarantor applicable 149 tender advance meaning assigned term section 43 agreement 150 tender draft meaning assigned term letter credit 151 termination date means last day drawing available letter credit 152 trustee means person group persons time serving corporate fiduciary indenture 153 uniform customs practice shall mean uniform customs practice documentary credits 1994 revision icc publication 500 article ii representations warranties guarantor represents warrants bank representations warranties shall survive delivery documents mentioned herein issuance letter credit 21 incorporation guarantor consolidated subsidiaries corporation partnership joint venture respectively duly organized existing good standing laws respective jurisdiction except failure good standing would material adverse effect corporate power respective properties carry respective business future time conducted duly qualified foreign corporation otherwise business every jurisdiction failure qualified would material adverse effect date execution delivery agreement guarantor respective consolidated subsidiaries shown exhibit b hereto subsidiaries 22 power authority conflicts enforceability duly authorized applicable provisions law execute deliver perform agreement agreements party corporate action part required lawful execution delivery performance hereof thereof duly taken agreement agreements party upon due execution delivery hereof valid binding legal obligation guarantor enforceable accordance respective terms subject bankruptcy insolvency reorganization moratorium similar laws affecting creditors rights generally general principles equity neither execution agreement fulfillment compliance respective provisions terms hereof conflict result breach terms conditions provisions constitute violation default applicable law regulation judgment writ order decree guarantor consolidated subsidiary respective properties subject charter bylaws guarantor consolidated subsidiary agreement instrument guarantor consolidated subsidiary party b create lien charge encumbrance upon property assets guarantor consolidated subsidiary pursuant terms agreement instrument guarantor subsidiary party respective properties bound except pursuant security instruments 23 financial condition consolidated balance sheet guarantor consolidated subsidiaries fiscal year ended june 30 1994 related consolidated statements income retained earnings changes financial position fiscal year copies furnished bank correct complete fairly present financial condition guarantor consolidated subsidiaries material respects date thereof results respective operations fiscal year guarantor consolidated subsidiaries material direct contingent liabilities date agreement provided reflected consolidated balance sheet dated june 30 1994 referred notes thereto set forth exhibit b hereto material adverse change business properties condition financial otherwise guarantor consolidated subsidiaries since june 30 1994 24 title property assets good marketable title property including properties assets reflected financial statements notes thereto described section 23 hereof except assets disposed since date said financial statements ordinary course business longer useful conduct business properties assets free clear material liens mortgages pledges encumbrances charges kind except liens reflected financial statements exhibit b hereto permitted section 72 hereof 25 litigation pending best knowledge threatened material actions suits proceedings court arbitrator governmental administrative body agency may materially adversely affect properties business condition financial otherwise guarantor consolidated subsidiaries consolidated basis except disclosed financial statements notes thereto described section 23 hereof exhibit b hereto 26 taxes filed material tax returns required filed material taxes due respect thereto paid except described exhibit b hereto controversy respect material amount additional taxes state federal foreign guarantor pending knowledge guarantor threatened federal income taxes guarantor examined reported closed applicable statutes fiscal years including fiscal year ending june 30 1990 adequate reserves established payment taxes periods ended subsequent june 30 1990 27 trademarks franchises licenses owns possesses right use necessary material patents licenses franchises trademarks trademark rights trade names trade name rights copyrights conduct business conducted without known conflict patent license franchise trademark trade name copyright persons 28 default performance observance fulfillment material obligations covenants conditions contained agreement instrument party may bound effect default would allow person cause obligation agreement instrument become due prior stated maturity 29 governmental authority received written approval federal state local foreign governmental authorities necessary carry terms agreement governmental consents approvals required making performance agreement 210 erisa requirements incurred material liability pbgc established erisa successor thereto erisa connection plan established maintained person common control within meaning section 414c internal revenue code 1984 amended code section 4001b erisa employees entitled participate plan incurred material accumulated funding deficiency within meaning erisa reportable event connection plan occurred continuing 211 pollution environmental control hazardous substances obtained permits licenses authorizations required environmental laws except extent failure obtained permit license authorization material adverse effect material compliance federal state local environmental laws regulations relating without limitation pollution reclamation protection environment including laws relating emissions discharges releases threatened releases pollutants contaminants hazardous toxic materials wastes air water land otherwise relating manufacture processing distribution use treatment storage disposal transport handling pollutants contaminants hazardous toxic substances materials wastes failure comply would material adverse effect neither guarantor guarantors knowledge previous owner project site disposed hazardous substances portion project site used subparagraph hazardous substances shall meaning set forth comprehensive environmental response compensation liability act 42 usc 6901 et seq regulations adopted pursuant act 212 capital structure exhibit b attached hereto made part hereof states correct name consolidated subsidiaries guarantor jurisdiction organization incorporation percentage voting stock owned guarantor good title shares purports stock consolidated subsidiary free clear case lien permitted liens shares duly issued fully paid nonassessable 213 solvent financial condition giving effect transactions contemplated hereby solvent 214 restrictions party subject contract agreement charter corporate restriction guarantor believes materially adversely affects business use ownership properties guarantor party subject contract agreement restricts right ability incur indebtedness set forth exhibit b attached hereto none prohibit execution compliance agreement guarantor 215 full disclosure financial statements referred section 23 agreement bond documents agreement written statement guarantor bank including without limitation guarantors filings securities exchange commission taken whole contain untrue statement material fact omit material fact necessary make statements contained therein herein misleading fact guarantor failed disclose bank writing materially affects adversely far guarantor foresee materially affect adversely properties business prospects profits condition financial otherwise guarantor consolidated subsidiaries ability guarantor borrower perform agreement bond documents 216 labor relations except described exhibit b attached hereto made part hereof material grievances disputes controversies union organization guarantors employees threats strikes work stoppages asserted pending demands collective bargaining union organization could material adverse effect 217 compliance laws duly complied material respects properties business operations leaseholds compliance material respects provisions federal state local laws rules regulations applicable guarantor properties conduct business including without limitation osha environmental laws failure comply would material adverse effect 218 brokers claims brokerage commissions finders fees investment banking fees connection transactions contemplated agreement except fees owed bank affiliates 219 trade relations exists actual threatened termination cancellation limitation modification change business relationship guarantor customer group customers whose purchases individually aggregate material business guarantor material supplier exists present condition state facts circumstances would materially affect adversely guarantor prevent guarantor conducting business consummation transaction contemplated agreement substantially manner heretofore conducted 220 investment company act guarantor investment company controlled investment company within meaning investment company act 1940 amended 221 survival representations warranties covenants warrants represents bank representations warranties guarantor contained agreement bond documents agreements shall true time execution agreement bond documents agreements shall survive execution delivery acceptance thereof bank parties thereto closing transactions described therein related thereto article iii representations warranties borrower represents warrants bank representations warranties shall survive delivery documents mentioned herein issuance letter credit 31 incorporation corporation duly incorporated existing good standing laws state incorporation corporate power property carry business conducted 32 power authority duly authorized applicable provisions law execute deliver perform agreement bond documents action corporate otherwise applicable part required lawful execution delivery performance hereof duly taken agreement bond documents upon due execution delivery hereof valid binding obligation enforceable accordance respective terms subject bankruptcy insolvency reorganization moratorium similar laws affecting creditors rights generally general principles equity neither execution agreement bond documents fulfillment compliance respective provisions terms conflict result breach terms conditions provisions constitute violation default applicable law regulation judgment writ order decree properties subject charter bylaws agreement instrument subsidiaries party subsidiaries respective properties bound affected b create lien charge encumbrance upon subsidiaries property assets pursuant terms agreement instrument subsidiaries party subsidiaries respective properties bound except pursuant security instruments 33 governmental authority received written approval federal state local foreign governmental authorities necessary carry terms agreement governmental consents approvals required making performance agreement bond documents 34 project site operation project complies material respects presently existing zoning land use restrictions affecting project site including without limitation restrictive covenants 35 survival representations warranties covenants warrants represents bank representations warranties contained agreement bond documents shall true time execution agreement bond documents shall survive execution delivery acceptance thereof bank parties thereto closing transactions described therein related thereto article iv terms letter credit reimbursement payments guaranty 41 letter credit bank agrees terms conditions hereinafter set forth issue deliver letter credit favor trustee substantially form exhibit attached hereto upon fulfillment applicable conditions set forth article viii hereof bank agrees payments letter credit made banks funds 42 reimbursement payments borrower shall pay bank 300 pm est honoring draw bank date amount drawn letter credit sum equal amount drawn letter credit b demand interest amounts remaining unpaid borrower due hereunder date amounts become due payment thereof full fluctuating interest rate per annum equal times lesser prime rate plus two percent 2 ii highest lawful rate permitted applicable law c demand reasonable expenses incurred bank enforcing rights agreement bond documents demand charges commissions costs expenses set forth sections 44 45 49 hereof 43 tender advances bank shall make payment portion purchase price corresponding principal interest bonds drawn letter credit pursuant tender draft conditions set forth section 83 fulfilled payment shall constitute tender advance made bank borrower date amount payment tender advance provided conditions said section 83 fulfilled amount drawn pursuant tender draft shall payable accordance terms section 42a notwithstanding provision hereof borrower shall repay unpaid amount tender advance together unpaid interest thereon earlier occur date bonds purchased pursuant tender draft resold provided paragraph 43d hereof ii date 366 days following date tender advance iii termination date borrower may prepay outstanding amount tender advance whole part together accrued interest date prepayment date amount prepaid borrower shall notify bank prior 1100 est date prepayment amount prepaid b borrower shall pay interest unpaid amount tender advance date tender advance amount paid full payable monthly arrears first day month term tender advance date amount paid full fluctuating interest rate per annum effect time equal prime rate provided unpaid amount tender advance paid due shall bear interest lesser prime rate plus two percent 2 highest rate permitted applicable law payable demand date amount paid full c pursuant pledge agreement borrower agreed accordance terms indenture bonds purchased proceeds tender draft shall delivered tender agent bank designee held bank designee pledge collateral securing borrowers payment obligations bank hereunder bonds delivered bank designee shall registered name bank designee pledgee borrower provided section 3 pledge agreement prior simultaneously resale pledged bonds borrower shall prepay cause tender agent prepay provided outstanding tender advances order made paying bank amount equal sum amounts advanced bank pursuant corresponding tender drafts relating bonds plus b aggregate amount accrued unpaid interest tender advances payment shall applied bank reimbursement drawings prepayment tender advances resulting drawings manner described upon receipt bank certificate completed signed trustee substantially form annex f letter credit borrower irrevocably authorizes bank rely certificate reinstate letter credit accordance therewith funds held tender agent result sales pledged bonds remarketing agent shall paid bank tender agent applied amounts owing borrower bank pursuant paragraph upon payment bank amount tender advance prepaid together accrued interest tender advance date prepayment amount prepaid principal amount outstanding tender advances shall reduced amount prepayment interest shall cease accrue amount prepaid 44 commission fee borrower shall pay bank commission rate onehalf one percent per annum undrawn amount available drawn letter credit computed date commission payable including date issuance letter credit termination date payable year letter credit issued date issuance ii thereafter payable annually advance full first day anniversary issuance letter credit letter credit terminated drawing letter credit pay principal bonds year preceding anniversary date bank refund borrower applicable unused portion commission calculated pro rata basis b borrower shall pay bank upon drawing letter credit accordance terms fee 150 per drawing c borrower shall pay bank upon transfer letter credit accordance terms transfer fee 1000 45 increased costs event change existing future law regulation ruling interpretation thereof affecting bank shall either impose modify make applicable reserve special deposit capital requirement assessment similar requirement letter credit b impose bank condition regarding letter credit result event referred clause b shall increase cost including reasonable allocation resources decrease yield bank issuing maintaining letter credit increase cost shall result banks reasonable allocation aggregate cost increases yield decreases resulting events upon demand bank borrower shall immediately pay bank time specified bank additional amounts shall sufficient compensate bank increased cost decreased yield statement charges submitted bank shall conclusive absent manifest error amount owed 46 computation payments interest commission charges agreement shall computed per annum basis based upon year 365 366 case may days calculated actual number days elapsed 47 payment procedure payments made borrower agreement shall made bank lawful currency united states america immediately available funds banks offices described beginning agreement 1200 noon est date due except payments made accordance terms section 42a 48 business days date payment hereunder falls day business day purposes agreement shall deemed fallen next succeeding business day extension time shall case included computation payments interest commission case may 49 reimbursement expenses borrower pay reasonable legal fees computed without regard statutory presumption incurred bank connection preparation execution delivery agreement letter credit bond documents transactions contemplated hereby thereby including amendments hereto thereto consents waivers hereunder thereunder also pay fees charges taxes recording filing security instruments borrower also pay reasonable legal expenses bank connection administration letter credit agreement bond documents borrower upon request promptly reimburse bank amounts expended advanced incurred bank collect satisfy obligation borrower agreement bond documents enforce rights bank agreement bond documents amounts include without limitation court costs reasonable attorneys fees auditors accountants investigation expenses incurred bank connection matters 410 expiration date letter credit expire stated expiration date unless bank notifies borrower writing least 120 days prior expiration date bank extend applicable expiration date additional oneyear period applicable expiration date 411 guaranty guarantor hereby absolutely unconditionally guarantees full timely payment due whether stated maturity acceleration otherwise obligations borrower hereafter existing agreement security instruments whether principal interest fees expenses otherwise guarantor agrees pay expenses including without limitation reasonable attorneys fees expenses incurred bank enforcing protecting rights guarantor agreement security instruments b guaranty payment collection guarantor expressly waives right require action brought borrower guarantor require resort security whether held available bank guaranty borrower shall default payment principal interest fees amount payable hereunder shall become due whether acceleration call prepayment otherwise upon occurrence event default hereunder guarantor upon demand bank successors assigns promptly fully make payments guarantor shall made immediately available coin currency united states america respective dates payment thereof legal tender payment public private debts default payment principal interest fees amount payable hereunder occurrence event default hereunder shall give rise separate cause action hereunder separate suits may brought hereunder cause action arises bank successors assigns sole discretion shall right proceed first directly guarantor successors assigns c guarantor hereby waives promptness diligence notice acceptance notice respect obligations borrower agreement requirement bank protect secure perfect insure security interest lien property subject hereto security instruments exhaust right take action borrower person guarantor exercise rights may acquire way subrogation agreement payment made hereunder otherwise obligations borrower shall paid performed full amount shall paid guarantor account subrogation rights time obligations borrower hereunder shall paid performed full amount shall held trust benefit bank shall forthwith paid bank credited applied upon obligations borrower hereunder whether matured unmatured accordance terms hereof e guaranty shall continue effective reinstated case may time payment obligations borrower hereunder rescinded otherwise returned bank upon insolvency bankruptcy reorganization borrower otherwise though payment made 412 obligations absolute obligations borrower guarantor agreement shall absolute unconditional irrevocable shall paid strictly accordance terms agreement circumstances whatsoever including without limitation following circumstances lack validity enforceability letter credit bonds bond documents security instruments agreement instrument related thereto b amendment waiver consent departure terms letter credit bonds bond documents security instruments agreement instrument related thereto c existence claim setoff defense right borrower guarantor issuer may time trustee beneficiary transferee letter credit person trustee beneficiary transferee may acting bank person whether connection agreement security instruments letter credit bond documents project unrelated transaction statement draft document presented letter credit proving forged fraudulent invalid insufficient respect statement therein untrue inaccurate respect whatsoever e surrender exchange impairment security performance observance terms agreement f circumstance might otherwise constitute defense available discharge borrower guarantor except subject qualification obligations may reinstated upon bankruptcy notwithstanding payment full borrowers obligations bank notwithstanding absolute obligations borrower guarantor provided bank shall liable borrower guarantor provided section 104 hereof 413 waiver guarantors rights guarantor hereby waives fullest extent possible borrower assets rights whether law equity agreement otherwise subrogation indemnity reimbursement contribution similar claim cause action remedy otherwise would arise guarantors performance obligations bank agreement preceding waiver intended guarantor bank benefit borrower waiver shall enforceable borrower successors assigns absolute defense action guarantor borrower assets arises guarantors made payment bank respect borrowers liabilities guaranteed hereunder article v security insurance 51 security full timely payment performance borrower guarantor respective obligations hereunder borrower shall date hereof deliver pledge agreement bank 52 casualty liability insurance required borrower keep project properties continuously insured risks customarily insured businesses like size type engaged similar operations business interruption insurance including without limiting generality covenant contained herein bond documents casualty insurance general comprehensive liability insurance claims bodily injury death property damage provided however insurance required may provided blanket policies hereafter maintained borrower guarantor 53 notice casualty taking case material damage destruction part project borrower shall give prompt notice thereof bank case taking proposed taking material part project right therein eminent domain borrower shall give prompt notice thereof bank notice shall describe generally nature extent damage destruction taking loss proceeding negotiations article vi affirmative covenants obligations performed paid shall performed paid full long letter credit shall outstanding unless bank shall otherwise consent writing borrower guarantor perform observe covenants agreements contained respective part article vi 61 financial reports data information quarterly statements within fortyfive 45 days end fiscal quarter balance sheet guarantor consolidated subsidiaries end period income statement period portion fiscal year ending period consolidated consolidating basis setting forth comparative form figures period preceding fiscal year certified chief financial officer controller guarantor complete correct material respects prepared accordance gaap except without footnotes subject normal yearend audit adjustments b annual statements within ninety 90 days end fiscal year detailed audited financial report guarantor consolidated subsidiaries consolidated consolidating basis containing balance sheet end period income statement cash flows period setting forth comparative form figures preceding fiscal year containing unqualified opinion independent certified public accountants acceptable bank financial statements prepared accordance gaap examination connection financial statements made accordance generally accepted auditing standards accordingly included tests accounting records auditing procedures considered necessary circumstances c sec reports orders judgments etc promptly upon becoming available one copy regular periodic report registration statement prospectus file guarantor securities exchange securities exchange commission successor agency material order judgment decree decision ruling issued governmental authority proceeding guarantor party accountants statements within period provided paragraph b letter accountants render opinion financial statements stating reviewed agreement performing examination necessary render opinion annual financial statements obtained knowledge default event default resulting guarantors failure observe financial ratios sections 75 78 accountants knowledge default event default statement specifying best knowledge nature period existence default event default e certificates time delivery financial statements provided section 61a b officers certificate guarantor effect best knowledge default event default occurred continuing f notice default litigation promptly event within three business days chief financial officer controller guarantor obtains knowledge thereof notice 1 occurrence event constitutes default event default 2 litigation governmental proceeding pending guarantor likely materially adversely affect business operations property assets condition financial otherwise prospects guarantor subsidiaries consolidated basis g environmental matters promptly upon obtaining knowledge thereof notice facts circumstances known borrower guarantor reasonably believes likely form basis assertion material claim guarantor relating environmental matters including limited claim arising past present environmental practices asserted cercla rcra federal state local environmental statute h information time information documents financial otherwise bank may reasonably request 62 books records inspections borrower guarantor keep proper books record account full true correct entries conformity gaap requirements law shall made dealings transactions relation businesses activities borrower guarantor permit officers designated representatives bank visit inspect guidance officers borrower guarantor applicable properties borrower guarantor examine books account borrower guarantor discuss affairs finances accounts borrower guarantor advised officers applicable reasonable times intervals reasonable extent bank may request 63 maintenance property insurance exhibit sets forth true complete listing material insurance maintained guarantor borrower date hereof amounts insured date hereof set forth therein borrower guarantor shall keep property useful necessary business good working order condition except property become obsolete longer useful ii maintain financially sound reputable insurance companies insurance provides substantially greater coverage borrower least risks described exhibit iii furnish bank upon written request full information insurance carried 64 corporate franchises borrower guarantor cause done things necessary preserve keep full force effect existence material rights franchises licenses patents provided however nothing section 64 shall prevent withdrawal borrower guarantor qualification foreign corporation jurisdiction withdrawal could material adverse effect business operations property assets condition financial otherwise prospects borrower guarantor nothing section 64 shall prevent merger borrower guarantor consolidated subsidiary guarantor 65 compliance statutes etc borrower guarantor comply applicable statutes regulations orders applicable restrictions imposed governmental bodies domestic foreign respect conduct businesses ownership property including applicable statutes regulations orders restrictions relating environmental standards controls except noncompliances could aggregate material adverse effect business operations property assets condition financial otherwise prospects borrower guarantor borrower guarantor taken whole 66 erisa soon possible event within 10 days borrower guarantor knows reportable event occurred respect plan established maintained borrower guarantor erisa affiliate material accumulated funding deficiency incurred application made secretary treasury waiver modification minimum funding standard including required installment payments extension amortization period section 412 code respect plan terminated reorganized petitioned declared insolvent title iv erisa manner material adverse effect plan unfunded current liability within meaning title iv erisa giving rise lien erisa proceedings instituted terminate plan circumstances material adverse effect borrower guarantor erisa affiliate incur material liability account plan section 4062 4063 4064 multiemployer plan section 515 4201 4203 erisa borrower guarantor deliver bank certificate financial officer thereof setting forth details occurrence action borrower guarantor erisa affiliate required proposes take together notices required proposed given filed borrower guarantor erisa affiliate pbgc plan participant plan administrator respect thereto borrower guarantor deliver bank complete copy annual report form 5500 plan required filed internal revenue service pbgc given plan participants received either borrower guarantor 67 performance obligations borrower guarantor perform obligations terms mortgage indenture security agreement bound except non performances could aggregate material adverse effect business operations property assets condition financial otherwise prospects borrower guarantor borrower guarantor taken whole 68 taxes liens borrower guarantor promptly pay cause paid material taxes assessments governmental charges may lawfully levied assessed upon income profits borrower guarantor upon property real personal mixed belonging borrower guarantor upon part thereof also lawful claims labor material supplies unpaid might become lien charge property provided however neither borrower guarantor shall required pay tax assessment charge levy claim long validity thereof shall actively contested good faith proper proceedings borrower guarantor case may shall established reserves amounts satisfactory borrowers guarantors case may independent certified public accountants 69 payment obligations borrower guarantor pay due material obligations liabilities except indebtedness contested good faith appropriate proceedings diligently prosecuted appropriate reserves accrual maintained case judgments enforcement thereof stayed pending contest 610 environmental matters borrower guarantor obtain maintain licenses permits approvals required connection project respect hazardous materials shall mean materials defined hazardous substances hazardous waste solid waste comprehensive environmental response compensation liability act 1980 resource conservation recovery act similar environmental statute borrower guarantor applicable remain full compliance licenses permits approvals except extent failure comply would material adverse effect borrower guarantor give bank copies citations orders notices communications received respect violations alleged violations environmental laws connection project violation alleged violation likely material adverse effect borrower guarantor shall indemnify hold bank directors officers shareholders employees harmless damages penalties fines claims liens suits liabilities costs including cleanup costs judgments expenses including attorneys consultants experts fees expenses every kind nature suffered asserted bank direct indirect result warranty representation made borrower guarantor section 611 false untrue material respect requirement environmental law requires elimination removal hazardous materials project site bank borrower guarantor transferee borrower guarantor bank except extent damages penalties fines claims liens suits liabilities costs judgments expenses result directly indirectly actions bank directors officers shareholders employees article vii negative covenants obligations performed paid shall performed paid full long letter credit shall outstanding unless bank shall otherwise consent writing borrower guarantor covenant agree follows 71 negative pledge liens borrower guarantor create incur assume suffer exist lien upon respect property assets real personal tangible intangible constituting project sell property assets subject understanding agreement contingent otherwise repurchase property assets including sales accounts receivable recourse borrower guarantor assign right receive income permit filing financing statement uniform commercial code state similar notice lien similar recording notice statute provided provisions section 71 shall prevent creation incurrence assumption existence liens favor bank ii liens taxes yet due liens taxes contested good faith appropriate proceedings adequate reserves established iii except hereinafter set forth liens respect property assets borrower guarantor imposed law incurred ordinary course business carriers warehousemens mechanics liens similar liens arising ordinary course business exceed 10000000 aggregate x aggregate materially detract value property assets materially impair use thereof operation business borrower guarantor contested good faith appropriate proceedings effect preventing forfeiture sale property assets subject lien iv liens existence date hereof listed property subject thereto described exhibit c indication therein liens permitted liens hereunder provided exhibit c lien listed permitted lien designated time period lien shall cease permitted lien expiration time period v permitted encumbrances vi liens created pursuant security instruments vii utility deposits pledges deposits connection workers compensation unemployment insurance social security legislation 72 consolidation merger guarantor enter transaction merger consolidation except mergers guarantor surviving entity 73 sale assets dissolution etc subject section 72 hereof guarantor transfer sell assign lease otherwise dispose properties assets including notes franchises contract rights stock valued book value indebtedness subsidiary fiscal year taken together aggregate book value excess thirty percent 30 consolidated net worth except ordinary course business b change nature business wind liquidate dissolve agree foregoing 74 loans investments guarantor make permit remain outstanding loan advance purchase acquire stock securities interest make capital contribution investment person except guarantor subsidiary may make permit remain outstanding loans advances capital contributions investments acquire stock securities whollyowned subsidiary ii purchase acquire government obligations defined indenture b deposit accounts certificates deposit commercial banks capital surplus excess fifty million dollars 50000000 c bankers acceptances drawn accepted commercial banks capital surplus excess fifty million dollars 50000000 repurchase agreements secured obligations type specified due one year date acquisition thereof e commercial paper rated a2 better moodys variable rate preferred stock rated better standard poors iii acquire amount stock securities interest make capital contribution investment person connection acquisition 50 voting stock controlling interest person provided acquired person becomes subsidiary guarantor included guarantors balance sheet consolidated subsidiary iv make loans advances employees guarantor subsidiaries ordinary course business v make permit remain outstanding loans advances purchase acquire stock securities make capital contributions investments persons including without limitation persons subsidiaries guarantor aggregate amount exceed forty percent 40 consolidated net worth 75 consolidated total liabilities consolidated tangible net worth guarantor time permit ratio consolidated total liabilities consolidated tangible net worth greater 125 10 76 coverage ratio guarantor time permit ratio ebit period four consecutive fiscal quarters interest expense period less 250 10 77 current ratio guarantor permit ratio consolidated current assets consolidated current liabilities time less 250 10 78 consolidated net worth guarantor permit consolidated net worth less 250000000 december 31 1993 higher amount hereinafter set forth consolidated net worth guarantor shall increase quarterly beginning fiscal quarter ended december 31 1993 amount equal 50 consolidated net income positive guarantor fiscal quarter article viii conditions issuance letter credit 81 conditions issuance prior date issuance letter credit borrower guarantor shall furnished bank form satisfactory bank following two executed counterparts agreement executed counterparts security instruments b executed counterparts bond documents except bonds specimen copy may furnished c evidence compliance insurance requirements contained article vi hereof opinion dated date hereof addressed form substance acceptable bank issuers counsel matters bank may require e opinions counsel borrower guarantor dated date hereof addressed substantially form attached hereto exhibit e otherwise form substance acceptable bank f certificates borrower guarantor applicable including references articles incorporation bylaws charter documents applicable ii resolutions board directors authorizing execution delivery performance appropriate bond documents agreement security instruments borrower guarantor case may party iii incumbency specimen signatures officers iv matters bank may require g copies articles incorporation bylaws charter documents applicable guarantor certified true correct authorized officer date issuance bonds b corporations certificates dated earlier 20 days prior date issuance bonds secretary state applicable states good standing borrower guarantor h opinion bond counsel substantially form exhibit f reliance letter bond counsel substantially form exhibit g hereto form substance satisfactory bank counsel matters bank may reasonably request copies governmental approvals required connection transaction including resolution issuer authorizing authentication issuance bonds j evidence payment bank commission pursuant section 44 agreement k documents instruments certifications bank may reasonably require 82 additional conditions precedent issuance letter credit obligation bank issue letter credit shall subject conditions precedent date issuance following statements shall true bank shall received certificate signed chief financial officer controller borrower guarantor dated date issuance stating representations warranties contained article ii article iii agreement section 5 pledge agreement section 22 loan agreement correct date issuance letter credit though made date ii event occurred would result issuance letter credit constitutes event default would constitute event default requirement notice given time elapse b shall introduction change interpretation law regulation would make unlawful unduly burdensome bank issue letter credit outbreak escalation hostilities calamity crisis suspension material limitation trading new york stock exchange national securities exchange declaration general banking moratorium united states north carolina banking authorities establishment new restrictions transactions securities banks materially affecting free market securities extension credit banks 83 conditions precedent tender advance payment made bank letter credit pursuant tender draft shall constitute tender advance hereunder date payment event occurred would result tender advance constitutes event default would constitute event default requirement notice given time elapse unless borrower guarantor shall previously advised bank writing bank actual knowledge statement longer true borrower guarantor shall deemed represented warranted date payment bank letter credit pursuant tender draft date payment statement true correct article ix default 91 events default following shall constitute event default agreement whereupon obligations whether owing contingently owing option bank successors assigns immediately become due payable borrower without presentation demand protest notice kind hereby expressly waived borrower pay reasonable attorneys fees incurred bank successors assigns connection event default failure borrower guarantor pay within five 5 days date due payment principal interest commission charge expense referred article iv hereof b occurrence event default security instruments bond documents c borrower guarantor default payment principal due whether acceleration otherwise interest indebtedness excess 15 million beyond period grace provided respect thereto performance agreement term condition contained agreement obligation created effect default cause permit holder holders obligation trustee holder holders cause obligation become due prior stated maturity representation warranty certification statement made borrower guarantor herein writing furnished behalf borrower guarantor connection loan issuer loan agreement pursuant agreement security instruments shall false misleading incomplete material respect date made e borrower guarantor default performance observance agreement covenant contained article vii hereof f borrower guarantor default performance observance agreement covenant term condition contained herein default shall remedied thirty 30 days written notice thereof shall received bank g borrower guarantor shall make assignment benefit creditors file petition bankruptcy entered favor order relief federal bankruptcy code similar law foreign jurisdiction generally fail pay debts come due either number amount admit writing inability pay debts generally mature make voluntary assignment benefit creditors commence voluntary assignment benefit creditors commence proceeding relating reorganization arrangement readjustment debt dissolution liquidation law statute jurisdiction whether hereafter effect act indicate consent approval acquiescence proceeding appointment receiver trustee custodian defined federal bankruptcy code substantial part property trustee receiver shall appointed borrower substantial part property borrower guarantor appointment remains effect sixty 60 days petition bankruptcy reorganization shall filed borrower guarantor petition shall dismissed within sixty 60 days filing h final judgment outstanding final judgments borrower guarantor exceeds aggregate eight million dollars 8000000 excess insurance shall rendered borrower guarantor within 30 days entry thereof judgment shall discharged execution thereof stayed pending appeal within 30 days expiration stay judgment shall discharged time thereafter bank may pursuant section 902 indenture advise trustee event default occurred instruct trustee declare principal bonds outstanding interest thereon immediately due payable b proceed hereunder security instruments extent therein provided bond documents order may elect bank shall obligation proceed person exhaust remedy remedies may without resorting security whether held available bank 92 remedy exclusive remedy herein conferred upon reserved bank intended exclusive available remedy remedies every remedy shall cumulative shall addition every remedy given hereunder security instruments hereafter existing law equity statute article x miscellaneous 101 indemnification borrower guarantor jointly severally hereby indemnifies holds bank harmless claims damages losses liabilities costs expenses whatsoever bank may incur may claimed bank person reason connection execution delivery transfer payment failure pay letter credit provided borrower guarantor shall required indemnify bank claims damages losses liabilities costs expenses extent caused gross negligence willful misconduct bank connection paying drafts presented letter credit b banks willful failure pay letter credit connection court order presentation trustee successor corporate fiduciary indenture sight draft certificate strictly complying terms conditions letter credit c failure bank conform uniform customs practice ii reason connection execution delivery performance agreement security instruments transaction contemplated thereof b borrower guarantor jointly severally hereby indemnifies holds bank harmless damages penalties fines claims liens suits liabilities costs including cleanup costs judgments expenses including attorneys consultants experts fees expenses every kind nature suffered asserted bank direct indirect result warranty representation made borrower guarantor sections 211 hereof respectively false untrue material respect requirement law regulation ordinance local state federal requires elimination removal hazardous materials substances wastes environmentally regulated substances project site except extent damages penalties fines claims liens suits liabilities costs judgments expenses result directly indirectly actions bank directors officers shareholders employees borrowers guarantors obligations hereunder bank shall limited extent term agreement act occurrence prior termination agreement gives rise liability hereunder shall continue survive remain full force effect notwithstanding termination banks obligations hereunder anything herein contrary notwithstanding nothing section 101 intended shall construed limit borrowers reimbursement obligation guarantors guaranty obligation contained article iv hereof without prejudice survival obligation borrower guarantor indemnities obligations borrower guarantor contained section 101 shall survive payment full amounts payable pursuant article iv termination date 102 transfer letter credit letter credit may transferred assigned accordance terms letter credit 103 reduction letter credit letter credit subject reduction pursuant terms b amount available drawn letter credit shall permanently reduced accordance terms thereof bank shall right require trustee surrender letter credit bank issue date substitution outstanding letter credit substitute irrevocable letter credit substantially form letter credit changes therein shall appropriate give effect reduction dated date amount available drawn letter credit shall reduced 104 liability bank neither bank officers directors employees agents consultants shall liable responsible use may made letter credit acts omissions trustee beneficiary transferee connection therewith b validity sufficiency genuineness documents endorsements thereon even documents fact prove respects invalid insufficient inaccurate fraudulent forged c payment bank presentation documents comply terms letter credit including failure documents bear reference adequate reference letter credit circumstances whatsoever way related making failure make payment letter credit except borrower guarantor shall claim bank shall liable borrower guarantor extent direct opposed consequential damages suffered borrower guarantor caused gross negligence willful misconduct bank determining whether documents presented letter credit complied terms letter credit ii wrongful failure bank pay letter credit presentation trustee successor trustee indenture sight draft certificate strictly complying terms conditions letter credit iii failure bank conform requirements uniform customs practice furtherance limitation foregoing bank may accept documents appear face order without responsibility investigation regardless notice information contrary 105 successors assigns agreement shall binding upon borrower guarantor bank respective successors assigns rights borrower guarantor arising agreement shall sole benefit bank successors assigns shall entitled enforce performance observance agreement extent parties hereto 106 notices requests demands upon respective parties hereto shall deemed given made hand delivered mailed first class certified registered mail postage prepaid overnight courier service addressed follows address parties hereto shall notified pursuant section 106 bank first union national bank north carolina two first union center 7th floor charlotte north carolina 282880742 attention international operations copy first union national bank north carolina one first union plaza 19th floor charlotte north carolina 28288 attention capital markets borrower watts regulator co watts industries inc 815 chestnut street north andover massachusetts 01845 attention corporate controller guarantor watts industries inc route 114 chestnut street north andover 01845 except cases expressly herein provided notice request demand effective received party addressed event said notice request demand shall effective upon receipt addressee 107 amendment agreement may amended modified discharged upon agreement writing borrower guarantor bank 108 effect delay waivers delay omission exercise right power accruing upon default omission failure performance hereunder shall impair right power shall construed waiver thereof right power may exercised time often may deemed expedient order entitle bank exercise remedy hereafter existing law equity statute shall necessary give notice may herein expressly required event provision contained agreement breached party thereafter waived party empowered act waiver shall limited particular breach hereunder waiver amendment release modification agreement shall established conduct custom course dealing solely instrument writing duly executed parties thereunto duly authorized agreement 109 counterparts agreement may executed simultaneously several counterparts shall deemed original together shall constitute one instrument 1010 severability invalidity unenforceability one phrases sentences clauses sections contained agreement shall affect validity enforceability remaining portions agreement part thereof 1011 cost collection borrower guarantor shall liable payment reasonable fees expenses including reasonable attorneys fees computed without regard statutory presumption incurred connection enforcement agreement 1012 set upon occurrence event default hereunder bank hereby authorized without notice borrower guarantor set appropriate apply monies securities properties borrower guarantor hereafter held received transit bank borrower guarantor obligations borrower guarantor irrespective whether bank shall made demand hereunder credit security instrument although obligations may contingent unmatured 1013 governing law agreement shall governed construed accordance laws state north carolina guarantor hereby acknowledge letter credit shall governed construed accordance uniform customs practice 1014 references words herein hereof hereunder words similar import used agreement refer agreement whole particular article section subsection 1015 consent jurisdiction venue event action suit proceeding brought borrower guarantor behalf bank enforce observance performance provisions agreement security instruments including without limitation collection amounts owing thereunder borrower guarantor hereby irrevocably consents exercise jurisdiction borrower guarantor extent permitted applicable laws property united states district court western district north carolina supreme court north carolina state court ii irrevocably waives objection might hereafter assert venue proceeding court described clause witness whereof borrower guarantor bank caused agreement executed respective names sealed instrument date first written borrower watts regulator co title guarantor watts industries inc title bank first union national bank north carolina title attest title corporate seal exhibit form letter credit irrevocable letter credit date september 1994 letter credit s045494 first national bank boston trustee 150 royall street canton massachusetts 02021 attention corporate trust department ladies gentlemen hereby issue first national bank boston trustee trust indenture dated september 1 1994 indenture rutherford county industrial facilities pollution control financing authority issuer pursuant 5000000 aggregate principal amount industrial development revenue refunding bonds watts regulator co project series 1994 bonds issued irrevocable letter credit s045494 letter credit account watts regulator co massachusetts corporation company amount 5250000 initial stated amount time reduced reinstated hereinafter provided amount available subject provisions reducing amounts available hereunder 5000000 time reduced reinstated hereinafter provided principal amount available shall available payment principal portion purchase price corresponding principal bonds ii subject provisions reducing amounts available hereunder 250000 time reduced reinstated hereinafter provided interest amount available shall available payment 120 days interest portion purchase price corresponding interest bonds assumed rate 15 per annum computed basis year 365 days subject aggregate limits conditions set forth herein funds may drawn upon hereunder respect payment unpaid principal amount portion purchase price corresponding principal bonds ii respect payment 120 days interest accrued payable portion purchase price corresponding interest accrued bonds prior stated maturity date letter credit effective immediately expires 300 pm eastern time presentation office hereinafter defined september 1997 may extended time hereinafter described stated termination date earlier hereinafter provided letter credit shall automatically extended additional oneyear period applicable stated termination date unless give successor trustee written notice election renew letter credit least 120 days prior applicable stated termination date us certified mail return receipt requested drawings letter credit paid funds hereby irrevocably authorize draw us aggregate amount exceed amount available accordance terms conditions subject reductions amounts hereinafter set forth 1 one drawings subject provisions contained next following paragraph one drafts drawn us sight presented payment day banks required authorized close charlotte north carolina business day referring therein number letter credit accompanied written completed certificate signed form annex attached hereto draft accompanied certificate interest draft amount exceeding interest amount available date drawing 2 one drawings one drafts drawn us sight presented payment business day referring therein number letter credit accompanied written completed certificate signed form annex b attached hereto draft accompanied certificate tender draft aggregate amount exceeding amount available date drawing 3 one drawings one drafts drawn us sight presented payment business day referring therein number letter credit accompanied written completed certificate signed form annex c attached hereto draft accompanied certificate partial redemption draft aggregate amount exceeding amount available date drawing 4 single drawing draft drawn us sight presented payment business day referring therein number letter credit accompanied written completed certificate signed form annex hereto draft accompanied certificate conversion draft amount exceeding amount available date drawing 5 single drawing draft drawing us sight presented payment business day referring therein number letter credit accompanied written completed certificate signed form annex e attached hereto draft accompanied certificate final draft amount exceeding amount available date drawing shall draw us interest draft shall received us within ten 10 calendar days date payment respect drawing notice effect reimbursed drawing interest portion letter credit reinstated x right draw us single drawing interest draft clause 1 immediately preceding paragraph shall automatically reinstated effective eleventh 11th calendar day date payment respect drawing shall authorized draw us interest draft accordance said clause 1 provisions paragraph providing reinstatement right draw us interest draft succeeding single drawing shall applicable successive drawing interest draft clause 1 immediately preceding paragraph long letter credit shall terminated set forth upon honoring tender draft presented hereunder amount available letter credit shall automatically reduced amount drawn tender draft principal amount available drawn hereunder shall automatically reduced amount equal principal component tender draft interest amount available drawn hereunder shall automatically reduced amount equal amount interest component tender draft upon honoring partial redemption draft presented hereunder amount available letter credit shall automatically permanently reduced amount drawn partial redemption draft principal amount available drawn hereunder shall automatically permanently reduced amount equal principal component partial redemption draft honored us hereunder interest amount available drawn hereunder shall automatically permanently reduced amount equal amount interest component partial redemption draft honored us hereunder upon honoring conversion draft presented hereunder amount available letter credit shall automatically permanently reduced amount drawn conversion draft principal amount available drawn hereunder shall automatically permanently reduced amount equal principal component conversion draft honored us hereunder interest amount available drawn hereunder shall automatically permanently reduced amount equal amount interest component conversion draft honored us hereunder amount available principal amount available interest amount available drawn letter credit respect tender draft shall reinstated provided paragraph extent reimbursed behalf company immediately available funds delivered us presentation office 300 pm eastern time business day amount drawn respect principal interest tender draft receive reimbursement behalf company strict conformity terms conditions letter credit 300 pm eastern time business day prior termination hereof reimbursement honored stated received next succeeding business day amount received us behalf company reimbursement amounts drawn hereunder tender draft shall accompanied completed certificate signed form annex f attached hereto applied extent amount received us indicated therein reimburse us amounts drawn hereunder tender drafts confirm amount principal amount available interest amount available increased reimbursement delivering executed completed acknowledgment accompanying form annex f delivered connection reimbursement amount available principal amount available interest amount available shall increased compliances provisions paragraph draft certificate presented hereunder shall dated date presentation draft certificate shall presented office located 301 south college street t7 charlotte north carolina 28288 0742 attention international operations office state north carolina may designated us written notice delivered least three business days prior date interest payable bonds presentation office shall presented business day receive drafts certificates office strict conformity terms conditions letter credit later 1100 eastern time business day prior termination hereof honor initiating wiring funds 230 pm eastern time day accordance payment instructions receive drafts certificates office strict conformity terms conditions letter credit 1100 eastern time business day prior termination hereof honor next succeeding business day accordance payment instructions requested payment letter credit may made wire transfer federal reserve bank richmond funds account bank federal reserve wire system deposit day funds designated account maintain us connection presentation tender draft conversion draft bonds aggregate principal amount equal principal amount tender draft conversion draft shall delivered bank designee promptly practicable event within five business days presentation registered name bank designee pledgee company pledged bank pursuant pledge agreement respect tender draft bank agrees shall release bonds pledged letter credit shall reinstated amount available reinstated shall equal exceed aggregate principal 120 days interest calculated assumed rate 15 per annum bonds drawings available hereunder giving effect release upon earliest honoring final draft presented hereunder ii second day following date receive certificate signed stating interest rate bonds converted fixed interest rate iii date receive certificate signed stating company provided accepted alternate credit facility accordance terms indenture effective date certificate iv stated termination date letter credit shall terminate letter credit transferable entirety transferee certify us succeeded trustee indenture may successively transferred transfer amount available letter credit transferee shall effected presentation us letter credit accompanied certificate form annex g attached hereto payment transfer commission referred therein upon presentation shall forthwith transfer transferee requested transferee issue letter credit transferee provisions therein consistent letter credit letter credit sets forth full undertaking shall way modified amended amplified limited reference document instrument agreement referred herein including without limitation bonds indenture except certificates drafts referred herein hereby incorporated reference shall deemed incorporate herein reference document instrument agreement except certificates drafts except otherwise provided herein letter credit shall governed construed accordance uniform customs practice documentary credits 1993 revisions international chamber commerce publication 500 ucp extent inconsistent therewith laws state north carolina communications respect letter credit presentations drafts certificates hereunder shall writing shall addressed us 301 south college street t7 charlotte north carolina 282880742 attention international operations specifically referring number letter credit truly first union national bank north carolina title vice president annex form certificate interest draft certificate drawing connection payment 120 days interest irrevocable letter credit s045494 undersigned duly authorized officer undersigned trustee hereby certifies first union national bank north carolina bank references irrevocable letter credit s045494 letter credit terms defined therein otherwise defined herein used herein therein defined issued bank favor trustee follows 1 trustee indenture holders bonds 2 trustee making drawing letter credit respect payment interest bonds payment due payable regular interest payment date record date interest payment date none bonds interest drawn pursuant draft held record company bank designee pledgee company 3 interest draft accompanying certificate first interest draft presented trustee letter credit interest draft last presented trustee letter credit honored paid bank trustee received notice within ten days presentation interest draft bank reimbursed 4 amount interest draft accompanying certificate computed compliance terms conditions bonds indenture exceed interest amount available drawn trustee letter credit 5 upon receipt undersigned amount demanded hereby undersigned apply directly payment due interest amount owing account bonds pursuant indenture b portion said amount shall applied undersigned purpose c portion said amount shall commingled funds held undersigned witness whereof trustee executed delivered certificate day 19 first national bank boston trustee name title used certificate relating first interest draft used certificate relating interest draft first interest draft annex b form certificate tender draft certificate drawing connection payment principal purchase price portion purchase price corresponding interest bonds tendered irrevocable letter credit s045494 undersigned duly authorized officer undersigned trustee hereby certifies first union national bank north carolina bank reference irrevocable letter credit s045494 letter credit terms defined herein otherwise defined herein used herein therein defined issued bank favor trustee follows 1 trustee indenture registered owners bonds 2 trustee making drawing letter credit respect payment upon tender less bonds outstanding defined indenture unpaid principal amount bonds accrued interest thereon purchased result tender pursuant terms article iii indenture bonds presently held record company bank designee pledge company payment due date certificate tender draft accompanies presented bank 3 amount tender draft accompanying certificate equal sum drawn respect payment unpaid principal bonds presently held record company bank designee pledgee company purchased result tender amount exceed principal amount available letter credit ii drawn respect payment days exceed 120 days accrued unpaid interest bonds constituting portion purchase price bonds purchased result tender amount exceed interest amount available letter credit 4 trustee shall register cause registered name bank designee pledgee company pursuant section 3 pledge agreement shall deliver cause delivered bank designee bonds principal amount tender draft accompanying certificate promptly practicable event within five business days presentation tender draft accompanying certificate 5 upon receipt undersigned amount demanded hereby undersigned apply directly payment due purchase price bonds tendered pursuant indenture b portion said amount shall applied undersigned purpose c portion said amount shall commingled funds held undersigned 6 amount tender draft accompanying certificate computed compliance terms conditions bonds indenture exceed amount available letter credit trustee acknowledges pursuant terms letter credit upon banks honoring tender draft accompanying certificate amount available letter credit shall automatically reduced aggregate amount tender draft ii principal amount available letter credit shall automatically reduced amount equal amount principal component draft set forth paragraph 3 iii interest amount available letter credit shall automatically reduced amount equal amount interest component draft set forth paragraph 3 subject reinstatement set forth letter credit witness whereof trustee executed delivered certificate day first national bank boston trustee name title annex c form certificate partial redemption draft certificate drawing connection payment principal 120 days interest upon partial redemption irrevocable letter credit s045494 undersigned duly authorized officer undersigned trustee hereby certifies first union national bank north carolina bank reference irrevocable letter credit s045494 letter credit terms defined therein otherwise defined herein used herein therein defined issued bank favor trustee follows 1 trustee indenture registered owners bonds 2 trustee making drawing letter credit respect payment upon redemption less bonds outstanding defined indenture unpaid principal amount 120 days accrued unpaid interest bonds redeemed pursuant indenture bonds presently held record company bank designee pledgee company 3 amount partial redemption draft accompanying certificate equal sum drawn respect payment unpaid principal bonds presently held record company bank designee pledgee company redeemed amount exceed principal amount available letter credit ii drawn respect payment days exceed 120 days accrued unpaid interest bonds amount exceed interest amount available letter credit 4 amount partial redemption draft accompanying certificate computed accordance terms conditions bonds indenture exceed amount available letter credit 5 certificate partial redemption draft accompanies dated presented bank date unpaid principal amount accrued unpaid interest bonds redeemed due payable indenture upon redemption less bonds outstanding defined indenture 6 upon receipt undersigned amount demanded hereby undersigned apply directly payment due principal amount accrued unpaid interest bonds pursuant indenture b portion said amount shall applied undersigned purpose c portion said amount shall commingled funds held undersigned trustee acknowledges pursuant terms letter credit upon banks honoring partial redemption draft accompanying certificate amount available letter credit shall permanently reduced aggregate amount partial redemption draft ii principal amount available letter credit shall permanently reduced amount equal amount principal component draft set forth paragraph 3 iii interest amount available letter credit shall permanently reduced amount interest component draft set forth paragraph 3 witness whereof trustee executed delivered certificate day 19 first national bank boston trustee name title annex form certificate conversion draft certificate drawing connection payment principal plus accrued interest upon mandatory purchase conversion fixed interest rate irrevocable letter credit s045494 undersigned duly authorized officer undersigned trustee hereby certifies first union national bank north carolina bank reference irrevocable letter credit s045494 letter credit terms defined therein otherwise defined herein used herein therein defined issued bank favor trustee follows 1 trustee indenture registered owners bonds 2 trustee making drawing letter credit respect payment upon mandatory tender purchase pursuant section 202e indenture conversion fixed interest rate within meaning indenture less bonds outstanding defined indenture unpaid principal amount 120 days accrued unpaid interest bonds purchased bonds presently held record company bank designee pledgee company payment due date certificate conversion draft accompanies presented bank 3 amount conversion draft accompanying certificate equal sum drawn respect payment unpaid principal bonds presently held record company bank designee pledgee company purchased amount exceed principal amount available letter credit ii drawn respect payment days exceed 120 days accrued unpaid interest bonds amount exceed interest amount available letter credit 4 amount conversion draft accompanying certificate computed compliance terms conditions bonds indenture exceed amount available letter credit 5 upon receipt undersigned amount demanded hereby undersigned apply directly payment due principal amount interest accrued unpaid bonds pursuant indenture b portion said amount shall applied undersigned purpose c portion said amount shall commingled funds held undersigned 6 trustee shall register cause registered name bank agent pledgee company pursuant section 3 pledge agreement shall deliver cause delivered bank agent principal amount bonds equal principal amount conversion draft accompanying certificate promptly practicable event within five business days presentation conversion draft accompanying certificate witness whereof trustee executed delivered certificate day 19 first national bank boston trustee name title annex e form certificate final draft certificate drawing connection payment principal plus accrued interest upon stated accelerated maturity optional mandatory redemption whole irrevocable letter credit s045494 undersigned duly authorized officer undersigned trustee hereby certifies first union national bank north carolina bank reference irrevocable letter credit s045494 letter credit terms defined therein otherwise defined herein used herein therein defined issued bank favor trustee follows 1 trustee indenture registered owners bonds 2 trustee making drawing letter credit respect payment either stated maturity upon acceleration result redemption whole pursuant indenture unpaid principal amount 120 days accrued unpaid interest bonds outstanding within meaning indenture bonds presently held record company bank designee pledgee company 3 amount final draft accompanying certificate equal sum drawn respect payment unpaid principal bonds presently held record company bank designee pledgee company amount exceed principal amount available letter credit ii drawn respect payment days exceed 120 days accrued unpaid interest bonds amount exceed interest amount available letter credit 4 amount final draft accompanying certificate computed compliance terms conditions bonds indenture exceed amount available letter credit 5 upon receipt undersigned amount demanded hereby undersigned apply directly payment due principal amount accrued unpaid interest thereon owing account bond pursuant indenture b portion said amount shall applied undersigned purpose c portion said amount shall commingled funds held undersigned witness whereof trustee executed delivered certificate day 19 first national bank boston trustee name title annex f form reinstatement certificate tender draft certificate reinstatement amounts available irrevocable letter credit nos045494 undersigned duly authorized officer undersigned trustee hereby certifies first union national bank north carolina bank reference irrevocable letter credit s045494 letter credit terms defined therein otherwise defined herein used herein therein defined issued bank favor trustee follows 1 trustee indenture holders bonds 2 amount paid today behalf company payment made reimburse pursuant section 42 letter credit reimbursement guaranty agreement dated september 1 1994 reimbursement agreement company bank amounts drawn letter credit tender drafts trustee hereby requests reinstate letter credit upon receipt payment amount equal amount payment received 3 amount referred paragraph 2 represents aggregate principal amount bonds resold sold behalf company 4 amount referred paragraph 2 represents accrued unpaid interest bonds witness whereof trustee executed delivered certificate day 19 first national bank boston trustee name title attached annex f acknowledgment bank hereby confirms trustee principal amount available letter credit reinstated amount interest amount available letter credit reinstated amount day 19 first union national bank name title annex g form transfer certificate instruction transfer first union national bank north carolina one first union plaza charlotte north carolina 28288 attention international operations corp10 irrevocable letter credit s045494 ladies gentlemen value received undersigned beneficiary transferor hereby irrevocably transfer name transferee address transferee rights transferor respect referenced letter credit including right draw said letter credit amount available said transferee succeeded transferor trustee certain trust indenture dated september 1 1994 rutherford county industrial facilities pollution control financing authority first national bank boston initial trustee thereunder indenture respect 5000000 industrial development revenue refunding bonds watts regulator co project series 1994 complied provisions indenture virtue transfer transferee shall sole rights beneficiary said letter credit including sole rights relating past future amendments thereof whether increases extensions otherwise amendments advised directly transferee without necessity consent notice transferor signature transferee acknowledges duly succeeded transferor trustee pursuant trust indenture advice letter credit returned herewith along transfer fee 100000 ask endorse transfer reverse side thereof forward directly transferee customary notice transfer truly first national bank boston trustee insert name title authorized officer corporate seal acknowledged insert name transferee insert name title authorized officer corporate seal exhibit b representations guarantor section 21 consolidated subsidiaries see attached list section 23 financial condition none section 24 title property assets none section 25 litigation none section 26 taxes none section 212 capital structure see attached list section 214 restrictions village walden industrial development agency industrial development revenue refunding bonds spence engineering company inc project series 1994 original aggregate principal amount 7500000 entire 7500000 aggregate principal amount currently outstanding b hillsborough county industrial development authority industrial development revenue bonds leslie co project dated april 18 1986 series 1986 bonds original aggregate principal amount 7200000 4762290 currently outstanding c hillsborough county industrial development revenue refunding bonds leslie controls inc project series 1994 series 1994 bonds dated august 4 1994 original aggregate principal amount 4765000 currently outstanding november 1 1994 proceeds series 1994 bonds used along additional funds leslie controls inc watts industries inc refund outstanding principal interest series 1986 bonds 838 notes dated november 26 1991 due 2003 original aggregate principal amount 75000000 currently outstanding e 125000000 revolving credit agreement dated august 30 1994 unsecured floating interest rate amounts outstanding 25 basis points liebor five year commitment banking syndicate whose agent first national bank boston currently amounts outstanding section 216 labor relations none direct indirect subsidiaries watts industries inc domestic watts automatic control valve inc delaware watts internatinal sales corp massachusetts watts investment company delaware watts regulator company massachusetts watts securities corp massachusetts circle seal controls inc delaware green country castings inc oklahoma henry pratt company delaware james jones company california kf industries inc oklahoma kf sales corp delaware rudolph labranche inc new hampshire leslie controls inc new jersey nicholson steam trap inc delaware spence engineering company delaware ancon usa inc delaware jameco acquisition corp delaware jameco industries inc new york international watts industries canada inc canada watts industries europe bv netherlands watts industries france sa france watts ocean gmbh germany wattsco international us virgin islands watts ocean bv netherlands watts sfr sa france watts uk ltd united kingdom edward barber co ltd united kingdom edward barber uk ltd united kingdom grc controls sa spain hst ag switzerland hst gmbh austria intermes spa italy kf industries ltd united kingdom kingsworth products ltd united kingdom leslie international vi virgin islands mtr gmbh germany ocean bv netherlands watts industries ag switzerland vra bvba belgium jameco export sales corportion us virgin islands multiscope spa watts intermes lda portugal wig armaturen vertriebs gmbh germany addition foregoing company holds 89 interest rg laurence company inc new jersey 80 interest londa spa italy 55 interest isi spa italy 60 interest tianjin tanggu watts valve company limited chinese joint venture exhibit c liens none exhibit insurance see attached exhibit e form opinion counsel borrower guarantor september 1994 rutherford county industrial facilities pollution control financing authority rutherford county courthouse main street rutherfordton north carolina 28139 first national bank boston trustee 150 royall street mail stop 450215 canton massachusetts 02021 first union national bank north carolina 301 south tryon street charlotte north carolina 28288 smith helms mulliss moore llp post office box 31247 charlotte north carolina 28231 ladies gentlemen acted counsel watts regulator co company watts industries inc guarantor connection transactions contemplated trust indenture dated september 1 1994 trust indenture rutherford county industrial facilities pollution control financing authority first national bank boston trustee company providing issuance authority industrial revenue refunding bonds watts regulator co project aggregate principal amount 5000000 bonds b execution delivery loan agreement dated september 1 1994 loan agreement company authority providing loan authority company principal amount 5000000 evidenced companys promissory note dated september 1 1994 principal amount 5000000 note proceeds loan used refund authoritys industrial revenue bonds regtrol inc project dated october 1 1984 issued finance acquisition construction installation project defined loan agreement use company manufacture regulators similar products c execution delivery letter credit reimbursement guaranty agreement dated september 1 1994 reimbursement agreement among company guarantor first union national bank north carolina bank issuer letter credit described therein letter credit execution delivery remarketing agreement dated september 1 1994 remarketing agreement among company first union national bank north carolina remarketing agent remarketing agent e execution delivery tender agency agreement dated september 1 1994 tender agency agreement among company trustee first national bank boston tender agent f execution delivery placement agreement dated september 1 1994 issued first union national bank north carolina placement agent agreed accepted authority company g execution delivery pledge agreement dated september 1 1994 pledge agreement company accepted bank h private placement memorandum execution delivery company connection therewith certain instruments certificates documents hereinafter referred counsel company guarantor examined originals copies documents records instruments relating authorization execution delivery performance company guarantor applicable loan agreement note reimbursement agreement remarketing agreement tender agency agreement placement agreement pledge agreement including following articles organization bylaws company certificate incorporation bylaws guarantor amended date presently effect b trust indenture c loan agreement note e reimbursement agreement f remarketing agreement g tender agency agreement h placement agreement pledge agreement j private placement memorandum k resolutions board directors company dated september 1994 authorizing execution delivery loan agreement note reimbursement agreement placement agreement remarketing agreement tender agency agreement pledge agreement related documents instruments l resolutions board directors guarantor dated september 1994 authorizing execution delivery reimbursement agreement related documents instruments addition reviewed companys certificates federal tax matters executed company authority certificate non arbitrage matters including exhibits thereto tax certificates joined company connection issuance bonds course representation company connection issuance bonds nothing come attention leads us believe tax certificates contain misstatement material fact omits state material fact necessary make statements contained tax certificates true complete also examined originals copies certified satisfaction records company guarantor certificates public officials officers company guarantor ii agreements instruments documents deemed necessary basis opinions hereinafter expressed questions fact material opinions relevant facts independently established us relied upon certificates company guarantor respective officers public officials assumed due execution deliver reimbursement agreement bank basis foregoing opinion company corporation validly organized existing good standing laws commonwealth massachusetts guarantor corporation validly organized existing good standing laws state delaware company requisite corporate power authority execute deliver loan agreement note reimbursement agreement remarketing agreement placement agreement tender agency agreement pledge agreement guarantor requisite corporate power authority execute deliver reimbursement agreement ii loan agreement note remarketing agreement placement agreement tender agency agreement pledge agreement duly authorized executed delivered company constitutes legal valid binding obligation instrument conveyance case may company enforceable accordance terms subject qualifications set forth iii reimbursement agreement duly authorized executed delivered company guarantor constitutes legal valid binding obligation company guarantor enforceable accordance terms subject qualifications set forth iv borrowing company loan agreement execution delivery performance company guarantor loan agreement note placement agreement reimbursement agreement remarketing agreement tender agency agreement pledge agreement violate conflict result breach cause default require consent massachusetts delaware federal law regulation presently applicable company guarantor articles organization company certificate incorporation guarantor order court regulatory body arbitral tribunal agreement instrument known us company guarantor party company guarantor property may bound affected best knowledge based upon inquiry officers company guarantor result creation lien pledge charge encumbrance upon assets properties company guarantor expressly contemplated documents v best knowledge inquiry officers company guarantor judicial regulatory arbitral proceedings pending threatened law equity company guarantor decided adversely company guarantor would material adverse effect financial condition operations company guarantor adversely affect validity enforceability note loan agreement reimbursement agreement remarketing agreement placement agreement tender agency agreement pledge agreement transactions contemplated therein vi approvals consents federal delaware massachusetts regulatory authorities required connection execution delivery performance company guarantor applicable loan agreement note reimbursement agreement remarketing agreement placement agreement tender agency agreement pledge agreement obtained opinions set forth subject qualification enforceability documents instruments referred herein may limited bankruptcy insolvency reorganization similar laws relating limiting enforcement creditors rights applicable equitable principles may affect remedies provided therein participated conferences company guarantor representatives bank contents private placement memorandum discussed passing upon assume responsibility accuracy completion private placement memorandum however nothing come attention leads us believe private placement memorandum financial statements financial statistical data included therein express belief contained date untrue statement material fact omitted state material fact necessary order make statements therein light circumstances made misleading truly goodwin procter hoar exhibit f form opinion bond counsel september 1994 rutherford county industrial facilities pollution control financing authority 601 north main street rutherford north carolina 28139 first national bank boston 150 royall street mail stop 450215 canton massachusetts 02021 watts regulator co 815 chestnut street north andover massachusetts 01845 rutherford county industrial facilities pollution control financing authority 5000000 industrial development revenue refunding bonds watts regulator co project series 1994 ladies gentlemen acted bond counsel connection issuance rutherford county financing authority political subdivision body corporate politic state north carolina issuer industrial development revenue refunding bonds watts regulator co project aggregate principal amount 5000000 bonds series 1994 bonds issued trust indenture dated september 1 1994 indenture issuer first national bank boston trustee bonds issued pursuant chapter 800 1975 session laws north carolina amended codified appears chapter 159c general statutes north carolina enabling act proceeds sale bonds used issuer make loan 5000000 watts regulator co company pursuant loan agreement dated september 1 1994 company issuer loan agreement loan evidenced companys promissory note dated september 1 1994 principal amount 5000000 note proceeds loan used redeem 5000000 outstanding principal amount issuers industrial development revenue bonds regtrol inc project series 1984 prior bonds proceeds prior bonds used finance costs incurred regtrol inc connection acquiring constructing installing equipment certain project located rutherford county north carolina company successor merger regtrol inc payments respect principal interest bonds purchase price bonds deemed tendered purchase holder thereof made pursuant drawings trustee irrevocable direct pay letter credit even date herewith letter credit issued first union national bank north carolina bank pursuant letter credit reimbursement guaranty agreement dated september 1 1994 reimbursement agreement company bank capacity bond counsel examined documents records issuer instruments including specimen copy bonds counterparts certified copies indenture loan agreement note deemed necessary relevant enable us express opinions set forth making examinations described assumed genuineness signatures authenticity documents submitted us originals conformity original documents submitted us certified photostatic copies authenticity originals documents various questions fact material opinion relied extent considered company representations warranties covenants contained indenture loan agreement reimbursement agreement companys certificate respect federal income tax matters tax certificate delivered certificates representations made issuer board commissioners rutherford county north carolina representatives north carolina federal tax reform allocation committee opinion regarding procedures actions issuer consent based upon examination certificates certified extracts records proceedings issuer relating authorization approval documents instruments herein referred opinion walter dalton county attorney counsel issuer even date herewith giving opinion set forth paragraph 2 relied opinion goodwin procter hoar counsel company even date herewith due authorization execution delivery loan agreement company legal valid binding nature thereof based upon foregoing opinion date hereof existing law 1 issuer political subdivision body corporate politic state north carolina validly organized existing constitution laws state north carolina enabling act full power authority legal right make loan company contemplated loan agreement execute deliver perform indenture loan agreement borrow issue sell perform bonds 2 indentures loan agreement duly validly authorized executed delivered issuer assuming due authorization execution delivery thereof parties thereto constitutes legal valid binding agreement issuer enforceable issuer accordance terms 3 note duly endorsed delivered issuer trustee forms note letter credit approved issuer 4 borrowing issuance sale performance bonds duly authorized issuer bonds duly executed delivered issuer bonds legal valid binding limited obligations issuer payable accordance terms solely moneys drawn letter credit proceeds payments loan agreement note bonds constitute create manner debt liability obligation state north carolina political subdivision agency thereof directly contingently obligate state north carolina political subdivision agency thereof levy pledge form taxation whatever therefor 5 enabling act interest bonds exempt present income taxes imposed state north carolina 6 assuming continuing compliance issuer company certain covenants comply requirements internal revenue code 1986 amended applicable bonds code interest bonds includible gross income owners thereof federal income tax purposes except interest bond period bond owned person substantial user facilities financed proceeds bond related person within meaning section 147a code failure comply covenants comply requirements code regarding use expenditure investment bond proceeds including timely rebate us treasury certain investment earnings may cause interest bonds become includable gross income owners thereof federal income tax purposes date issue interest bonds also includable gross income owners thereof federal income tax purposes retroactive date issuance bonds event 40000000 limitation imposed code amount outstanding tax exempt facilityrelated bonds exceeded within three years date bonds issued 7 interest bonds specific item tax preference purposes federal alternative minimum tax imposed corporations taxpayers including individuals federal environmental tax corporations ownership bonds receipt accrual interest thereon may result federal cases state local tax consequences including without limitation inclusion thereof certain calculations related federal corporate alternative minimum tax environmental tax respect express opinion expressed herein excludability interest bonds gross income owners thereof federal income tax purposes result conversion date delivery alternate credit facility opinion rendered understanding event subsequent bond counsel opinion obtained subsequent opinion person entitled rely upon respect matters addressed therein foregoing opinion shall deemed address matters enforceability documents instruments referred herein may limited bankruptcy insolvency reorganization similar laws relating limiting enforcement creditors rights remedial provisions documents instruments may limited equitable principles may affect remedies provided therein express opinion affect possible unavailability remedy specific performance addition provisions regarding payment certain attorneys fees may enforceable except extent provided north carolina general statutes 56212 prepared assisted preparation reviewed detail documents indenture loan agreement note form bonds information prepared connection purchase sale bonds including without limitation memorandum terms private placement memorandum express opinion accuracy completeness information opinion limited matters north carolina united states federal law opinion given law jurisdiction express opinion respect federal state securities blue sky laws opinions expressed herein solely benefit registered owners time bonds may relied upon published communicated person entity without specific prior written approval instance truly smith helms mulliss moore llp exhibit g form reliance opinion bond counsel september 29 1994 first union national bank north carolina one first union center charlotte north carolina 28288 5000000 rutherford county industrial facilities pollution control financing authority industrial development revenue refunding bonds watts regulator co project series 1994 ladies gentlemen acted bond counsel connection authorization issuance captioned bonds rutherford county industrial facilities pollution control financing authority requested reliance opinion hereinafter set forth request examined executed counterparts trust indenture relating bonds dated september 1 1994 indenture authority first national bank boston trustee loan agreement relating bonds dated september 1 1994 loan agreement authority watts regulator co company purposes opinion expressed assumed registration letter credit delivered even date herewith connection issuance bonds required securities act 1933 amended based upon foregoing upon examination deem appropriate opinion bonds exempt registration pursuant securities act 1933 amended indenture exempt qualification indenture pursuant trust indenture act 1939 amended ii assignment note defined loan agreement trustee possession thereof trustee effective create valid lien note favor trustee reference made opinion even date covering validity bonds tax exemption interest thereon hereby entitled rely opinion addressed truly smith helms mulliss moore llp trust indenture rutherford county industrial facilities pollution control financing authority first national bank boston trustee securing 5000000 rutherford county industrial facilities pollution control financing authority industrial development revenue refunding bonds watts regulator co project series 1994 dated september 1 1994 page parties 1 recitals 1 forms form bond 2 article definitions rules construction 19 section 101 definitions 19 section 102 rules construction 29 article ii bonds 30 section 201 amount terms issuance bonds 30 section 202 designation denominations maturity date interest rates bonds 30 section 203 optional tender provisions bonds 34 section 204 registered bonds required bond registrar bond register 35 section 205 transfer exchange 35 section 206 execution 36 section 207 authentication authenticating agent 37 section 208 payment principal interest rights preserved 37 section 209 persons deemed owners 38 section 210 mutilated destroyed lost stolen undelivered bonds 39 section 211 temporary bonds 39 section 212 cancellation surrendered bonds 40 section 213 conditions issuance 40 article iii purchase remarketing tendered bonds 42 section 301 remarketing tendered bonds 42 section 302 purchase bonds delivered tender agent 43 section 303 delivery purchased bonds 44 section 304 delivery proceeds sale remarketed bonds 45 section 305 remarketing certain events 45 article iv refunding prior bonds 45 section 401 refunding prior bonds 45 article v revenues application thereof 46 section 501 revenues paid trustee 46 section 502 bond fund 46 section 503 revenues held bondholders certain exceptions 48 section 504 rebate fund 48 section 505 nonpresentment bonds escheats 49 article vi depositaries moneys security deposits investment funds credit facility 49 section 601 security deposits 49 section 602 investment moneys 49 section 603 credit facility 50 article vii redemption purchase bonds 53 section 701 redemption purchase dates prices 53 section 702 company direct optional redemption 55 section 703 selection bonds called redemption 56 section 704 notice redemption purchase 56 section 705 bonds redeemed purchased part 57 article viii particular covenants provisions 57 section 801 covenant pay bonds limited obligations issuer 57 section 802 covenants perform obligations indenture 58 section 803 covenant perform obligations loan agreement 58 section 804 trustee may enforce issuers rights loan agreement 58 section 805 covenant arbitrage 59 section 806 inspection bond register 59 section 807 priority pledge security interest 59 section 808 insurance condemnation proceeds 59 article ix default remedies 60 section 901 defaults 60 section 902 acceleration annulment thereof 61 section 903 remedies 62 section 904 legal proceedings trustee 62 section 905 discontinuance proceedings trustee 62 section 906 credit facility issuer bondholders may direct proceedings 63 section 907 limitations actions bondholders 63 section 908 trustee may enforce rights without possession bonds 64 section 909 remedies exclusive 64 section 910 delays omissions impair rights 64 section 911 application moneys event default 64 section 912 trustee bondholders entitled remedies act 65 section 913 trustee may file claim bankruptcy 65 section 914 receiver 66 article x concerning trustee 66 section 1001 acceptance trusts 66 section 1002 trustee give notice 68 section 1003 trustee entitled indemnity 68 section 1004 trustee responsible insurance taxes execution indenture acts issuer application moneys applied accordance indenture 69 section 1005 compensation 70 section 1006 trustee preserve records 70 section 1007 trustee may bondholder 70 section 1008 trustee responsible recitals 71 section 1009 trustee responsibility recording filing 71 section 1010 trustee may require information 71 section 1011 trustee may rely certificates 71 section 1012 trustee bond 72 section 1013 segregation funds interests 72 section 1014 qualification trustee 72 section 1015 resignation removal trustee 72 section 1016 successor trustee 73 section 1017 cotrustee 74 section 1018 notice moodys sp 75 section 1019 filing certain continuation statements 75 section 1020 several capacities 75 article xi execution instruments bondholders proof ownership bonds 76 section 1101 execution instruments bondholders proof ownership bonds 76 section 1102 preservation information 76 article xii remarketing agent tender agent placement agent 77 section 1201 remarketing agent 77 section 1202 tender agent 78 section 1203 placement agent 78 section 1204 notices 79 article xiii amendments supplements 79 section 1301 amendments supplements without bondholders consent 79 section 1302 amendments bondholders credit facility issuers consent 80 section 1303 supplemental indentures affecting rights credit facility issuer 80 section 1304 amendment loan agreement 81 section 1305 amendment loan agreement requiring consent credit facility issuer 81 section 1306 amendment credit facility 82 section 1307 trustee authorized join amendments supplements reliance counsel 82 article xiv defeasance payments 82 section 1401 defeasance 82 section 1402 deposit funds payment bonds 84 section 1403 effect purchase bonds 84 article xv miscellaneous provisions 84 section 1501 covenants issuer bind successors 84 section 1502 notices 85 section 1503 trustee paying agent bond registrar 86 section 1504 rights indenture 86 section 1505 form certificates opinions 86 section 1506 severability 87 section 1507 covenants issuer covenants officials individually 87 section 1508 state law governs 87 section 1509 payments due days business days 87 section 1510 execution counterparts 87 following typed end define pages must inserted manually execution issuer 88 execution trustee 88 exhibit 89 exhibit b 91 trust indenture trust indenture dated september 1 1994 rutherford county industrial facilities pollution control financing authority issuer political subdivision body corporate politic state north carolina first national bank boston national banking association principal office boston massachusetts capacity trustee hereinafter referred trustee w n e h whereas issuer intends issue sell variable rate industrial revenue refunding bonds aggregate principal amount 5000000 bonds b pursuant loan agreement loan agreement even date herewith loan proceeds bonds watts regulator co company used refund outstanding principal amount issuers 5000000 rutherford county industrial facilities pollution control financing authority regtrol inc project series 1984 bonds prior bonds c secure repayment bonds 1 assignment contained herein issuer trustee pursuant issuer assigns trustee benefit bondholders hereinafter defined certain rights loan agreement endorses without recourse order pledges assigns trustee note even date herewith issued company pursuant loan agreement note 2 delivery trustee irrevocable direct pay letter credit dated date issuance bonds amount 5250000 issued first union national bank north carolina whereas security payment bonds issuer agreed assign pledge trustee right title interest issuer loan agreement except certain rights reserved issuer terms indenture b pledged revenues hereinafter defined c amounts deposit time bond fund hereinafter defined excluding amounts deposit rebate account hereinafter defined amounts deposit time redemption fund hereinafter defined whereas company first union national bank north carolina national banking association bank entered letter credit reimbursement guaranty agreement dated september 1 1994 reimbursement agreement pursuant bank agreed issue irrevocable directpay letter credit dated date delivery bonds letter credit favor trustee account company obligating bank pay trustee upon draws made trustee accordance terms thereof amount equal aggregate principal amount bonds outstanding hereinafter defined used trustee pay principal bonds whether maturity upon redemption acceleration otherwise b pay portion purchase price equal principal amount bonds delivered tender agent hereinafter defined purchase plus ii amount equal one hundred twenty 120 days accrued interest bonds maximum interest rate fifteen percent 15 per annum used trustee pay accrued interest bonds pay portion purchase price tendered bonds equal accrued interest bonds whereas things necessary make bonds authenticated trustee issued delivered provided indenture legal valid binding enforceable limited obligations issuer according import thereof create valid assignment pledge pledged revenues payment principal redemption premium interest bonds valid assignment certain rights title interest issuer loan agreement note done performed execution issuance delivery bonds subject terms hereof respects authorized whereas trustee accepted trusts created indenture evidence thereof joined execution hereof whereas issuer determined bonds issued hereunder shall substantially following form variations omissions insertions required permitted indenture form bond cusip issuer obligated pay principal redemption premium interest bond except revenues proceeds pledged therefor pursuant indenture neither faith credit taxing power issuer state north carolina political subdivision thereof pledged payment thereof bond shall deemed constitute debt liability obligation issuer state north carolina political subdivision thereof within meaning provision constitution laws state shall constitute give rise pecuniary liability issuer state political subdivision thereof bond may tendered purchase described herein delivery optional tender notice respect bond constitutes irrevocable offer sell bond date specified therein binding subsequent owners bond event owner bond fails deliver bond tender agent specified date owner hereof shall thereafter entitled payment purchase price benefits indenture bond also subject mandatory tender purchase described herein rutherford county industrial facilities pollution control financing authority industrial development revenue refunding bond watts regulator co project series 1994 r registered owner principal amount maturity date initial interest rate interest payment datesthe first business day march june september december commencing first business day december 1994 conversion date hereinafter defined maturity date original delivery date rutherford county industrial facilities pollution control financing authority herein called issuer political subdivision body corporate politic duly organized existing constitution laws state north carolina herein called state value received hereby promises pay sources hereinafter mentioned registered owner set forth registered assigns principal amount set forth maturity date set forth pay sources hereinafter mentioned interest thereon interest payment date immediately preceding date authentication endorsed hereon unless bond authenticated interest payment date event bear interest date unless authenticated prior first business day december 1994 event bear interest date authentication payable interest payment date payment said principal sum made provided rate rates per annum set forth principal interest premium paid coin currency united states america time payment legal tender payment public private debts interest paid check mailed interest payment date person whose name bond registered close business regular record date hereinafter defined immediately preceding interest payment date provided however bonds hereinafter defined bear interest variable rate hereinafter defined interest also payable wire transfer account member bank federal reserve system registered owner bonds aggregate principal amount one million dollars 1000000 written request identifying account number owner received trustee hereinafter defined regular record date bonds bear interest variable rate hereinafter defined regular record date close business day immediately preceding interest payment date bonds bear interest fixed rate hereinafter defined regular record date fifteenth 15th day calendar month immediately preceding interest payment date interest punctually paid duly provided forthwith cease payable owner regular record date may paid person whose name bond registered close business special record date defined indenture hereinafter defined payment defaulted interest fixed trustee may paid time lawful manner fully provided indenture principal redemption price paid upon surrender bond principal corporate trust office first national bank boston trustee said banking institution successor trustee cotrustee indenture herein called trustee town canton massachusetts payment purchase price bonds purchased described herein paid upon surrender bonds office first national bank boston town canton massachusetts capacity herein called tender agent bond issued pursuant constitution laws state north carolina state particularly industrial pollution control facilities financing act amended codified appears chapter 159c general statutes north carolina hereinafter called act pursuant resolutions duly adopted issuer bond interest thereon shall deemed constitute create manner debt liability obligation state political subdivision agency thereof pledge faith credit state political subdivision agency shall limited obligations issuer payable solely revenues funds pledged therefor shall payable assets funds issuer revenues funds pledged therefor neither faith credit taxing power state political subdivision agency thereof pledged payment principal interest bond one bonds duly authorized issue variable rate industrial revenue bonds issuer aggregate original principal amount 5000000 designated rutherford county industrial facilities pollution control financing authority industrial development revenue refunding bonds watts regulator co project series 1994 bonds issued purpose refunding whole outstanding principal amount 5000000 rutherford county industrial facilities pollution control financing authority industrial development revenue bonds regtrol inc project series 1984 prior bonds proceeds used finance whole part cost acquiring constructing installing certain project rutherford county owned operated company project bond issued pursuant trust indenture dated september 1 1994 said trust indenture together supplements amendments thereto therein permitted herein called indenture issuer first national bank boston trustee said banking institution successor trustee cotrustee indenture herein called trustee executed counterpart indenture file principal corporate trust office trustee reference hereby made indenture provisions among others respect custody application proceeds bonds collection disposition revenues description funds charged pledged payment principal interest amounts payable bonds nature extent security terms conditions bonds may issued rights duties obligations issuer trustee rights owners bonds acceptance bond owner hereof assents provisions indenture issuer entered loan agreement dated september 1 1994 herein called loan agreement watts regulator co massachusetts corporation herein called company issuer agreed lend company proceeds bond loan consideration evidence loan company agreed issue promissory note herein called note principal amount payable installments bearing interest rate rates payable times corresponding principal amount installments principal interest rates due dates bonds loan agreement also provides payment company certain fees expenses issuer trustee loan agreement obligates company pay cost maintaining project good repair material respects keeping properly insured b maintain credit facility hereinafter defined period time bonds bear interest variable rate herein called variable rate period security payment bonds right title interest issuer loan agreement except certain rights reserved issuer terms indenture together loan agreement b pledged revenues c amounts deposit time bond fund defined indenture excluding amounts deposit rebate account defined indenture amounts deposit time redemption fund defined indenture assigned trustee indenture pledged payment principal redemption premium interest bonds issuer shall vested interest project virtue issuance bonds project shall otherwise constitute part security payment bonds reference indenture hereby made description aforesaid bond fund charged pledged payment principal redemption premium interest bonds nature extent security rights duties obligations issuer company trustee rights owners bonds terms conditions upon occurrence indenture loan agreement may modified terms conditions upon occurrence lien indenture may defeased bond prior maturity redemption date hereof provisions owner hereof acceptance bond assents credit facility company entered letter credit reimbursement guaranty agreement dated september 1 1994 herein called reimbursement agreement among company watts industries inc guarantor first union national bank north carolina capacity herein called bank pursuant reimbursement agreement company caused letter credit issued bank herein called letter credit letter credit extensions renewals thereof amendment thereto alternate credit facility hereinafter defined referred herein credit facility delivered trustee entitled letter credit draw amount 5250000 5000000 available payment principal portion purchase price corresponding principal bonds b 250000 support payment one hundred twenty 120 days interest portion purchase price corresponding interest bonds maximum rate fifteen percent 15 per annum subject provisions indenture company required variable rate period provide alternate credit facility terms provisions substantially letter credit alternate credit facility prior termination letter credit variable rate period unless letter credit current alternate credit facility replaced prior expiration accordance terms indenture bond become subject mandatory redemption provided indenture source funds principal premium interest bonds payable solely payments note loan agreement moneys held trustee indenture purpose including respect principal interest moneys drawn trustee letter credit alternate credit facility benefit bondholders bank issuer letter credit institution issuing alternate credit facility herein called credit facility issuer except otherwise specified indenture bond entitled benefits indenture equally ratably principal redemption purchase price interest bonds issued indenture interest rates initial interest rate bonds bear interest original delivery date october 1994 initial interest rate variable rate october 1994 prior including conversion date hereinafter defined bonds bear interest rate equal floating rate established hereinafter provided herein called variable rate variable rate equal rate interest certified trustee first union national bank north carolina remarketing agent bonds herein successors capacity called remarketing agent wednesday next succeeding business day defined indenture wednesday business day herein called determination date minimum rate interest necessary judgment remarketing agent taking account market conditions prevailing determination date enable remarketing agent arrange sale bonds determination date secondary market price equal principal amount thereof plus interest accrued date settlement remarketing agent fails certify rate variable rate next calculation period periods hereinafter defined thereafter certified remarketing agent remain recently established certified remarketing agent event remarketing agent fails certify rate four 4 consecutive calculation periods rate calculation period thereafter none certified remarketing agent ninety percent 90 yield united states treasury bills maturing approximately thirty 30 days determination date published wall street journal determination date wall street journal longer published reasonably equivalent financial publication selected remarketing agent next preceding business day wall street journal published determination date purposes hereof calculation period shall mean period including day following determination date week even business day including following determination date provided variable period determination date end calculation period regular record date calculation period extend business day following determination date reason variable rate determined described held invalid unenforceable court competent jurisdiction period interest rate period equal eight percent 800 per annum notwithstanding anything contrary contained herein indenture variable rate interest excess fifteen percent 1500 per annum interest prior conversion date hereinafter defined computed basis three hundred sixtyfive 365 three hundred sixtysix 366 day year applicable number days actually elapsed payable interest payment date fixed rate athe interest rate bond converted fixed rate upon election company pursuant indenture convert rate interest bonds outstanding variable rate fixed rate upon satisfaction certain conditions notice given company trustee accordance requirements indenture bonds shall subject mandatory tender purchase owners thereof conversion date shall interest payment date conversion date owners bonds entitled tender bonds purchase conversion date placement agent determine fixed rate manner described subsection c promptly notify company trustee fixed rate period fixed rate effective credit facility must effect bat least twenty 20 thirty 30 days prior conversion date notice mailed trustee registered owner bonds stating among things 1 conversion date 2 name address placement agent agreed use best efforts arrange sale bonds tendered deemed tendered purchase conversion date herein called placement agent 3 seventeenth 17th day preceding conversion date owner entitled deliver optional tender notice tenth 10th day preceding conversion date owner entitled tender bond purchase described 4 bond deemed tendered purchase conversion date 5 order receive payment purchase price bond deemed tendered registered owner bond must deliver bond office tender agent 10 eastern time conversion date 6 interest bond payable including conversion date 7 name credit facility issuer bonds tendered conversion date undelivered bonds irrevocably deposited trust trustee amount moneys sufficient pay purchase price undelivered bonds shall deemed tendered purchased purchase price event failure owner bonds tender bonds prior conversion date said owner shall entitled payment including interest accrue subsequent conversion date purchase price untendered bonds untendered bonds shall longer entitled benefits indenture except purpose payment purchase price therefor cupon conversion date stated notice fixed rate borne bonds period beginning conversion date ending maturity date prior redemption bonds fixed rate interest rate per annum sole judgment placement agent taking account prevailing financial market conditions would minimum interest rate required sell bonds conversion date price equal 100 principal amount thereof fixed rate shall determined placement agent conversion date placement agent shall notify trustee company thereof telephone manner may appropriate later 200 pm eastern time date notice shall promptly confirmed writing dif reason fixed rate held invalid unenforceable court competent jurisdiction fixed rate eight percent 800 per annum notwithstanding anything contrary contained herein indenture fixed rate interest excess fifteen percent 1500 per annum ethe fixed rate computed basis three hundred sixty 360day year computed actual number days elapsed payable interest payment date conversion date principal premium interest bonds shall paid full interest rate determination binding determination interest rate bonds remarketing agent placement agent appropriate accordance terms indenture conclusive binding upon registered owners bonds issuer company trustee remarketing agent placement agent tender agent credit facility issuer redemption bonds optional redemption awhile bonds bear interest variable rate bonds subject redemption upon written direction issuer given request company interest payment date conversion date whole part redemption price equal one hundred percent 100 principal amount thereof without premium plus interest accrued redemption date bwhile bonds bear interest fixed rate bonds subject redemption upon written direction issuer given request company whole part interest payment date occurring dates set forth redemption prices premium expressed percentage principal amount redeemed set forth plus interest accrued redemption date follows commencement redemption period redemption price business day four 103 declining 12 4 years succeeding anniversary first conversion dateday redemption period reaching 100 thereafter 100 cthe bonds subject redemption upon written direction issuer given request company time whole part redemption price equal one hundred percent 100 principal amount thereof plus interest accrued redemption date event damage destruction condemnation project fully described section 701b indenture mandatory redemption athe bonds subject mandatory redemption whole date redemption price equal one hundred percent 100 principal amount thereof plus accrued interest redemption date within one hundred eighty 180 days receipt trustee written notice determination taxability defined loan agreement bthe bonds subject mandatory redemption whole interest payment date occurring closest fifteen 15 days prior date expiration current credit facility unless prior date alternate credit facility provided accordance indenture redemption price purchase price equal one hundred percent 100 principal amount thereof without premium plus interest accrued redemption date cthe bonds subject mandatory redemption whole date prior maturity redemption price equal 100 principal without redemption premium accrued interest thereon 90 days following cessation operation defined indenture notice redemption selection bonds notice redemption identifying bonds portions thereof redeemed given sixty 60 days less twenty 20 days prior redemption date mailing copy redemption notice first class mail owner bond redeemed whole part address shown bond register maintained bond registrar notice optional redemption may conditioned upon deposit moneys trustee date fixed redemption notice effect unless moneys deposited bonds called redemption including bonds purchased company provided indenture yet surrendered payment purchase price cease bear interest specified redemption date provided funds redemption price accrued interest payable specified redemption date deposit principal place payment time less bonds redeemed particular bonds called redemption selected following order priority first bonds pledged credit facility issuer second bonds owned company third bonds selected random method determined trustee sole discretion mandatory purchase upon conversion fixed rate bonds subject mandatory purchase whole part conversion date purchase price equal one hundred percent 100 principal amount thereof plus interest accrued thereon date purchase owner bond acceptance hereof agrees mandatory purchase bond provided indenture agrees bond purchased date specified upon deposit trustee amount sufficient pay purchase price hereof owner bond also understands agrees event owner fails deliver bond properly endorsed transfer trustee date specified interest cease accrue hereon specified date owner hereof thereafter entitled payment purchase price benefit indenture purchase option owner variable rate period bonds bear interest variable rate bond portion thereof authorized denomination purchased demand owner thereof business day purchase price equal one hundred percent 100 principal amount thereof plus interest accrued date purchase upon delivery tender agent optional tender notice form attached hereto exhibit herein called optional tender notice specifying date bond purchased date business day prior seventh 7th day date delivery optional tender notice receive payment purchase price owner required deliver bond tender agent accompanied executed form assignment instruments transfer satisfactory trustee less five 5 days prior purchase date specified notice provided indenture provided however owner investment company registered pursuant investment company act 1940 may deliver bond tender agent prior 1000 date purchase bonds option owner thereof conversion date deemed payment redemption bonds portion thereof notwithstanding foregoing owner right tender bonds purchase described paragraph following acceleration payment bonds pursuant terms indenture conversion date owner bond acceptance hereof agrees delivery written notice described preceding paragraph owner constitutes irrevocable offer sell bond date specified bond purchased date upon deposit tender agent amount sufficient pay purchase price hereof owner bond also understands agrees event owner fails deliver bond properly endorsed transfer tender agent date specified notice bond held owner agent company interest cease accrue hereon date specified notice owner hereof thereafter entitled payment purchase price benefits indenture issuer extent permitted law execute trustee authenticate deliver substitute bond lieu undelivered bond tender agent issuer appointed first national bank boston tender agent tender agent may changed time company consent trustee authorized denominations subject provisions indenture bonds issuable registered bonds denomination one hundred thousand dollars 100000 integral multiple 5000 excess thereof provided less 100000 principal amount bonds outstanding one bond shall issued smaller denomination subject limitations provided indenture upon payment tax governmental charge bonds may exchanged like aggregate principal amount bonds authorized denominations transfer bond transferable registered owner hereof duly authorized attorney principal corporate trust office first national bank boston bond registrar canton massachusetts compliance terms conditions set forth indenture upon surrender bond provided transfers connection remarketing hereof made corporate trust office trustee canton massachusetts accompanied duly executed instrument transfer form satisfactory bond registrar subject reasonable regulations issuer bond registrar trustee may prescribe upon payment tax governmental charge incident transfer provided moneys purchase bond provided pursuant draw credit facility bond transferable anyone company assignee pledgee upon transfer trustee shall cause new bond bonds registered name transferee transferees denominations authorized indenture aggregate principal amount principal amount bond maturity bearing interest rate issued transferee except set forth bond otherwise provided indenture person whose name bond registered deemed owner hereof purposes issuer bond registrar trustee affected notice contrary owner bond right enforce provisions indenture institute action enforce covenants therein take action respect event default indenture institute appear defend suit proceeding respect thereto except provided indenture certain events conditions manner effect set forth indenture principal bond may become may declared due payable stated maturity hereof together interest accrued hereon modifications alterations loan agreement indenture supplement amendment thereto may made extent circumstances permitted indenture may made certain cases without consent owners bonds anything herein indenture contrary notwithstanding obligations issuer hereunder subject limitation payment interest owner bond required extent receipt payment owner bond would contrary provisions law applicable bond limits maximum rate interest may charged collected owner case date maturity interest principal bonds date fixed redemption bonds shall city payment day business day payment interest principal need made date may made next succeeding business day force effect made date maturity date fixed redemption provided interest accrue period extension bond governed construed accordance laws state north carolina acts conditions things required happen exist performed precedent issuance bond execution indenture happened exist performed required witness whereof issuer caused bond executed manual facsimile signature chairman vice chairman issuer official seal impressed imprinted hereon attested manual facsimile signature secretary assistant secretary issuer 1994 rutherford county industrial facilities pollution control financing authority chairman seal attest secretary certificate authentication bond one bonds series designated therein issued provisions withinmentioned indenture first national bank boston trustee itsauthorized signatory date authentication 1994 form assignment appear reverse bond form assignment value received undersigned hereby sells assigns transfers unto please insert social security identifying number assignee within bond hereby constitute appoint attorney transfer said bond books within named issuer full power substitution premises dated presence bondholder signature guaranteed end form bond therefore consideration premises acceptance trustee trusts hereby created purchase acceptance bonds bondholders also consideration sum one dollar issuer hand paid trustee execution delivery indenture receipt hereby acknowledged purpose fixing declaring terms conditions upon bonds issued delivered secured accepted bondholders persons shall time become owners thereof order secure payment bonds time issued outstanding hereunder interest thereon according tenor purport effect order secure performance observance covenants agreements conditions therein herein contained issuer hereby pledge assign grant security interest unto trustee successors assigns benefit owners bonds right title interest issuer presently owned hereafter acquired following collectively trust estate athe loan agreement may time supplemented amended including limited payments installment purchase obligations due become due note loan agreement whether made respective due dates prepayments permitted required loan agreement together full power authority name issuer otherwise demand receive enforce collect receipt foregoing endorse execute checks instruments orders file claims take action trustee may deem necessary advisable connection therewith issuer hereby irrevocably appoints trustee attorneyinfact issuer purposes appointment coupled interest irrevocable provided however issuer shall continue rights together trustee contained following sections loan agreement isection 71 pertaining issuers right access project defined loan agreement iisection 73 pertaining issuers right receive payment certain costs expenses iiisection 76 pertaining issuers right certain indemnities ivsection 77 pertaining issuers right release indemnification vsection 78 pertaining issuers right receive certain information visection 81 pertaining issuers right consent withhold consent assignment rights company loan agreement lease sale project viisections 93 95 pertaining issuers right reimbursement expenses incurred upon default viiisections 101c 102 103 pertaining issuers right notice prepayments rights upon occurrence certain events ixsection 125 pertaining issuers right receive notices xsections 1212 1213 1214 pertaining limitations liability issuer bthe note even date herewith company issuer original principal amount 5000000 evidencing companys obligation pay purchase price pursuant loan agreement together interest thereon amounts respect thereto provided loan agreement issuer date endorsed pledged assigned note without recourse order delivered trustee security obligations issuer trustee hereinafter referred call money securities time deposit transit credited account fund created hereunder including without limitation bond fund redemption fund excluding rebate fund drevenues hereinafter defined mutually agreed covenanted parties hereto equal proportionate benefit security bondholders without preference priority distinction lien otherwise except hereinafter provided one bond reason priority issue sale negotiation thereof otherwise benefit bondholders security fulfillment obligations issuer hereunder hold forever subject however exceptions reservations matters therein herein recited trust nevertheless benefit security owners time bonds delivered hereunder issued issuer outstanding extent set forth herein benefit credit facility issuer long credit facility place respect bonds provided however right title interest trustee trust estate pledged assigned indenture shall ceased terminated become void accordance article xiv hereof principal interest bonds obligations arising hereunder shall paid bondholders shall paid company pursuant article xiv hereof indenture covenants agreements obligations issuer hereunder shall cease terminate void thereupon trustee shall cancel discharge indenture execute deliver issuer company instruments writing shall required evidence discharge hereof otherwise indenture shall remain full force effect indenture witnesseth expressly declared bonds issued secured hereunder issued delivered trust estate revenues funds herein pledged assigned dealt disposed upon subject terms conditions stipulations covenants agreements trusts uses purposes hereinafter expressed issuer agreed covenanted hereby agree covenant trustee owners said bonds follows say article definitions rules constructionarticle idefinitions rules construction tc article idefinitions rules construction section 101definitionssection 101definitions tc section 101definitions l 2 words terms defined article loan agreement shall meanings indenture unless otherwise specifically defined herein addition following words terms used indenture shall following meanings unless meaning plainly intended act shall mean industrial pollution control facilities financing act amended codified appears chapter 159c general statutes north carolina alternate credit facility shall mean irrevocable direct pay letter credit insurance policy similar credit enhancement support facility benefit trustee terms alternate credit facility shall respects material bondholders except term alternate credit facility credit facility replaced alternate credit facility set forth section 603 hereof authenticating agent shall mean trustee agent appointed pursuant section 207 hereof available moneys shall mean aany moneys paid trustee company deposit trustee least three hundred sixtyseven 367 days prior event bankruptcy shall occurred proceeds investment moneys become available moneys bmoneys deposit trustee representing proceeds resale remarketing agent bonds persons issuer company described article iii hereof case times since deposit trustee held separate segregated account accounts subaccount subaccounts moneys available moneys time held proceeds investment thereof cmoneys drawn credit facility case times since deposit trustee held separate segregated account accounts subaccount subaccounts moneys drawn credit facility time held bank shall mean first union national bank north carolina issuer letter credit successors assigns bank account shall mean account name established bond purchase fund pursuant section 302 hereof bond bonds shall mean bond bonds authenticated delivered indenture bond counsel shall mean attorneyatlaw firm attorneys nationally recognized standing matters pertaining taxexempt nature interest bonds issued states political subdivisions duly admitted practice law highest court state united states america approved issuer bond fund shall mean trust fund designated established pursuant section 502a hereof bond purchase fund shall mean trust fund designated established pursuant section 302 hereof bond register shall meaning provided section 204 hereof bond registrar shall mean bond registrar designated section 204 hereof bondholder bondholders owner owners shall mean initial owner owners future owner owners bond bonds registered books records bond registrar pursuant section 204 hereof business day shall mean day upon banks states massachusetts north carolina open transaction business nature required pursuant loan agreement indenture calculation period shall mean period including day following determination date week even business day including following determination date provided determination date end calculation period regular record date calculation period extend business day following determination date cessation operation shall mean company ceased opinion issuer operate project industrial project industry within meaning act cessation operation shall deemed occurred 60 days shall elapsed written notice given company issuer operations project shall ceased company shall demonstrated satisfaction issuer company assignee lessee buyer pursuant section 81 loan agreement resumed operations project industrial project industry within meaning act company good faith seeking arrange resumption economically reasonable operation project industrial project industry provided temporary shutdown due strike labor dispute lack fuel similar occurrence shall deemed cessation operation commission shall mean local government commission north carolina division department state treasurer successor successors thereto company shall mean watts regulator co massachusetts corporation successor assigns surviving resulting transferee corporation entity conversion date shall mean business day elected company accordance section 202e indenture effective date conversion interest rate bonds variable rate fixed rate date shall interest payment date counsel shall mean attorney firm attorneys acceptable trustee may need counsel issuer company credit facility shall mean letter credit alternate credit facility delivered trustee pursuant article vi hereof credit facility account shall mean account name established bond fund pursuant section 502 hereof credit facility issuer shall mean bank respect letter credit institution issuing alternate credit facility defaulted interest meaning provided section 208 hereof determination date shall mean wednesday week wednesday business day next succeeding business day event bankruptcy shall mean petition company issuer bankruptcy act similar act may enacted shall filed bankruptcy proceedings instituted company issuer third parties unless petition shall dismissed dismissal shall final subject appeal event default shall mean events specified section 901 hereof event default fixed rate shall mean fixed annual rate interest bonds determined placement agent pursuant section 202e hereof reason fixed rate held invalid unenforceable court competent jurisdiction fixed rate shall equal eight percent 800 per annum fixed rate shall event exceed fifteen percent 1500 fixed rate period shall mean period fixed rate effect shall period beginning conversion date ending maturity date governmental obligations shall mean idirect obligations united states america full timely payment full faith credit united states america pledged iiobligations issued person controlled supervised acting instrumentality united states america full timely payment unconditionally guaranteed full faith credit obligation united states america iiisecurities receipts evidencing ownership interests obligations specified portions principal interest obligations described clause ii full timely payment securities receipts obligations unconditionally guaranteed united states america obligations securities receipts subject redemption prior maturity less par option anyone holder thereof indenture shall mean indenture amended supplemented time question initial interest rate shall mean initial rate interest 375 per annum bonds initial rate period shall mean including original delivery date including october 5 1994 interest payment date shall mean first business day march june september december commencing first business day december 1994 ending maturity date bonds investment obligations shall mean aany government obligations bany bonds obligations united states america principal interest constitute direct obligations united states america obligations subsidiary corporations united states america fully guaranteed payment united states america cobligations federal land bank dobligations federal home loan bank eobligations federal intermediate credit bank fbonds obligations issued public housing agency municipal corporation united states america bonds obligations fully secured payment principal interest pledge annual contributions annual contributions contract contracts united states government project notes issued public housing agency urban renewal agency municipal corporation united states america fully secured payment principal interest requisition loan payment agreement united states government g interestbearing savings accounts including trustee interestbearing certificates deposit interestbearing time deposits investments constituting direct obligations bank deposits insured federal deposit insurance corporation provided accounts certificates deposits time deposits investments either insured federal deposit insurance corporation b secured deposit national state bank located within state government obligation h short term obligations corporations organized laws state assets exceeding 500000000 obligations rated within two 2 highest categories established moodys sp mature later one hundred eighty 180 days date purchase ii purchases exceed ten 10 percent corporations outstanding obligations money market mutual funds registered investment company act 1940 amended provided portfolio money market fund limited government obligations agreements purchase government obligations jrepurchase agreements respect obligations included subsections investments extent time permitted applicable law investment public funds issuer shall mean rutherford county industrial facilities pollution control financing authority political subdivision body corporate politic existing pursuant constitution laws state including act letter credit shall mean irrevocable direct pay letter credit dated september 29 1994 amount 5250000 issued bank including extensions thereof loan agreement shall mean loan agreement even date herewith issuer company amendments supplements thereof permitted indenture majority bondholders shall mean owners majority aggregate principal amount outstanding bonds maturity date shall mean first business day september 2002 moodys shall mean moodys investors service inc delaware corporation successors assigns corporation shall dissolved liquidated shall longer perform functions securities rating agency moodys shall deemed refer nationally recognized securities rating agency designated trustee consent company credit facility issuer note shall mean promissory note given company pursuant provisions loan agreement substantially form attached thereto optional tender notice shall mean notice owner bond tender agent form attached bond exhibit original delivery date shall mean september 29 1994 outstanding connection bonds shall mean time question bonds authenticated delivered indenture except ibonds theretofore canceled required cancelled section 212 hereof iibonds deemed paid accordance article xiv hereof iiibonds substitution bonds authenticated delivered pursuant article ii hereof determining whether owners requisite aggregate principal amount bonds outstanding concurred request demand authorization direction notice consent waiver provisions hereof bonds held behalf company unless outstanding bonds owned company affiliate company defined shall disregarded purpose determination purpose paragraph affiliate specified entity shall mean entity directly indirectly controlling controlled direct indirect common control specified entity control used respect specific entity shall mean power direct management policies entity directly indirectly whether ownership voting securities contract otherwise terms controlling controlled meanings correlative foregoing payments account shall mean account name established bond fund pursuant section 502 hereof placement agent shall mean securities dealer bank trust company designated company consent credit facility issuer agree establish preliminary fixed rate use best efforts arrange sale tendered bonds conversion date particularly described section 202e hereof pledge agreement shall mean pledge agreement even date herewith company bank amendments supplements thereof pledged revenues means shall include payments required made company loan agreement except payments made trustee services rendered trustee indenture bond registrar paying agent bonds except expenses indemnification payments required made pursuant sections 75 76 77 loan agreement principal office trustee bond registrar shall mean office time question corporate trust business principally conducted prior bonds means 5000000 rutherford county industrial facilities pollution control financing authority industrial development revenue bonds regtrol inc project series 1984 prior bondholder means bank capacity holder prior bonds private placement memorandum shall mean private placement memorandum dated september 29 1994 relating bonds redemption fund shall mean trust fund designated established pursuant section 401a hereof regular record date shall mean iin respect interest payment date variable rate period close business day immediately preceding interest payment date iiin respect interest payment date fixed rate period fifteenth 15th day whether business day calendar month immediately preceding interest payment date reimbursement agreement shall mean letter credit reimbursement guaranty agreement even date herewith among company watts industries inc guarantor bank may amended time filed trustee agreement company credit facility issuer setting forth obligations company credit facility issuer arising payments credit facility provides shall deemed reimbursement agreement purpose indenture remarketing account shall mean account name established bond purchase fund pursuant section 302 hereof remarketing agent shall mean first union national bank north carolina successors provided section 1201 hereof remarketing agreement shall mean remarketing agreement even date herewith company remarketing agent amendments supplements thereof requisite bondholders shall mean owners twothirds 23rds aggregate principal amount outstanding bonds responsible officer used respect trustee shall mean chairman vicechairman board directors chairman vicechairman executive committee board directors president vice president secretary assistant secretary treasurer assistant treasurer cashier assistant cashier trust officer assistant trust officer controller assistant controller officer trustee customarily performing functions similar performed designated officers banking institutions trust powers also shall mean respect particular corporate trust matter officer matter referred knowledge familiarity particular subject revenues shall mean iall amounts payable trustee respect principal redemption price interest bonds company note b credit facility issuer credit facility iiinvestment income respect moneys held trustee bond fund redemption fund security interest security interests refers security interests created herein security instruments shall meaning set forth uniform commercial code sp shall mean standard poors corporation new york corporation successors assigns corporation shall dissolved liquidated shall longer perform functions securities rating agency sp shall deemed refer nationally recognized securities rating agency designated trustee consent company credit facility issuer special record date shall mean purpose payment defaulted interest bonds date fixed trustee pursuant section 208 hereof state shall mean state north carolina subsidiary shall mean corporation association business entity fifty percent 50 issued outstanding stock equivalent thereof ordinary voting power time determination made owned controlled company one subsidiaries affiliates company tender agent shall mean first national bank boston successors provided section 1202 hereof tender agency agreement shall mean tender agency agreement even date herewith among company trustee tender agent tendered bonds shall mean bonds tendered deemed tendered owners purchase pursuant optional tender notice conversion date trustee shall mean first national bank boston successor trust hereunder undelivered bond shall mean iany bond optional tender notice given pursuant section 203 hereof delivered tender agent date specified purchase iiany bond delivered trustee redemption purchase mandatory redemption purchase date conversion date provided either case trustee hand available date funds sufficient purchase redeem said bond variable rate shall mean variable interest rate established initial rate period rate interest determined remarketing agent determination date minimum rate interest necessary judgment remarketing agent taking account market conditions prevailing determination date enable remarketing agent arrange sale bonds determination date secondary market price equal principal amount thereof plus interest accrued date settlement remarketing agent fails certify rate variable rate next succeeding calculation period periods thereafter certified remarketing agent shall remain recently established certified remarketing agent thereafter certified remarketing agent adjusted set forth next succeeding sentence event remarketing agent fails certify rate four 4 consecutive calculation periods rate calculation period thereafter none certified remarketing agent shall ninety percent 90 yield united states treasury bills maturing approximately thirty 30 days determination date calculation period published wall street journal determination date next business day wall street journal published determination date wall street journal longer published reasonably equivalent financial publication selected remarketing agent provided variable period determination date end calculation period regular record date calculation period extend business day following determination date bondholder may request variable rate effect time respect bonds trustee remarketing agent reason variable rate determined described held invalid unenforceable court competent jurisdiction period interest rate period shall equal eight percent 800 per annum variable rate shall rate excess fifteen percent 1500 per annum variable rate period shall mean period variable rate effect bonds variable rate purchase date shall mean bonds bear interest variable rate business day prior including date tenth day preceding conversion date bonds may tendered purchase option owner thereof accordance section 203 hereof section 102rules constructionsection 102rules construction tc section 102rules construction l 2 awords masculine gender shall deemed construed include correlative words feminine neuter genders unless context shall otherwise indicate words bond owner bondholder record person shall include plural well singular number word person shall include individual corporation partnership joint venture association jointstock company trust unincorporated organization government agency political subdivision thereof word bondholder used herein respect bonds shall mean registered owner bonds bwords importing redemption calling redemption bonds shall deemed refer connote payment bonds stated maturity cthe table contents captions headings indenture convenience way limit scope intent provision section indenture dall references herein particular articles sections references articles sections indenture unless reference indicated eall references herein code 1954 code particular provision section thereof shall deemed refer successor provision section thereof case may fall references herein time shall charlotte north carolina time article ii bondsarticle iithe bonds tc article iithe bonds section 201amount terms issuance bondssection 201amount terms issuance bonds tc section 201amount terms issuance bonds l 2 athe bonds shall limited 5000000 aggregate principal amount shall contain substantially terms recited form bond set forth indenture bonds may issued indenture except accordance article ii additional bonds shall issued indenture bthe issuer may cause copy text opinion bond counsel delivered connection issuance bonds printed bonds may bear endorsement legend satisfactory trustee may required conform usage law respect thereto including imposition cusip identifying numbers cupon satisfaction conditions set forth section 213 hereof issuer shall issue bonds trustee shall issuers request authenticate bonds deliver specified request section 202designation denominations maturity date interest rates bondssection 202designation denominations maturity date interest rates bonds tc section 202designation denominations maturity date interest rates bonds l 2 adesignation denominations maturity date bonds shall designated 5000000 rutherford county industrial facilities pollution control financing authority industrial development revenue refunding bonds watts regulator co project series 1994 bonds shall issuable fully registered bonds denominations 100000 integral multiple 5000 excess thereof provided less one hundred thousand dollars 100000 principal amount bonds outstanding one bond shall issued smaller denomination provided subsequent initial issuance bonds replacement substitution bonds issued exchange accordance provisions section 205 hereof may issued denominations 5000 integral multiples thereof bonds shall bear date authentication shall bear interest recent date interest paid duly provided authenticated interest payment date interest paid duly provided date authentication shall mature subject prior redemption provided article vii hereof first business day september 2002 bonds shall numbered 1 consecutively upwards prefixed letter r binterest rates bonds shall bear interest applicable rate provided interest payment date interest accrued day immediately preceding interest payment date shall payable bonds bear interest variable rate interest bonds shall computed basis year three hundred sixtyfive 365 three hundred sixtysix 366 days applicable number days actually elapsed including conversion date thereafter interest bonds shall computed basis three hundred sixty 360 day year number days actually elapsed cinitial interest rate initial rate period bonds shall bear interest initial interest rate dvariable rate following initial rate period conversion date bonds shall bear interest variable rate variable rate period remarketing agent shall determine interest rate bonds determination date remarketing agent shall give notice telephone telecopier telex telegram telecommunication device upon request shall confirm writing determination date trustee company interest rate effect following calculation period determination variable rate remarketing agent shall conclusive binding upon bondholders issuer company trustee tender agent remarketing agent owner may request variable rate effect time respect bonds trustee remarketing agent efixed rate conversion fixed rate 1the company onetime option convert interest rate payable bonds variable rate fixed rate effective interest payment date following compliance company provisions section 202e period fixed rate effective credit facility must effect bonds shall subject mandatory tender purchase owners thereof conversion date exercise option convert company shall deliver mail first class mail notice trustee credit facility issuer respect determination company convert interest rate bonds variable rate fixed rate notice shall delivered trustee least thirty 30 fortyfive 45 days prior conversion date ii name credit facility issuer issuing credit facility effect conversion date copy commitment letter credit facility issuer committing issue credit facility connection conversion iii opinion bond counsel described section 202f hereof trustee shall deliver mail first class mail notice substantially form attached hereto exhibit b least twenty 20 days thirty 30 days prior conversion date owner bond address shown registration books issuer notice given trustee provided section shall conclusively presumed duly given whether owner receives notice failure mail notice mailing defective notice owner shall affect proceeding purchase owner proper notice mailed said notice shall state among things 1 conversion date 2 name address placement agent agreed use best efforts arrange sale bonds tendered deemed tendered purchase conversion date herein called placement agent 3 seventeenth 17th day preceding conversion date owner entitled deliver optional tender notice tenth 10th day preceding conversion date owner entitled tender bond purchase described 4 bond deemed tendered purchase conversion date 5 order receive payment purchase price bond deemed tendered registered owner bond must deliver bond office tender agent 10 eastern time conversion date specifying address 6 interest bond payable including conversion date 7 name credit facility issuer proposing issue credit facility effect conversion date described owners bonds shall required tender bonds conversion date tender agent purchase price bonds tendered conversion date undelivered bonds irrevocably deposited trust trustee amount moneys sufficient pay purchase price untendered bonds shall deemed tendered purchased pursuant section 202e event failure owner bonds tender bonds prior conversion date said owner shall entitled payment including interest accrue subsequent conversion date purchase price untendered bonds untendered bonds shall longer entitled benefits indenture except purpose payment purchase price therefor 2on proposed conversion date placement agent shall determine fixed rate date manner described subsection 4 shall notify trustee company fixed rate telephone telecopier telex telegram telecommunication device upon request shall confirm notice writing 3any owner bonds converted fixed rate shall deemed tendered bonds tender agent said owner shall entitled payment including interest accrue subsequently conversion date purchase price bonds shall equal unpaid principal amount bonds shall longer entitled benefits indenture except purpose payment purchase price therefor interest payable conversion date payment purchase price bonds shall made upon presentment surrender bonds tender agent upon request trustee shall provide tender agent address set forth bond register owner trustee shall notify bond registrar bonds respect trustee received optional retention notices bonds shall deemed tendered purchase conversion date case bond deemed tendered issuer shall cause executed trustee shall authenticate deliver new owner provided section 301 hereof new bond like date tenor lieu substitution bond deemed tendered 4on conversion date fixed rate shall interest rate per annum sole judgment placement agent taking account prevailing financial market conditions would minimum interest rate required sell bonds conversion date price equal 100 principal amount thereof fixed rate shall determined placement agent conversion date placement agent shall notify trustee company thereof telephone manner may appropriate later 200 pm eastern time conversion date notice shall promptly confirmed writing fconditions conversion additional notices 1as condition giving notice provided section 202e company shall provide trustee opinion bond counsel effect proposed conversion interest rate bonds cause interest bonds includable gross income owners thereof federal income tax purposes 2the delivery company trustee letter bond counsel confirming opinion required prior notification described conversion date condition precedent conversion event company fails deliver trustee letter bond counsel referred preceding sentence conversion shall take effect bonds shall continue bear interest variable rate 3the trustee shall provide tender agent copy notice delivered owners bonds pursuant section 202 hereof 4the credit facility effect following conversion must delivered trustee conversion date credit facility must meet requirements section 603c alternate credit facility items required delivered section 603c must delivered conversion date credit facility effect fixed rate period shall amount less principal amount bonds interest thereon period 120 days computed fixed rate event company fails cause letter credit items called herein delivered trustee conversion date conversion shall take effect bonds shall continue bear interest variable rate section 203optional tender provisions bondssection 203optional tender provisions bonds tc section 203optional tender provisions bonds l 2 awhile bonds bear interest variable rate bond portion thereof authorized denomination bond registered name company shall purchased demand owner thereof business day purchase price equal one hundred percent 100 principal amount thereof plus interest accrued date purchase owner bond delivers tender agent address filed trustee optional tender notice least seven 7 days prior variable rate purchase date specified notice bany optional tender notice delivered pursuant preceding subsection shall automatically constitute 1 irrevocable offer sell bond variable rate purchase date price equal one hundred percent 100 principal amount bond plus interest accrued variable rate purchase date 2 irrevocable authorization instruction bond registrar effect transfer bond purchaser thereof variable rate purchase date purchase bonds pursuant provisions section 203 shall deemed redemption thereof cany owner delivers optional tender notice pursuant section 203 shall deliver bond tender agent address filed trustee less five 5 days prior variable rate purchase date specified aforesaid optional tender notice provided however bond owner investment company registered investment company act 1940 may deliver bonds owned tender agent address filed trustee prior 1000 variable rate purchase date bonds delivered tender agent pursuant section 203 must duly endorsed transfer blank form satisfactory trustee dif bondholder gives optional tender notice shall fail deliver bond bonds identified optional tender notice tender agent prior 1000 variable rate purchase date undelivered bond shall purchased shall cease accrue interest variable rate purchase date owner thereof shall thereafter entitled payment purchase price therefor benefits indenture issuer extent permitted law shall execute trustee authenticating agent shall authenticate deliver substitute bond bonds lieu undelivered bond registrar shall register bond name purchaser purchasers thereof pursuant section 205 hereof tender agent shall notify trustee bond registrar undelivered bonds trustee shall 1 notify remarketing agent undelivered bond 2 place stop transfer undelivered bonds undelivered bonds properly delivered tender agent payment purchase price undelivered bonds shall made upon presentment surrender bonds tender agent upon notice delivery bond registrar shall make necessary adjustment bond register enotwithstanding anything contrary contained herein rights owners tender bonds pursuant section 203 shall cease immediately without notice including date payment bonds accelerated following event default pursuant article ix hereof section 204registered bonds required bond registrar bond registersection 204registered bonds required bond registrar bond register tc section 204registered bonds required bond registrar bond register l 2 aall bonds shall issued fully registered form bonds shall registered upon original issuance upon subsequent transfer exchange provided indenture bthe issuer shall designate one persons act bond registrar bonds provided bond registrar appointed bonds shall either trustee person would meet requirements qualification successor trustee imposed section 1014 hereof issuer hereby appoints first national bank boston bond registrar respect bonds person trustee undertaking act bond registrar shall first execute written agreement form satisfactory trustee perform duties bond registrar indenture agreement shall filed trustee tender agent cthe bond registrar shall act registrar transfer agent bonds shall kept office bond registrar register herein sometimes referred bond register subject reasonable regulations issuer trustee bond registrar may prescribe shall provisions registration bonds registration transfers bonds issuer shall cause bond registrar designate written notification trustee specific office location may changed time upon similar notification bond register kept absence specific designation bond registrar principal corporate trust office trustee canton massachusetts shall deemed office respect bonds trustee acting bond registrar section 205transfer exchangesection 205transfer exchange tc section 205transfer exchange l 2 aupon surrender transfer bond office bond registrar issuer shall execute trustee authenticating agent shall authenticate deliver name transferee transferees one new fully registered bonds authorized denomination aggregate principal amount new owner entitled receive provided moneys purchase bond provided pursuant draw credit facility bond shall transferable one company assignee pledgee except transfers connection purchase bonds pursuant section 203 hereof remarketing thereof pursuant article iii shall effected office tender agent canton massachusetts bonds shall surrendered transfer principal corporate trust office trustee canton massachusetts also issuer shall execute trustee authenticating agent shall authenticate deliver bonds lieu undelivered bonds bbonds may exchanged bonds authorized denomination like aggregate principal amount upon surrender bonds exchanged principal corporate trust office bond registrar trustee provided however connection purchase bonds tendered purchase remarketing thereof pursuant article iii hereof bonds may exchanged principal office tender agent office agent designated trustee whenever bonds surrendered exchange issuer shall execute trustee authenticating agent shall authenticate deliver bonds bondholder making exchange entitled receive call bonds presented transfer exchange redemption payment required issuer bond registrar trustee shall accompanied written instrument instruments transfer authorization exchange form satisfactory bond registrar may include signature guarantee duly executed owner attorney duly authorized writing dno service charge shall made bondholder exchange transfer bonds issuer bond registrar may require payment sum sufficient cover tax governmental charge may imposed relation thereto eexcept connection purchase bonds pursuant section 203 hereof remarketing thereof pursuant article iii hereof neither issuer bond registrar behalf issuer shall required issue transfer exchange bond selected redemption whole part fnew bonds delivered upon transfer exchange shall valid obligations issuer evidencing debt bond surrendered shall secured indenture shall entitled security benefits hereof extent bonds surrendered section 206executionsection 206execution tc section 206execution l 2 athe bonds shall executed manual facsimile signature chairman seal issuer shall affixed imprinted lithographed reproduced thereon shall attested manual facsimile signature secretary bbonds executed provided may issued shall upon request issuer authenticated trustee authenticating agent notwithstanding officer signing bonds whose facsimile signature appears thereon shall ceased hold office time issuance authentication shall held office date bond section 207authentication authenticating agentsection 207authentication authenticating agent tc section 207authentication authenticating agent l 2 ano bond shall valid purpose trustees certificate authentication thereon shall duly executed provided indenture authentication shall conclusive proof bond duly authenticated delivered indenture owner thereof entitled benefit trust hereby created subject provisions section 203d article xiv hereof bif bond registrar trustee may appoint bond registrar authenticating agent power act trustees behalf subject direction authentication delivery bonds connection transfers exchanges section 205 hereof authentication delivery bonds authenticating agent pursuant section shall purposes indenture deemed authentication delivery trustee shall however authenticate bonds upon initial issuance authenticating agent may authenticate bonds substitution undelivered bonds authenticating agent shall entitled reasonable compensation company services cany corporation authenticating agent may merged converted may consolidated corporation resulting merger consolidation conversion authenticating agent shall party corporation succeeding corporate trust business authenticating agent shall successor authenticating agent hereunder successor corporation otherwise eligible bond registrar section 204 hereof without execution filing document part parties hereto authenticating agent successor corporation dany authenticating agent may time resign giving written notice resignation trustee issuer remarketing agent company trustee may time terminate agency authenticating agent giving written notice termination authenticating agent issuer company upon receiving notice resignation upon termination case time authenticating agent shall cease eligible section trustee shall promptly appoint successor authenticating agent shall give written notice appointment issuer company shall mail notice appointment owners bonds names addresses owners appear bond register section 208payment principal interest rights preservedsection 208payment principal interest rights preserved tc section 208payment principal interest rights preserved l 2 athe principal redemption price bond shall payable upon surrender bond office trustee paying agent appointed pursuant indenture interest payment date shall payable check mailed interest payment date address person entitled thereto regular record date applicable special record date address shall appear bond register bonds bear interest variable rate interest shall also payable wire transfer account member bank federal reserve system owner bonds aggregate principal amount 1000000 written request identifying account number owner received trustee prior regular record date special record date binterest bond payable punctually paid duly provided interest payment date shall paid person whose name bond registered close business regular record date interest cany interest bond payable punctually paid duly provided interest payment date herein called defaulted interest shall forthwith cease payable owner bonds relevant regular record date solely virtue registered owner record owner regular record date defaulted interest shall paid pursuant section 911 hereof person whose name bond registered close business special record date fixed trustee date fifteen 15 less ten 10 days prior date proposed payment trustee shall cause notice proposed payment defaulted interest special record date therefor mailed first class postage prepaid bondholder address appears bond register less ten 10 days prior special record date dsubject foregoing provisions section 208 bond delivered indenture upon transfer exchange lieu bond shall carry rights interest accrued unpaid accrue bond payments principal redemption price interest bonds whether upon redemption acceleration maturity otherwise shall made first pursuant draws credit facility accordance terms dates due second available moneys deposit trustee held trust benefit owners bonds pursuant provisions article xiv hereof collected funds available trustee hereunder payments section 209persons deemed ownerssection 209persons deemed owners tc section 209persons deemed owners l 2 issuer trustee bond registrar authenticating agent may deem treat person whose name bond registered absolute owner thereof whether bond shall overdue notwithstanding notation ownership writing thereon made anyone issuer trustee bond registrar authenticating agent purpose receiving payment account principal premium subject section 208 hereof interest bond purposes neither issuer trustee bond registrar authenticating agent shall affected notice contrary payments made registered owner upon order shall valid extent sum sums paid effectual satisfy discharge liability moneys payable upon bond section 210mutilated destroyed lost stolen undelivered bondssection 210mutilated destroyed lost stolen undelivered bonds tc section 210mutilated destroyed lost stolen undelivered bonds l 2 aif bond shall become mutilated issuer shall execute trustee authenticating agent shall thereupon authenticate deliver new bond like tenor denomination exchange substitution bond mutilated upon surrender trustee mutilated bond cancellation issuer trustee may require reasonable indemnity therefor bond shall reported lost stolen destroyed evidence loss theft destruction thereof shall submitted issuer trustee evidence shall satisfactory indemnity satisfactory shall given issuer shall execute thereupon trustee authenticating agent shall authenticate deliver new bond like tenor denomination cost providing substitute bond provisions section shall borne bondholder whose benefit substitute bond provided mutilated lost stolen destroyed bond shall matured mature issuer may consent trustee pay owner principal amount bond upon maturity thereof compliance aforesaid conditions owner without issuance substitute bond therefor bthe issuer shall execute trustee authenticating agent shall authenticate deliver substitute bond lieu undelivered bond cevery substituted bond issued pursuant section 210 shall constitute additional contractual obligation issuer whether bond alleged destroyed lost stolen shall time enforceable anyone shall entitled benefits indenture equally proportionately bonds duly issued hereunder dall bonds shall held owned upon express condition foregoing provisions extent permitted law exclusive respect replacement payment mutilated destroyed lost stolen undelivered bonds shall preclude rights remedies section 211temporary bondssection 211temporary bonds tc section 211temporary bonds l 2 pending preparation definitive bonds agreement purchasers bonds issuer may issue upon request trustee shall authenticate lieu definitive bonds one temporary printed typewritten bonds substantially tenor recited denomination authorized section 202 hereof upon request issuer trustee shall authenticate definitive bonds exchange upon surrender equal principal amount temporary bonds exchanged temporary bonds shall rights remedies security hereunder definitive bonds section 212cancellation surrendered bondssection 212cancellation surrendered bonds tc section 212cancellation surrendered bonds l 2 bonds surrendered payment redemption transfer exchange bonds surrendered trustee issuer company cancellation shall cancelled trustee certificate evidencing cancellation shall furnished trustee issuer company bonds purchased pursuant section 203 hereof shall surrendered bonds unless otherwise specifically provided indenture shall outstanding bonds section 213conditions issuancesection 213conditions issuance tc section 213conditions issuance l 2 aprior simultaneously authentication delivery bonds trustee shall received notice conditions issuance letter credit set forth article viii original reimbursement agreement satisfied shall filed trustee documents certificates opinions trustee may require including following 1a copy certified secretary resolution issuer authorizing issuance bonds awarding bonds directing authentication delivery bonds upon order purchasers therein named upon payment purchase price therein set forth 2executed counterparts indenture loan agreement note endorsed without recourse issuer trustee letter credit reimbursement agreement tender agency agreement remarketing agreement 3an opinion counsel issuer effect execution delivery loan agreement indenture duly authorized issuer loan agreement indenture duly executed issuer assuming proper authorization execution indenture trustee loan agreement company loan agreement indenture valid binding agreements issuer enforceable accordance respective terms subject qualification enforceability thereof may limited bankruptcy insolvency reorganization moratorium similar laws affecting enforcement creditors rights generally exercise judicial discretion accordance general equitable principles 4an opinion counsel company effect execution delivery loan agreement note reimbursement agreement remarketing agreement tender agency agreement duly authorized company loan agreement note reimbursement agreement remarketing agreement tender agency agreement duly executed delivered company loan agreement note reimbursement agreement remarketing agreement tender agency agreement assuming due authorization execution delivery thereof parties thereto valid binding enforceable company accordance terms subject qualification enforceability thereof may limited bankruptcy insolvency reorganization moratorium similar laws affecting enforcement creditors rights generally exercise judicial discretion accordance general equitable principles 5an opinion counsel company effect copies instruments financing statements described opinion necessary recorded filed manner places required state law effect lien indenture perfected creates rights issuer loan agreement assigned indenture valid security interest ii issuers endorsement pledge note trustee trustees possession thereof creates valid perfected first priority security interest note subject equal prior liens 6an opinion counsel issuer effect issuance bonds execution indenture duly validly authorized issuer conditions precedent delivery bonds fulfilled bonds indenture valid binding agreements issuer enforceable accordance terms subject qualification enforceability thereof may limited bankruptcy insolvency reorganization moratorium similar laws affecting enforcement creditors rights generally exercise judicial discretion accordance general equitable principles 7a written request authorization issuer addressed trustee directing trustee authenticate deliver bonds 8such documents trustee may reasonably require 9a favorable opinion bond counsel taxexempt status interest bonds bwhen documents mentioned paragraphs 1 9 subsection section shall filed trustee bonds shall executed required indenture trustee shall authenticate bonds deliver upon order purchasers named resolution mentioned paragraph 1 thereof upon payment trustee account issuer purchase price bonds trustee shall entitled rely conclusively upon resolution resolutions document approved thereby name purchasers amount purchase price csimultaneously delivery bonds trustee shall apply proceeds bonds accordance article iv indenture article iii purchase remarketing tendered bondsarticle iiipurchase remarketing tendered bonds tc article iiipurchase remarketing tendered bonds section 301remarketing tendered bondssection 301remarketing tendered bonds tc section 301remarketing tendered bonds l 2 anot later close business date tender agent receives optional tender notice tender agent shall notify remarketing agent company telephone telex telecopier confirmed writing requested specifying variable rate purchase date bnot later close business ninth 9th day prior conversion date trustee shall notify placement agent company telephone telex telecopier confirmed writing requested specifying aggregate principal amount bonds deemed tendered mandatory purchase conversion date cexcept provided subsection section 305 hereof upon receipt remarketing agent notice tender agent pursuant section 301a hereof placement agent notice trustee pursuant section 301b hereof remarketing agent placement agent case may shall use best efforts arrange sale par plus accrued interest bonds tendered deemed tendered settlement variable rate purchase date conversion date respectively 400 pm business day immediately preceding variable rate purchase date conversion date remarketing agent placement agent respectively shall give notice telephone telecopier telex promptly confirmed writing requested trustee tender agent specifying principal amount bonds placed trustee names addresses social security numbers tax identification numbers proposed purchasers thereof dnotwithstanding provisions subsection c bond purchased pursuant terms indenture date notice redemption conversion given shall remarketed except buyer agrees time purchase tender bond redemption purchase redemption purchase date eduring variable rate period remarketing agent shall continue use best efforts arrange sale price equal principal amount thereof plus accrued interest bonds purchased moneys advanced credit facility pursuant section 302a2 hereof provided bonds purchased moneys advanced credit facility shall released delivery purchasers unless credit facility reinstated sum amount drawn thereunder pay purchase price bonds b interest portion 120 days maximum rate 15 trustee received executed reinstatement certificate required delivered credit facility issuer trustee agrees advise tender agent immediately upon receipt reinstatement certificate fnotwithstanding anything herein contrary bonds may remarketed price equal principal amount thereof plus accrued interest section 302purchase bonds delivered tender agentsection 302purchase bonds delivered tender agent tc section 302purchase bonds delivered tender agent l 2 athere hereby established tender agent bond purchase fund purchase price bonds tendered purchase variable rate purchase date conversion date bonds remarketed shall paid hereby established bond purchase fund two separate segregated accounts designated remarketing account bank account funds received purchasers tendered bonds company credit facility issuer shall deposited remarketing agent placement agent case may remarketing account prior 1000 variable rate purchase date conversion date remarketing agent placement agent case may shall deliver tender agent deposit remarketing account bond purchase fund immediately available funds payable order tender agent amount equal purchase price bonds delivered tender agent remarketed remarketing agent placed placement agent specified notice delivered pursuant section 301c hereof funds drawn trustee credit facility pursuant section 302b amount equal aggregate purchase price bonds tendered purchase less amount available remarketing account shall direction trustee delivered credit facility issuer tender agent deposit bank account bond purchase fund variable rate purchase date conversion date tender agent shall effect purchase funds listed bonds owners thereof purchase price equal principal amount thereof plus interest accrued date purchase payment shall made immediately available funds payment purchase price shall derived following sources order priority indicated 1proceeds remarketing bonds pursuant section 301c hereof constitute available moneys 2moneys furnished trustee tender agent representing proceeds drawing trustee credit facility 3any moneys available purposes bthe tender agent shall advise trustee telex telecopier shall advise credit facility issuer company telephone case later 1030 variable rate purchase date conversion date case may amount drawing credit facility necessary make timely payments hereunder trustee shall promptly event later 1100 take action necessary draw credit facility specified amount amounts received trustee drawing credit facility shall transferred tender agent held tender agent bank account pending application moneys provided article iii trustee shall provide tender agent funds referred paragraph 2 section 302a prior time tender agent required apply funds effect purchase bonds shall notify tender agent promptly receipt notice credit facility issuer reinstating credit facility remarketing agent shall deliver funds sale bonds held credit facility issuer pledgee company pursuant section 301e hereof tender agent deposit remarketing account funds shall promptly paid tender agent behalf company credit facility issuer reimbursement agreement tender agent shall notify trustee reimbursement trustee shall promptly deliver credit facility issuer reinstatement certificate form transfer certificate required credit facility section 303delivery purchased bondssection 303delivery purchased bonds tc section 303delivery purchased bonds l 2 abonds purchased shall delivered follows 1bonds placed remarketing agent placement agent pursuant section 301 hereof shall delivered tender agent remarketing agent placement agent case may behalf purchasers thereof 2bonds purchased moneys described section 302a2 shall delivered credit facility issuer pledgee company pursuant terms reimbursement agreement pledge agreement credit facility issuer designee bexcept otherwise set forth herein bonds delivered provided section 303 shall registered bond registrar manner directed recipient thereof cin event bond delivered tender agent delivered owner thereof properly endorsed transfer prior variable rate purchase date conversion date case may irrevocably deposited tender agent amount sufficient pay purchase price thereof amount may held tender agent noninterest bearing account issuer shall execute trustee authenticating agent shall authenticate deliver substitute bond lieu undelivered bond registrar shall register bond name purchaser thereof thereafter interest undelivered bond shall cease accrue holder thereof shall entitled payment purchase price therefor benefits indenture dnotwithstanding foregoing bonds purchased funds identified section 302a2 hereof shall held credit facility issuer tender agent shall delivered subsequent purchasers thereof person trustee notified tender agent credit facility reinstated extent purchase price bonds interest thereon section 304delivery proceeds sale remarketed bondssection 304delivery proceeds sale remarketed bonds tc section 304delivery proceeds sale remarketed bonds l 2 proceeds placement bonds remarketing agent bonds delivered tender agent placement agent bonds conversion date shall paid first tendering bondholders bonds second credit facility issuer extent amounts drawn credit facility connection payment purchase price bonds reimbursed credit facility issuer time sale bonds third company section 305no remarketing certain eventssection 305no remarketing certain events tc section 305no remarketing certain events l 2 anything indenture contrary notwithstanding shall remarketing bonds pursuant article iii conversion date principal bonds shall accelerated pursuant section 902 hereof article iv refunding prior bondsarticle ivrefunding prior bonds tc article ivrefunding prior bonds section 401 refunding prior bondssection 401 refunding prior bonds tc section 401 refunding prior bonds l 2 aa special fund hereby created designated rutherford county industrial facilities pollution control financing authority industrial development revenue refunding bonds watts regulator co project series 1994 redemption fund redemption fund moneys received issuer proceeds sale bonds together amounts described subparagraph shall deposited redemption fund bmoneys held redemption fund shall invested reinvested trustee written direction company investment obligations constitute direct obligations principal interest unconditionally guaranteed united states america ii shall mature later december 1 1994 obligations purchased investment moneys redemption fund shall deemed times part redemption fund interest accruing thereon profit realized investment shall credited redemption fund loss resulting investment shall charged redemption fund trustee shall sell market price present redemption obligation purchased whenever shall necessary order provide cash meet payment transfer redemption fund neither trustee issuer shall liable responsible loss resulting investment sale investment made pursuant terms section trustee may make investments permitted section bond investment department unless otherwise directed writing company cthe moneys redemption fund shall held trustee trust shall october 1 1994 earlier date directed company applied together additional funds contributed company watts industries inc payment full outstanding principal amount prior bonds dsimultaneously deposit trustee amounts described company watts industries shall pay trustee deposit redemption fund additional amounts sufficient pay principal interest prior bonds date redemption thereof pay directly fees charges expenses holders prior bonds prior bondholder connection redemption prior bonds following payments trustee shall receive prior bondholder certificate effect prior bonds redeemed paid full evidence prior bonds cancelled ein lieu procedures set forth redemption prior bonds upon direction company proceeds initial sale bonds may retained placement agent escrow together accrued interest provided company delivered first union national bank north carolina holder prior bonds payment full outstanding principal interest prior bonds article v revenues application thereofarticle vrevenues application thereof tc article vrevenues application thereof section 501revenues paid trusteesection 501revenues paid trustee tc section 501revenues paid trustee l 2 issuer caused revenues paid directly trustee notwithstanding arrangements issuer receives payments account note credit facility respect principal redemption price interest bonds issuer shall immediately pay trustee held revenues section 502the bond fundsection 502the bond fund tc section 502the bond fund l 2 athere hereby established trustee special fund designated rutherford county industrial facilities pollution control financing authority industrial development revenue refunding bonds watts regulator co project series 1994 bond fund bond fund moneys accordance section 502c hereof trustee shall apply 1 principal redemption price bonds mature become due upon surrender thereof 2 interest bonds becomes payable hereby established trustee within bond fund two separate segregated accounts designated payments account credit facility account bthere shall deposited various accounts bond fund time following 1into payments account payments principal redemption price including premium interest note b moneys received trustee pursuant provisions indenture provisions note loan agreement accompanied written directions person depositing moneys paid account bond fund amounts deposited payments account shall segregated held earnings thereon separate apart funds bond fund amounts become available moneys time funds deposited payments account become available moneys may commingled available moneys payments account 2into credit facility account moneys drawn trustee credit facility pay principal redemption price excluding premium bonds interest bonds cexcept provided section 911 hereof moneys bond fund shall used solely payment principal redemption price bonds interest bonds following sources following order priority 1moneys held credit facility account provided event shall moneys held credit facility account used pay amounts due bonds held company including without limitation bonds pledged credit facility issuer pay portion redemption premiums required pursuant section 701a2 hereof 2moneys held payments account extent amounts qualify available moneys except respect moneys paid bonds held company including without limitation bonds pledged credit facility issuer moneys need qualify available moneys dnot later 1000 third 3rd business day preceding date principal redemption price interest bonds due payable payment date trustee shall notified company credit facility issuer amounts principal interest due bonds payment date later 1100 payment date trustee shall present draft drafts credit facility amounts due payable bonds funds shall wired bank deposited credit facility account payments due bonds shall made trustee accordance section 208 section 502c hereof following payment bondholders trustee shall behalf company promptly pay moneys deposit payments account amount equal amounts drawing drawings bank reimbursement bank terms reimbursement agreement amounts owed company credit facility issuer reimbursement agreement amounts remaining payments account business day immediately following payment date shall paid company upon request consent credit facility issuer eexcept provided following sentence bond fund shall depleted least year except reasonable carryover amount exceed greater one years earnings bond fund one twelfth 112th annual debt service money deposited bond fund shall spent within thirteen 13 month period beginning date deposit amount received investment money held bond fund shall spent within one 1 year period beginning date receipt amounts remaining bond fund payment full principal redemption price interest bonds provisions payment thereof shall paid company written request company therefor otherwise required law provided payments received trustee credit facility connection payment bonds remaining amounts shall paid credit facility issuer extent payments section 503revenues held bondholders certain exceptionssection 503revenues held bondholders certain exceptions tc section 503revenues held bondholders certain exceptions l 2 revenues shall applied provided indenture held trustee trust benefit owners outstanding bonds except portion revenues representing principal redemption price bonds interest bonds previously matured called redemption accordance article vii indenture shall held benefit owners bonds section 504rebate fundsection 504rebate fund tc section 504rebate fund l 2 event company provides deposit amounts time rebate united states america pursuant loan agreement trustee hereby authorized create special fund designated rebate fund rebate fund shall held separate apart funds indenture shall subject lien pledge granted hereunder benefit bondholders trustee shall remit money deposited rebate fund united states america otherwise directed writing company moneys deposited rebate fund shall held invested sole direction company making investments hereunder selling disposing investments required hereby trustee shall duty responsibility independently verify compliance sections 148d 148f code regulations promulgated thereunder trustee shall fully protected relying solely upon written directions company aforesaid circumstances whatsoever shall trustee liable issuer company holder loss taxexempt status bonds claims demands damages liabilities losses costs expenses resulting therefrom way connected therewith long trustee acts accordance written directions company provided hereunder trustee shall responsible losses investment money rebate fund made direction company section 505nonpresentment bonds escheatssection 505nonpresentment bonds escheats tc section 505nonpresentment bonds escheats l 2 bond evidence beneficial ownership bond shall presented payment principal thereof becomes due whether maturity acceleration upon call redemption upon purchase otherwise liability issuer holder thereof payment bond shall forthwith cease determine completely discharged funds sufficient pay bond interest due thereon shall held trustee uninvested benefit holder thereof thereupon shall duty trustee hold funds without liability interest thereon benefit holder bond shall thereafter restricted exclusively funds claim whatever nature part indenture respect bond moneys deposited trustee held trustee trust payment principal interest bonds remaining unclaimed period set forth north carolina general statutes section 116b18 successor escheats provision shall paid appropriate officer body provided chapter 116b north carolina general statutes successor escheats statute thereafter holders bonds shall look officer body payment extent amount received without interest thereon trustee shall responsibility respect moneys article vi depositaries moneys security deposits investment funds credit facilityarticle videpositaries moneys security fordeposits investment funds credit facility tc article videpositaries moneys security fordeposits investment funds credit facility section 601security depositssection 601security deposits tc section 601security deposits l 2 moneys deposited trustee provisions indenture loan agreement shall held trust applied accordance provisions indenture loan agreement shall subject lien created hereby attachment creditor trustee issuer company section 602investment moneyssection 602investment moneys tc section 602investment moneys l 2 aat request direction company confirmed writing moneys held credit bond fund including amount therein shall invested reinvested trustee investment obligations shall mature later respective dates moneys held credit said funds required purposes intended provided moneys held credit facility account bond fund shall invested reinvested trustee governmental obligations shall mature later date moneys required paid provided investment shall made direction company trustee shall entitled rely instruction company making investments hereunder selling disposing investments required hereby trustee shall duty responsibility independently verify compliance sections 148d 148f code regulations promulgated thereunder trustee shall fully protected relying solely upon written directions company aforesaid circumstances whatsoever shall trustee liable issuer company holder loss taxexempt status bonds claims demands damages liabilities losses costs expenses resulting therefrom way connected therewith long trustee acts accordance written directions company provided hereunder bobligations purchased investment moneys fund account shall deemed times part fund account interest accruing thereon profit realized investment shall credited fund account loss resulting investment shall charged fund account trustee shall sell market price present redemption obligation purchased whenever shall necessary order provide cash meet payment transfer fund account neither trustee issuer shall liable responsible loss resulting investment sale investment made pursuant terms section cfor purpose trustees determination amount deposit credit fund account obligations moneys fund account invested shall valued lower cost market dthe trustee may make investments permitted section bond investment department unless otherwise directed writing company representative section 603the credit facilitysection 603the credit facility tc section 603the credit facility l 2 ainitial letter credit 1the letter credit shall direct pay letter credit shall provide direct payments upon order trustee hereinafter set forth shall irrevocable obligation bank pay upon order trustee upon request accordance terms thereof amount 5250000 5000000 shall support payment principal bonds due portion purchase price corresponding principal tendered bonds remarketed variable rate purchase date sold conversion date b 250000 shall support payment one hundred twenty 120 days interest maximum rate fifteen percent 15 per annum bonds due portion purchase price corresponding interest tendered bonds remarketed variable rate purchase date sold conversion date 2the letter credit shall terminate automatically earliest date drawing letter credit honored upon maturity acceleration bonds redemption bonds b day credit facility issuer receives notice conversion following conversion date c date bank receives notice trustee alternate credit facility substituted letter credit effect date bank receives notice trustee longer bonds outstanding e stated termination date described letter credit may extended pursuant terms thereof 3the banks obligation letter credit may reduced extent drawing thereunder subject reinstatement provided therein letter credit shall provide respect drawing trustee solely pay interest bonds interest payment date trustee shall received bank within ten 10 days date drawing notice telecopier telex writing bank reimbursed trustees right draw letter credit respect payment interest shall reinstated eleventh 11th day following drawing amount equal drawing respect drawing trustee amount available letter credit payment purchase price bonds interest bonds shall reinstated amount equal drawing extent bank reimbursed accordance terms reimbursement agreement amounts drawn 4the letter credit shall provide accordance terms indenture bonds shall become declared immediately due payable pursuant provision indenture trustee shall entitled draw letter credit extent amounts available thereunder pay aggregate principal amount bonds outstanding plus amount interest exceed one hundred twenty 120 days 5upon termination letter credit trustee shall return letter credit bank bexpiration unless alternate credit facility provided accordance section 603c hereof least thirty 30 days interest payment date immediately preceding fourteenth 14th day prior expiration date credit facility trustee shall call bonds redemption accordance section 701c2 hereof time shall cease bonds outstanding hereunder trustee shall promptly surrender current credit facility credit facility issuer cancellation trustee shall comply procedures set forth credit facility relating termination thereof calternate credit facilities bonds bear interest variable rate company may option provide delivery trustee alternate credit facility connection conversion interest rate fixed rate company shall provide delivery trustee alternate credit facility alternate credit facility shall terms respects material owners bonds credit facility replaced shall form acceptable trustee tender agent unless earlier required terms hereof prior date delivery alternate credit facility trustee company shall furnish trustee 1an opinion counsel stating delivery alternate credit facility trustee authorized indenture complies terms hereof alternate credit facility enforceable credit facility issuer thereof accordance terms 2if bonds rated moodys sp written evidence satisfactory trustee moodys bonds rated moodys sp bonds rated sp case effect rating agency reviewed proposed alternate credit facility substitution proposed alternate credit facility current credit facility result aa permanent withdrawal rating bonds ba reduction current rating bonds rated moodys sp written evidence satisfactory trustee sole discretion obligations substantially equivalent term proposed alternate letter credit bank institution issuing proposed alternate credit facility rated moodys sp category obligations substantially equivalent term bank institution issued credit facility replaced provided however company provides trustee opinion bond counsel change current rating bonds change credit facility issuer bank institution obligations rated different category obligations equivalent term issuer credit facility replaced adversely affect exclusion interest bonds gross income federal tax purposes evidence need provided company shall instead provide trustee written evidence shall satisfactory trustee commercial paper bank institution issuing proposed alternate credit facility rated p3 higher moodys a3 higher sp 3 opinion bond counsel approved issuer delivery alternate credit facility adversely affect exclusion interest bonds gross income purposes federal income taxation trustee shall accept alternate credit facility surrender previously held credit facility previous credit facility issuer cancellation promptly fifteenth 15th day alternate credit facility becomes effective later fifteenth 15th day following last interest payment date covered credit facility cancelled dnotices substitution replacement credit facility 1the trustee shall least twenty 20 days prior proposed replacement credit facility alternate credit facility give notice thereof mail owners bonds notice shall include identity issuer thereof rating assigned bonds moodys sp following effective date alternate credit facility bonds rated moodys sp rating assigned moodys sp obligations substantially equivalent term proposed alternate credit facility issuer alternate credit facility 2the trustee shall promptly give notice replacement credit facility issuer tender agent remarketing agent article vii redemption purchase bondsarticle viiredemption purchase bonds tc article viiredemption purchase bonds section 701redemption purchase dates pricessection 701redemption purchase dates prices tc section 701redemption purchase dates prices l 2 bonds shall subject redemption certain instances purchase prior maturity amounts times manner provided article vii payments redemption price purchase price bond shall made upon surrender trustee agent directed bond redeemed purchased aoptional redemption 1optional redemption variable rate period bonds bear interest variable rate bonds shall subject redemption upon written direction issuer given request company interest payment date conversion date whole part redemption price one hundred percent 100 principal amount thereof without premium plus interest accrued redemption date 2optional redemption premium fixed rate period bonds bear interest fixed rate bonds shall subject redemption upon written direction issuer given request company whole part interest payment date occurring dates set forth redemption prices expressed percentages principal amount redeemed set forth plus interest accrued redemption date follows commencement redemption periodredemption price business day four103 declining 12 4 years thesucceeding anniversary first conversion dateday redemption period reaching 100 thereafter 100 bextraordinary optional redemption due casualty eminent domain 1the bonds may redeemed whole part issuer time written direction company redemption price equal one hundred percent 100 principal amount thereof plus interest accrued thereon redemption date without premium following conditions existence shall certified trustee company representative athe project shall damaged destroyed extent amount net proceeds insurance exceeds 500000 company elects rebuild project fails elect within ninety 90 days receipt trustee net proceeds btitle temporary use project substantial portion thereof shall taken eminent domain amount net proceeds taking exceeds 500000 company elects replace property taken fails elect within ninety 90 days receipt trustee net proceeds 2such redemption shall occur next interest payment date occurring less thirty 30 days following expiration 90day period referred paragraph 1 section 701b cmandatory redemption 1determination taxability bonds shall subject mandatory redemption whole date redemption price equal one hundred percent 100 principal amount thereof plus accrued interest redemption date shall one hundred eighty 180 days following receipt trustee written notice determination taxability 2failure provide alternate credit facility bonds shall subject mandatory redemption time one hundred percent 100 principal amount thereof without premium plus interest accrued thereon date redemption interest payment date occurring closest fifteen 15 days prior date expiration current credit facility unless alternate credit facility provided accordance article vi hereof 3cessation operation redemption bonds shall subject mandatory redemption whole date prior maturity redemption price equal 100 principal amount thereof payable redemption date without redemption premium accrued interest thereon redemption date redemption date shall 90 days following occurrence cessation operation dmandatory purchase conversion date bonds shall subject mandatory purchase whole conversion date purchase price equal one hundred percent 100 principal amount thereof without premium plus interest accrued thereon date purchase conversion date section 702company direct optional redemptionsection 702company direct optional redemption tc section 702company direct optional redemption l 2 issuer shall direct trustee writing call bonds optional redemption shall notified company notified trustee writing company made intends make corresponding prepayment note direction issuer trustee shall given least fortyfive 45 days sixty 60 days prior redemption date shorter period shall acceptable trustee long credit facility held trustee shall call bonds optional redemption available moneys payments account bond fund notified credit facility issuer receive moneys pursuant credit facility aggregate sufficient pay redemption price bonds called redemption plus accrued interest thereon section 703selection bonds called redemptionsection 703selection bonds called redemption tc section 703selection bonds called redemption l 2 except otherwise provided herein bonds less bonds redeemed particular bonds called redemption shall selected following order priority first bonds pledged bank pursuant pledge agreement second bonds owned company third bonds selected random method determined trustee sole discretion fair reasonable trustee shall treat bond denomination greater one hundred thousand dollars 100000 representing number separate bonds denomination minimum denomination one hundred thousand dollars 100000 integral multiple five thousand dollars 5000 excess thereof trustee shall determine section 704notice redemption purchasesection 704notice redemption purchase tc section 704notice redemption purchase l 2 awhen required redeem purchase bonds provision article vii directed issuer trustee shall cause notice redemption purchase given sixty 60 days less twenty 20 days prior redemption purchase date mailing copy notices redemption purchase first class mail postage prepaid registered owners bonds redeemed purchased addresses shown bond register failure mail notice defect mailing thereof respect bond shall affect validity redemption purchase bond notices redemption purchases shall also mailed remarketing agent credit facility issuer notice shall given name issuer shall identify bonds redeemed purchased case partial redemption purchase bonds respective principal amounts thereof redeemed purchased shall specify redemption purchase date shall state redemption purchase date redemption purchase price bonds called redemption purchase payable principal corporate trust office trustee case mandatory redemptions purchases pursuant section 701c2 701d hereof office trustees paying agent date interest cease accrue trustee may use cusip numbers notices redemption purchase convenience bondholders provided notice shall state representation made correctness numbers either printed bonds contained notice redemption purchase reliance may placed identification numbers containing prefix established indenture bwith respect notice redemption purchase bonds accordance section 701c2 hereof notice shall also specify date expiration term credit facility cafter conversion date time mailing notice optional redemption issuer shall deposited trustee moneys sufficient redeem bonds called redemption notice may state conditional deposit available moneys trustee later redemption date notice shall effect unless moneys deposited dupon redemption less bonds trustee shall furnish credit facility issuer notice form specified credit facility issuer reduce coverage provided credit facility upon redemption bonds trustee shall surrender credit facility credit facility issuer cancellation epurchases section 701d hereof shall accordance section 202e hereof section 705bonds redeemed purchased partsection 705bonds redeemed purchased part tc section 705bonds redeemed purchased part l 2 bond redeemed purchased part shall surrendered place stated notice provided section 704 hereof due endorsement written instrument transfer form satisfactory trustee duly executed owner thereof attorney duly authorized writing issuer shall execute trustee authenticating agent shall authenticate deliver owner bond without service charge new bond bonds authorized denomination requested owner aggregate principal amount equal exchange unredeemed unpurchased portion principal bond surrendered article viii particular covenants provisionsarticle viiiparticular covenants provisions tc article viiiparticular covenants provisions section 801covenant pay bonds limited obligations issuersection 801covenant pay bonds limited obligations issuer tc section 801covenant pay bonds limited obligations issuer l 2 athe issuer covenants promptly pay principal interest amounts payable bonds places dates manner provided herein bonds according true intent meaning thereof principal interest amounts payable solely payments made company note revenues brutherford county north carolina shall event liable payment principal interest bonds performance pledge mortgage obligation agreement kind whatsoever may undertaken issuer neither bonds agreements obligations issuer shall construed constitute indebtedness rutherford county north carolina within meaning constitutional statutory provision whatsoever bonds interest thereon shall deemed constitute create manner debt liability obligation state political subdivision agency thereof pledge faith credit state political subdivision agency shall limited obligations issuer payable solely revenues funds pledged therefor shall payable assets funds issuer neither faith credit taxing power state political subdivision agency thereof pledged payment principal interest bonds section 802covenants perform obligations indenturesection 802covenants perform obligations indenture tc section 802covenants perform obligations indenture l 2 issuer covenants faithfully perform times covenants undertakings stipulations provisions contained indenture bonds executed delivered hereunder proceedings issuer pertaining thereto faithfully observe perform times covenants undertakings stipulations provisions loan agreement part observed performed issuer covenants duly authorized constitution laws state including particularly without limitation act issue bonds authorized hereby enter indenture endorse note trustee pledge payments note revenues manner extent herein set forth assign interest note loan agreement trustee action part issuance bonds issued hereunder execution delivery indenture duly effectively taken bonds hands owners thereof valid binding obligations issuer according tenor import thereof section 803covenant perform obligations loan agreementsection 803covenant perform obligations loan agreement tc section 803covenant perform obligations loan agreement l 2 subject provisions section 804 article issuer covenants agrees suffer permit take action anything fail take action fail anything may result termination cancellation loan agreement long bond outstanding punctually fulfill obligations require company perform punctually duties obligations loan agreement execute agree change amendment modification supplement loan agreement indenture except supplement amendment duly executed issuer company approval trustee upon terms conditions set forth article xiii indenture agree abatement reduction abrogation waiver diminution modification manner extent whatsoever obligation company pay note meet obligations provided loan agreement promptly notify trustee writing actual alleged event default loan agreement whether company issuer notify trustee least thirty 30 days proposed date effectiveness proposed termination cancellation loan agreement section 804trustee may enforce issuers rights loan agreementsection 804trustee may enforce issuers rights loan agreement tc section 804trustee may enforce issuers rights loan agreement l 2 loan agreement duly executed counterpart filed trustee sets forth covenants obligations issuer company including provision section 129 thereof subsequent issuance bonds prior payment bonds defined loan agreement loan agreement note may effectively amended changed modified altered terminated except provided article xiii indenture reference hereby made loan agreement detailed statement said covenants obligations company loan agreement issuer agrees trustee subject provisions loan agreement indenture reserving certain rights issuer respecting actions trustee name issuer may enforce rights issuer obligations company pursuant loan agreement behalf bondholders whether issuer default hereunder section 805covenant arbitragesection 805covenant arbitrage tc section 805covenant arbitrage l 2 issuer covenants agrees make authorize use directs trustee make permit use proceeds bonds would cause bond arbitrage bond within meaning section 148 code applicable regulations promulgated time thereunder covenants observe violate requirements section 148 code applicable regulations extent necessary interest bonds cease excluded gross income recipients thereof federal income tax purposes reason use proceeds provided neither issuer trustee shall liable investment moneys indenture made direction company representative section 806inspection bond registersection 806inspection bond register tc section 806inspection bond register l 2 reasonable times upon reasonable regulations established bond registrar bond register may inspected copied expense company bondholder section 807priority pledge security interestsection 807priority pledge security interest tc section 807priority pledge security interest l 2 pledge herein made trust estate security interest created herein respect thereto constitutes first prior pledge security interest trust estate said pledge security interest shall time impaired directly indirectly issuer trustee trust estate shall otherwise pledged except provided herein loan agreement persons shall rights respect thereto section 808insurance condemnation proceedssection 808insurance condemnation proceeds tc section 808insurance condemnation proceeds l 2 reference hereby made sections 64 65 loan agreement whereunder provided certain circumstances respective net proceeds insurance condemnation awards net proceeds sale lieu condemnation paid trustee deposited separate trust accounts bond fund disbursed paid therein provided trustee hereby accepts agrees perform duties obligations therein specified article ix default remediesarticle ixdefault remedies tc article ixdefault remedies section 901defaultssection 901defaults tc section 901defaults l 2 following events hereby declared event default apayment interest bonds shall made shall become due bpayment principal redemption price bonds shall made shall become due whether maturity upon call redemption otherwise event default loan agreement shall occurred waived dthe trustee receives written notice credit facility issuer event default reimbursement agreement occurred waived ethe trustee receives notice telecopier telex writing credit facility issuer credit facility issuer reimbursed drawing thereon close business tenth 10th calendar day following drawing credit facility pay interest bonds interest portion letter credit reinstated amount drawn fpayment purchase price bond tendered pursuant section 203 hereof made payment due gthe issuer shall fail duly punctually perform covenants conditions agreements provisions contained bonds indenture part issuer performed referred preceding subsections section provided however failure specified subsections c g section 901 shall constitute event default written notice specifying failure requiring remedied shall given company issuer trustee may give notice discretion shall give notice written direction owners less twentyfive percent 25 aggregate principal amount bonds outstanding company issuer shall thirty 30 days receipt notice correct said failure shall corrected said failure within applicable period section 902acceleration annulment thereofsection 902acceleration annulment thereof tc section 902acceleration annulment thereof l 2 asubject requirement consent credit facility issuer acceleration must obtained case event default described subsections c g section 901 hereof upon occurrence event default trustee may upon 1 written request credit facility issuer 2 occurrence event default described subsection b e f section 901 hereof trustee shall notice issuer declare entire unpaid principal interest bonds due payable upon declaration said principal together interest accrued thereon shall become payable immediately without penalty premium place payment provided therein anything indenture bonds contrary notwithstanding trustee shall permitted request receipt indemnity satisfaction prior declaration acceleration upon occurrence acceleration hereunder trustee shall immediately exercise rights may owner note declare payments thereunder due payable immediately extent already done shall immediately draw upon credit facility extent permitted terms thereof interest bonds shall cease accrue upon receipt trustee funds drawn credit facility bimmediately acceleration occurrence event default sections 901a b e f trustee shall immediately event within two business days thereafter notify writing issuer company credit facility issuer commission occurrence acceleration within five 5 days occurrence acceleration hereunder trustee shall notify first class mail postage prepaid owners bonds outstanding occurrence acceleration cif principal bonds become due payable arrears interest upon bonds paid issuer also performs things respect may default hereunder pays reasonable charges trustee bondholders including reasonable attorneys fees every case credit facility issuer majority bondholders written notice issuer trustee may annul acceleration consequences annulment shall binding upon trustee upon owners bonds issued hereunder provided however trustee shall annul declaration without written consent credit facility issuer unless acceleration resulted failure credit facility issuer honor proper draw payment credit facility notwithstanding foregoing trustee shall annul acceleration resulted event default resulted drawing credit facility section 901e hereof unless credit facility reinstated accordance terms amount equal principal amount bonds outstanding plus one hundred twenty 120 days interest accrued thereon trustee received written notice reinstatement credit facility issuer trustee shall forward copy notice bondholders received pursuant paragraph company immediately upon annulment trustee shall cancel notice company demand payment note made trustee pursuant section 902 section 903other remediessection 903other remedies tc section 903other remedies l 2 event default occurs continuing trustee principal bonds becomes immediately due payable may enforce every right granted owner note loan agreement supplements amendments thereto exercising rights given trustee article ix trustee shall take action judgment trustee applying standards described section 1001 hereof would best serve interests bondholders section 904legal proceedings trusteesection 904legal proceedings trustee tc section 904legal proceedings trustee l 2 aif event default occurred continuing trustee discretion may upon written request credit facility issuer owners less twentyfive percent 25 aggregate principal amount outstanding bonds receipt indemnity satisfaction shall name 1by mandamus suit action proceeding law equity enforce rights bondholders hereunder 2bring suit upon bonds credit facility extent credit facility issuer shall wrongfully dishonored drawings made strict conformity terms hereof note 3by action suit equity seek enjoin acts things may unlawful violation rights bondholders bif event default section 901c occurs continuing trustee discretion may upon written request owners less twentyfive percent 25 aggregate principal amount outstanding bonds receipt indemnity satisfaction shall enforce every right granted loan agreement owner note section 905discontinuance proceedings trusteesection 905discontinuance proceedings trustee tc section 905discontinuance proceedings trustee l 2 proceeding commenced trustee account event default discontinued determined adversely trustee company credit facility issuer trustee bondholders shall restored former positions rights hereunder though proceedings commenced section 906credit facility issuer bondholders may direct proceedingssection 906credit facility issuer bondholders may direct proceedings tc section 906credit facility issuer bondholders may direct proceedings l 2 anything contrary indenture notwithstanding either credit facility issuer credit facility effect default occurred continuing credit facility majority bondholders credit facility effect shall right furnishing indemnity satisfactory trustee direct method place conducting remedial proceedings trustee hereunder provided direction shall conflict rule law indenture unduly prejudice rights minority bondholders section 907limitations actions bondholderssection 907limitations actions bondholders tc section 907limitations actions bondholders l 2 ano bondholder shall right bring suit credit facility bondholder shall right pursue remedy hereunder unless 1the trustee shall given written notice event default 2the owners less twentyfive percent 25 aggregate principal amount outstanding bonds shall requested trustee writing exercise powers hereinabove granted pursue remedy name names 3the trustee shall offered indemnity satisfactory costs expenses liabilities except offer indemnification shall required declaration acceleration section 902 hereof drawing credit facility 4the trustee shall failed comply request within reasonable time 5prior conversion date credit facility issuer failed honor proper draw request credit facility bnotwithstanding foregoing provisions subsection section 907 provision indenture obligation issuer shall absolute unconditional pay hereunder solely revenues funds pledged indenture principal redemption price interest bonds respective owners thereof respective due dates thereof nothing herein shall affect impair right action absolute unconditional owners enforce payment section 908trustee may enforce rights without possession bondssection 908trustee may enforce rights without possession bonds tc section 908trustee may enforce rights without possession bonds l 2 rights indenture bonds may enforced trustee without possession bonds production thereof trial proceedings relative thereto proceedings instituted trustee shall brought name ratable benefit owners bonds section 909remedies exclusivesection 909remedies exclusive tc section 909remedies exclusive l 2 remedy herein conferred intended exclusive remedy remedies remedy addition every remedy given hereunder hereafter existing law equity statute section 910delays omissions impair rightssection 910delays omissions impair rights tc section 910delays omissions impair rights l 2 delays omission respect exercising right power accruing upon default shall impair right power waiver default every remedy given article ix may exercised time often may deemed expedient section 911application moneys event defaultsection 911application moneys event default tc section 911application moneys event default l 2 aany moneys received trustee article ix shall applied following order provided moneys received trustee drawing credit facility shall applied extent permitted terms thereof provided paragraph 2 respect principal interest accrued bonds held company 1to payment reasonable costs trustee including counsel fees disbursements trustee interest thereon per annum rate equal prime base rate credit facility issuer payment reasonable costs expenses issuer including counsel fees incurred connection event default 2to payment principal redemption price case may interest bonds case moneys shall insufficient pay full payment principal redemption price interest ratably without preference priority one another installment interest installment interest bthe surplus shall paid company person lawfully entitled receive court competent jurisdiction may direct provided trustee received payments credit facility following event default surplus shall paid credit facility issuer extent payments extent credit facility issuer reimbursed payments fees expenses related thereto section 912trustee bondholders entitled remedies actsection 912trustee bondholders entitled remedies act tc section 912trustee bondholders entitled remedies act l 2 purpose article ix provide remedies trustee bondholders may lawfully granted provisions act remedy herein granted held unlawful trustee bondholders shall nevertheless entitled every remedy provided act intended insofar lawfully possible provisions article shall apply binding upon trustee receiver appointed applicable law section 913trustee may file claim bankruptcysection 913trustee may file claim bankruptcy tc section 913trustee may file claim bankruptcy l 2 case pendency receivership insolvency liquidation bankruptcy reorganization arrangement adjustment composition similar judicial proceeding relating issuer company obligor upon loan agreement bonds property issuer company obligor creditors trustee irrespective whether principal bonds shall due payable therein expressed declaration otherwise irrespective whether trustee shall made demand company payment note amount equal overdue principal interest additional interest shall entitled empowered intervention proceedings otherwise 1to file prove claim whole amount principal interest owing unpaid respect bonds file papers documents may necessary advisable order claims trustee including claim reasonable compensation expenses disbursements advances trustee agents counsel bondholders allowed judicial proceeding 2to collect receive moneys property payable deliverable claims distribute receiver assignee trustee liquidator sequestrator similar official judicial proceeding hereby authorized bondholders make payments trustee event trustee shall consent making payments directly bondholders pay trustee amount due reasonable compensation expenses disbursements advances trustee agents counsel amounts due trustee section 911 hereof bnothing herein contained shall deemed authorize trustee authorize consent accept adopt behalf bondholders plan reorganization arrangement adjustment composition affecting bonds rights bondholder thereof authorize trustee vote respect claim bondholders proceeding call moneys received trustee pursuant right given action taken indenture shall payment costs expenses proceedings resulting collection moneys fees expenses trustee deposited bond fund applied payment principal redemption premium interest due unpaid bonds accordance provisions indenture section 914receiversection 914receiver tc section 914receiver l 2 upon occurrence event default upon filing suit commencement judicial proceedings enforce rights trustee bondholders indenture trustee shall entitled matter right appointment receiver receivers amounts payable note otherwise loan agreement assigned trustee indenture pending proceedings powers court making appointment shall confer whether amounts payable shall deemed sufficient ultimately satisfy bonds new tab setting 4digit section allow enough space indent section titlesarticle x concerning trusteearticle xconcerning trustee tc article xconcerning trustee section 1001acceptance trustssection 1001acceptance trusts tc section 1001acceptance trusts l 2 trustee hereby represents warrants issuer benefit company bondholders well issuer national banking association duly authorized laws united states america accept execute trusts character herein set trustee accepts agrees execute trusts imposed upon indenture upon terms conditions set forth article subject provisions indenture including following express terms conditions parties hereto bondholders agree aexcept continuance event default trustee undertakes perform duties specifically set forth indenture implied covenants obligations shall read indenture trustee bin case event default occurred continuing trustee shall exercise rights powers vested indenture use degree care skill exercise prudent man would exercise use circumstances conduct affairs cthe trustee may execute trusts powers hereof perform duties attorneys agents receivers employees shall responsible misconduct negligence attorney agent receiver appointed upon due care shall entitled act upon opinion advice counsel concerning matters trust hereof duties hereunder may cases reimbursed hereunder reasonable compensation paid attorneys agents receivers employees may reasonably employed connection trust hereof trustee may conclusively rely upon opinion counsel shall responsible loss damage resulting action nonaction taken omitted taken good faith reliance upon opinion counsel dexcept specifically provided section 1019 respect filing continuation statements trustee shall responsible recital herein bonds except respect authentication certificate trustee endorsed bonds insuring trust estate part project collecting insurance moneys validity execution hereof issuer supplements hereto instruments assurance sufficiency security bonds trustee shall bound ascertain inquire performance observance agreements conditions part issuer part company loan agreement except hereinafter set forth trustee may require issuer company full information advice performance agreements conditions aforesaid condition trust estate ethe trustee shall liable connection performance nonperformance duties indenture except grossly negligent action grossly negligent failure act willful misconduct except 1this subsection shall construed limit effect subsection section 1001 2the trustee shall liable error judgment made good faith responsible officer officers trustee unless shall proved trustee grossly negligent ascertaining pertinent facts 3the trustee shall liable respect action taken omitted taken good faith accordance direction majority bondholders relating time method place conducting proceeding remedy available trustee exercising trust power conferred upon trustee indenture fwhether therein expressly provided every provision indenture way relates trustee including without limitation sections 1003 1004 hereof shall subject provisions section 1001 section 1002trustee give noticesection 1002trustee give notice tc section 1002trustee give notice l 2 athe trustee shall required take notice deemed notice default hereunder except failure issuer cause made payments trustee required made article v failure issuer company file trustee document required indenture loan agreement filed unless trustee shall notified default issuer holders 25 aggregate principal amount bonds outstanding unless responsible corporate trust officer trustee charged responsibility management trusts conferred indenture shall actual knowledge default bif responsible trust officer trustee charged responsibility management trusts conferred indenture shall actual knowledge event default continuing hereunder trustee shall give bondholders credit facility issuer commission written notice defaults within thirty 30 days receipt information cpromptly upon receipt notice occurrence determination taxability trustee shall give notice thereof company issuer bondholders former bondholders credit facility issuer section 1003trustee entitled indemnitysection 1003trustee entitled indemnity tc section 1003trustee entitled indemnity l 2 athe company shall indemnify trustee officers directors employees loss liability expense incurred arising connection acceptance administration duties indenture except set forth subsection b trustee shall notify company promptly claim may seek indemnity except company claimant company shall full sole right defend claim trustee shall cooperate defense trustee engages separate counsel trustee shall pay fees expenses counsel company shall longer obligation indemnify trustee provided however trustee shall right retain separate counsel fees expenses paid company representation trustee would inappropriate due actual conflict interest reasonably determined either party trustee company shall responsible settlement reached without companys consent bthe company shall obligated reimburse expense indemnify loss liability incurred trustee gross negligence willful misconduct bad faith cto secure companys payment obligations section 911 trustee shall lien prior lien trustee benefit owners bonds money property held collected trustee except amounts drawn credit facility money property held rebate fund trustee shall lien obligations shall survive satisfaction discharge indenture dwhen trustee issuer incurs expenses renders services event default expenses compensation services intended constitute expenses administration applicable bankruptcy law ethe trustee may begin suit appear defend suit anything else judgment proper done trustee without indemnity paragraph case issuer shall reimburse trustee issuer equal basis funds available therefor loan agreement costs expenses outlays counsel fees reasonable disbursements properly incurred connection therewith provided however trustee shall 1make payments hereunder principal redemption price interest bonds purchase price bonds tendered option owners thereof purchased company lieu redemption 2accelerate bonds required hereunder direction bondholders 3draw credit facility required hereunder without necessity bondholders providing security indemnity trustee issuer shall fail make reimbursement trustee may reimburse moneys possession provisions indenture moneys drawn credit facility shall entitled respect thereto preference bonds section 1004trustee responsible insurance taxes execution indenture acts issuer application moneys applied accordance indenturesection 1004trustee responsible insurance taxes execution indenture acts issuer application moneys applied accordance indenture tc section 1004trustee responsible insurance taxes execution indenture acts issuer application moneys applied accordance indenture l 2 athe trustee shall obligation effect maintain insurance renew policies insurance inquire sufficiency policies insurance carried company report make file claims proof loss damage insured may occur keep informed advised payment taxes assessments require payment made trustee shall responsibility respect validity sufficiency due execution acknowledgment indenture supplements thereto instruments assurance validity sufficiency security provided hereunder respect validity bonds due execution issuance thereof trustee shall obligation see duties herein imposed upon party covenants herein contained part party performed shall done performed trustee shall liability failure see duties covenants done performed bthe trustee shall liable responsible failure issuer employees agents make collections deposits perform act herein required issuer loss moneys arising insolvency act default omission depositary moneys shall deposited provisions indenture trustee shall responsible application proceeds bonds moneys deposited paid withdrawn transferred hereunder application payment withdrawal transfer shall made accordance provisions indenture trustee shall responsible liable loss suffered connection investment funds made accordance section 602 cthe permissive right trustee things enumerated indenture shall construed duty trustee shall answerable gross negligence willful misconduct immunities exemptions liability trustee hereunder shall extend directors officers employees agents section 1005compensationsection 1005compensation tc section 1005compensation l 2 subject provisions agreement relating compensation trustee issuer shall cause company pay trustee administrative expenses reasonable fees charges outofpocket expenses accordance section 75 loan agreement computing trustees compensation parties shall limited law compensation express trust company shall fail make payment required section 1005 trustee may shall obligation make payment moneys possession provisions indenture shall entitled preference therefor bonds hereunder provided payments section 1005 shall made moneys drawn credit facility section 1006trustee preserve recordssection 1006trustee preserve records tc section 1006trustee preserve records l 2 records files pertaining project custody trustee shall open reasonable times inspection issuer credit facility issuer company agents representatives section 1007trustee may bondholdersection 1007trustee may bondholder tc section 1007trustee may bondholder l 2 institution acting trustee indenture directors officers employees agents may good faith buy sell hold deal bonds issued secured indenture may join capacity bondholder action bondholder may entitled take like effect institution trustee indenture extent permitted law institution may also receive tenders purchase good faith bonds including department affiliate subsidiary like effect trustee section 1008trustee responsible recitalssection 1008trustee responsible recitals tc section 1008trustee responsible recitals l 2 recitals statements representations contained herein bonds shall taken construed made part issuer trustee shall responsibility correctness section 1009no trustee responsibility recording filingsection 1009no trustee responsibility recording filing tc section 1009no trustee responsibility recording filing l 2 except set forth section 1019 trustee shall obligation see recording filing indenture loan agreement financing statements instrument otherwise giving person notice provisions hereof thereof section 1010trustee may require informationsection 1010trustee may require information tc section 1010trustee may require information l 2 except obligations trustee section 902 obligations trustee make payments bonds due draw credit facility required hereunder anything contained indenture contrary notwithstanding trustee shall right shall required demand condition action trustee respect authentication bonds withdrawal cash release property action whatsoever within purview indenture showings certificates opinions appraisals information evidence corporate authority addition required terms hereof section 1011trustee may rely certificatessection 1011trustee may rely certificates tc section 1011trustee may rely certificates l 2 trustee shall protected shall incur liability acting proceeding acting proceeding good faith accordance terms indenture upon ordinance resolution order notice request consent waiver certificate statement instrument opinion affidavit requisition bond paper document shall good faith believe genuine adopted signed proper board person prepared furnished pursuant provisions loan agreement indenture upon written opinion attorney engineer accountant expert believed qualified relation subject matter trustee shall duty make investigation inquiry statements contained matters referred instrument action taken trustee pursuant indenture upon request authority consent person time making request giving authority consent owner bond shall conclusive binding upon future owners bond upon bonds issued exchange therefor place thereof section 1012trustee bondsection 1012trustee bond tc section 1012trustee bond l 2 trustee shall required give bond surety respect execution rights obligations hereunder section 1013segregation funds interestssection 1013segregation funds interests tc section 1013segregation funds interests l 2 moneys received trustee shall used applied invested herein provided held trust manner purposes received need segregated funds except extent required indenture law trustee shall liability interest moneys received hereunder section 1014qualification trusteesection 1014qualification trustee tc section 1014qualification trustee l 2 shall times trustee hereunder shall association corporation organized business laws united states america state authorized laws applicable laws state exercise corporate trust powers act bond registrar hereunder combined capital surplus least one hundred million dollars 100000000 subject supervision examination federal state authority association corporation commercial bank trust company shall also rating moodys bonds rated moodys baa 3p3 higher sp bonds rated sp baaa3 higher shall otherwise approved writing moodys sp case may association corporation publishes reports condition least annually pursuant law requirements aforesaid supervising examining authority purposes section 1014 combined capital surplus association corporation shall deemed combined capital surplus set forth recent report condition published time trustee shall cease eligible accordance provisions section 1014 shall resign immediately manner effect specified section 1015 hereof section 1015resignation removal trusteesection 1015resignation removal trustee tc section 1015resignation removal trustee l 2 ano resignation removal trustee appointment successor trustee pursuant article shall become effective acceptance appointment successor trustee section 1016 hereof bthe trustee may resign time giving written notice thereof issuer company instrument acceptance successor trustee shall delivered trustee within thirty 30 days giving notice resignation retiring trustee may petition court competent jurisdiction appointment successor trustee cthe trustee may removed time instrument instruments writing trustee copies issuer company signed majority bondholders attorneys legal representatives agents delivered trustee issuer company instruments effective received trustee dif time 1the trustee shall cease eligible section 1014 hereof shall fail resign written request therefor company majority bondholders 2the trustee shall become incapable acting shall adjudged bankrupt insolvent receiver trustee property shall appointed public officer shall take charge control trustee property affairs purpose rehabilitation conservation liquidation case issuer company may remove trustee bondholder may petition court competent jurisdiction removal trustee appointment successor eif trustee shall resign removed become incapable acting vacancy shall occur office trustee cause issuer approval company shall promptly appoint successor trustee shall appointed issuer approved company majority bondholders accepted appointment manner hereinafter provided bondholder bona fide owner bond least six 6 months may petition court competent jurisdiction appointment successor trustee fthe issuer shall give notice resignation removal trustee appointment successor trustee mailing written notice event firstclass mail postage prepaid bondholder notice shall include name address principal corporate trust office successor trustee section 1016successor trusteesection 1016successor trustee tc section 1016successor trustee l 2 aevery successor trustee appointed hereunder shall execute acknowledge deliver predecessor also issuer company instrument writing accepting appointment hereunder thereupon upon transfer credit facility successor trustee successor trustee without act shall become fully vested rights immunities powers trusts subject duties obligations predecessors predecessor shall nevertheless written request successor issuer upon payment expenses charges disbursements predecessor payable pursuant provisions section 1005 hereof execute deliver instrument transferring successor trustee rights immunities powers trusts predecessor hereunder every predecessor trustee shall deliver property moneys held hereunder successor subject nevertheless preference provided sections 1003 1005 hereof instrument writing issuer required successor trustee fully certainly vesting trustee rights immunities powers trusts hereby vested intended vested predecessor trustee instrument writing shall request executed acknowledged delivered issuer resignation trustee instrument instruments removing trustee appointing successor hereunder together instruments provided article shall filed andor recorded successor trustee recording office indenture financing statements filed andor recorded bnotwithstanding foregoing provisions article bank trust company power perform duties execute trusts indenture otherwise qualified act trustee hereunder bank trust company acting trustee may merged consolidated assets business bank trust company may sold shall deemed successor trustee section 1017cotrusteesection 1017cotrustee tc section 1017cotrustee l 2 purpose indenture shall violation law jurisdiction denying restricting right certain banking corporations associations transact business trustee contemplated herein jurisdiction recognized case litigation indenture particular case enforcement security interest contained indenture upon occurrence event default may necessary trustee appoint additional individual institution separate trustee cotrustee shall satisfactory company following provisions section 1017 adapted ends event incapacity lack authority trustee reason present future law jurisdiction exercise rights powers trusts herein granted trustee hold title security interest trust estate take action may necessary desirable connection therewith every remedy power right claim demand cause action immunity estate title interest lien expressed intended indenture exercised vested conveyed trustee respect thereto shall exercisable vest separate trustee cotrustee extent necessary enable separate trustee cotrustee exercise rights powers trusts every covenant obligation necessary exercise thereof shall run enforceable separate trustee cotrustee bshould deed conveyance instrument writing issuer required separate trustee cotrustee appointed trustee order fully certainly vest confirm properties rights powers trusts duties obligations deeds conveyances instruments shall request executed acknowledged delivered issuer case separate trustee cotrustee successor either shall die dissolved become incapable action resign removed estates properties rights powers trusts duties obligations separate trustee cotrustee far permitted law shall vest exercised trustee appointment new trustee successor separate trustee cotrustee section 1018notice moodys spsection 1018notice moodys sp tc section 1018notice moodys sp l 2 time bonds rated moodys sp trustee shall notify moodys sp applicable promptly aany change trustee bthe expiration termination credit facility variable rate period unless alternate credit facility provided trustee accordance terms indenture ca change interest rate borne bonds variable rate fixed rate dthe payment bonds eany material change indenture loan agreement reimbursement agreement credit facility remarketing agreement section 1019filing certain continuation statementssection 1019filing certain continuation statements tc section 1019filing certain continuation statements l 2 time trustee shall file cause filed continuation statements purpose continuing without lapse effectiveness financing statements shall filed prior issuance bonds connection issuers assignment trustee trust estate pursuant authority uniform commercial code state north carolina ii previously filed continuation statements shall filed herein required issuer company shall sign deliver trustee designee continuation statements may requested time trustee upon filing continuation statement trustee shall immediately notify issuer accomplished section 1020several capacitiessection 1020several capacities tc section 1020several capacities l 2 anything indenture contrary notwithstanding entity may serve hereunder trustee paying agent tender agent registrar remarketing agent combination capacities entity may serve hereunder credit facility issuer paying agent tender agent registrar remarketing agent combination capacities extent permitted law provided however event shall entity serve hereunder trustee credit facility issuer article xi execution instruments bondholders proof ownership bondsarticle xiexecution instruments bondholdersand proof ownership bonds tc article xiexecution instruments bondholdersand proof ownership bonds section 1101execution instruments bondholders proof ownership bondssection 1101execution instruments bondholders proof ownership bonds tc section 1101execution instruments bondholders proof ownership bonds l 2 aany request direction consent instrument writing required permitted indenture signed executed bondholder may signed executed bondholder attorneys legal representatives proof execution instrument ownership bonds shall sufficient purpose indenture shall conclusive favor trustee regard action taken instrument made following manner fact date execution person instrument may proved verification officer jurisdiction laws thereof power take affidavits within jurisdiction effect instrument subscribed sworn affidavit witness execution officer corporation association member partnership behalf corporation association partnership verification affidavit shall also constitute sufficient proof authority bnothing contained section 1101 shall construed limiting trustee proof intended trustee may accept evidence matters herein stated may sufficient request consent bondholder shall bind every future owner bonds request consent pertains bonds issued lieu thereof respect anything done trustee pursuant request consent cnotwithstanding foregoing provisions section 1101 trustee shall required recognize person owner bonds take action request unless bonds shall deposited section 1102preservation informationsection 1102preservation information tc section 1102preservation information l 2 trustee shall preserve bond register current form reasonably practicable name address bondholder received trustee capacity bond registrar article xii remarketing agent tender agent placement agentarticle xiithe remarketing agent thetender agent placement agent tc article xiithe remarketing agent thetender agent placement agent section 1201the remarketing agentsection 1201the remarketing agent tc section 1201the remarketing agent l 2 athe issuer hereby appoints first union national bank north carolina corporate office charlotte north carolina remarketing agent indenture remarketing agent successor remarketing agent written instrument delivered issuer trustee company shall accept duties obligations imposed indenture remarketing agreement bin addition obligations imposed remarketing agent hereunder remarketing agent shall agree keep books records connection activities remarketing agent hereunder shall consistent prudent industry practice make books records available inspection issuer trustee credit facility issuer company reasonable times cthe remarketing agent shall times member national association securities dealers inc registered municipal securities dealer securities exchange act 1934 amended national banking association bank trust company case authorized law perform obligations hereunder dif time remarketing agent unable unwilling act remarketing agent remarketing agent upon thirty 30 business days prior written notice issuer trustee tender agent company may resign remarketing agent may removed time company consent issuer written notice signed company delivered trustee remarketing agent credit facility issuer tender agent upon resignation removal remarketing agent company consent issuer shall appoint substitute remarketing agent meeting qualifications section 1201c ein event company shall fail appoint successor remarketing agent upon resignation removal remarketing agent upon dissolution insolvency bankruptcy trustee may required appoint remarketing agent act remarketing agent appointment successor remarketing agent accordance section 1201 provided however trustee capacity remarketing agent shall required sell bonds determine interest rate bonds pursuant section 202 hereof section 1202the tender agentsection 1202the tender agent tc section 1202the tender agent l 2 athe issuer hereby appoints tender agent indenture first national bank boston agent corporate trust office canton massachusetts tender agent successor tender agent written instrument delivered issuer trustee company shall accept duties obligations imposed indenture bthe tender agent shall times member national association securities dealers inc capitalization least fifteen million dollars 15000000 rating moodys bonds rated moodys baa 3p3 higher national banking association bank trust company capital surplus least 50000000 case authorized law perform obligations hereunder cif time tender agent unable unwilling act tender agent tender agent upon sixty 60 days prior written notice issuer trustee remarketing agent company may resign provided however case shall resignation become effective appointment successor tender agent tender agent may removed time company consent issuer written notice signed company delivered trustee remarketing agent credit facility issuer tender agent provided however case shall removal become effective appointment successor tender agent upon resignation removal tender agent company consent issuer shall appoint substitute tender agent meeting qualifications section 1202b din event company shall fail appoint successor tender agent upon resignation removal tender agent upon dissolution insolvency bankruptcy trustee may discretion required act tender agent appointment successor tender agent accordance section 1202 section 1203the placement agentsection 1203the placement agent tc section 1203the placement agent l 2 placement agent shall member national association securities dealers inc registered municipal securities dealer securities exchange act 1934 amended national banking association bank trust company case authorized law perform obligations described section 202e hereof issuer shall consent appointment placement agent placement agent shall agree establish fixed rate use best efforts arrange sale tendered bonds conversion date particularly described section 202e section 1204noticessection 1204notices tc section 1204notices l 2 trustee shall within thirty 30 days resignation removal remarketing agent tender agent appointment placement agent successor remarketing agent tender agent give notice thereof first class mail postage prepaid owners bonds article xiii amendments supplementsarticle xiiiamendments supplements tc article xiiiamendments supplements section 1301amendments supplements without bondholders consentsection 1301amendments supplements without bondholders consent tc section 1301amendments supplements without bondholders consent l 2 indenture may amended supplemented time without consent bondholders consent credit facility issuer credit facility effect default occurred continuing credit facility supplemental indenture authorized issuer filed trustee one following purposes ato add additional covenants issuer surrender right power herein conferred upon issuer bfor purpose inconsistent terms indenture cure ambiguity correct supplement provision contained herein supplemental indenture may defective inconsistent provision contained herein supplemental indenture make provisions regard matters questions arising indenture shall adversely affect interests owners bonds company cto permit bonds converted variable rate period certificateless securities represented master certificate held trust ownership either case evidenced book entries books bond registrar period time dto permit appointment cotrustee indenture eto modify eliminate add provisions indenture extent shall necessary effect qualification indenture trust indenture act 1939 similar federal statute hereafter enacted add indenture provisions may expressly permitted trust indenture act 1939 eexcept otherwise provided section 1302 hereof modify eliminate add provisions indenture extent shall necessary obtain rating bonds moodys sp fto amend administrative provisions hereof accommodate provisions alternate credit facility gto amend provisions hereof reflect obligation trustee issuer company disclose information regarding bonds project issuer company issuer letter credit shall required recommended disclosed accordance applicable regulations guidelines established among others american bankers association corporate trust committee section 1302amendments bondholders credit facility issuers consentsection 1302amendments bondholders credit facility issuers consent tc section 1302amendments bondholders credit facility issuers consent l 2 athis indenture may amended time except respect 1the principal redemption price purchase price interest payable upon bonds 2the interest payment dates maturity redemption purchase provisions bonds 3this article xiii supplemental indenture consented credit facility issuer credit facility effect default occurred continuing credit facility company approved majority bondholders would affected action proposed taken bthis indenture may amended respect matters enumerated paragraphs 1 3 subsection section unanimous consent bondholders credit facility issuer credit facility effect default occurred continuing credit facility company issuer section 1303supplemental indentures affecting rights credit facility issuersection 1303supplemental indentures affecting rights credit facility issuer tc section 1303supplemental indentures affecting rights credit facility issuer l 2 anything herein contrary notwithstanding supplemental indenture article xiii judgment credit facility issuer credit facility effect default occurred continuing credit facility adversely affects rights credit facility issuer shall become effective unless credit facility issuer shall consented execution delivery thereof section 1304amendment loan agreementsection 1304amendment loan agreement tc section 1304amendment loan agreement l 2 athe company trustee variable rate period credit facility issuer credit facility effect default occurred continuing credit facility may amend loan agreement provided prior making amendment company shall provide trustee credit facility issuer 1a copy proposed amendment 2an opinion bond counsel effect amendment supplement adversely affect exclusion interest bonds gross income recipients thereof federal income tax purposes unless trustee shall otherwise given consent amendment supplement effect amendment supplement otherwise adversely affect interests bondholders notwithstanding foregoing issuer company trustee variable rate period credit facility issuer credit facility effect default occurred continuing credit facility may amend loan agreement extent may necessary obtain rating bonds moodys sp without providing opinion bond counsel specified paragraph 2 bif company proposes amend loan agreement manner would adversely affect interests bondholders trustee shall notify bondholders proposed amendment may consent thereto consent least majority bondholders would affected action proposed taken provided trustee shall without unanimous consent owners bonds outstanding consent amendment would 1decrease amounts payable note 2change due date principal interest note change prepayment provisions note 3change section 53 loan agreement section 1305amendment loan agreement requiring consent credit facility issuersection 1305amendment loan agreement requiring consent credit facility issuer tc section 1305amendment loan agreement requiring consent credit facility issuer l 2 anything herein contrary notwithstanding amendment change modification loan agreement judgment credit facility issuer affects rights credit facility issuer shall become effective unless credit facility issuer shall consented execution delivery amendment change modification section 1306amendment credit facilitysection 1306amendment credit facility tc section 1306amendment credit facility l 2 initial credit facility may amended extent shall necessary obtain rating bonds moodys sp provided amendment supplement adversely affect interests bondholders trustee shall notify bondholders issuer proposed amendment credit facility would adversely affect interests bondholders may consent thereto consent issuer consent shall unreasonably withheld least majority bondholders would affected action proposed taken provided trustee shall without unanimous consent owners bonds outstanding consent amendment would decrease amount payable credit facility reduce term credit facility section 1307trustee authorized join amendments supplements reliance counselsection 1307trustee authorized join amendments supplements reliance counsel tc section 1307trustee authorized join amendments supplements reliance counsel l 2 trustee authorized join issuer execution delivery supplemental indenture amendment permitted article xiii shall fully protected opinion counsel supplemental indenture amendment permitted duly authorized issuer things necessary make valid binding agreement done provided certain amendments may agreement trustee credit facility issuer require prior consent credit facility issuer article xiv payments section 1401defeasancesection 1401defeasance tc section 1401defeasance l 2 awhen principal redemption price case may interest bonds issued hereunder paid including without limitation purchase price bonds tendered section 202 hereof provision made payment together compensation trustee sums payable hereunder issuer right title interest trustee trust estate security interests shall thereupon cease trustee written demand issuer shall release indenture security interests shall execute documents evidence release may reasonably required issuer shall turn company person body authority may entitled receive balances held hereunder provided payments received trustee credit facility connection release balances shall paid credit facility issuer extent payments payment provision therefor made respect less bonds particular bonds portion thereof provision payment shall considered made shall selected lot trustee thereupon trustee shall take similar action release indenture respect bonds notwithstanding anything contrary contained herein bonds purchased option owners thereof moneys held trustee pursuant article xiv shall remarketed shall cancelled trustee bprovision payment bonds shall deemed made trustee holds bond fund trust irrevocably set aside exclusively payment 1 moneys sufficient make payment provided credit facility held trustee moneys shall constitute available moneys 2 noncallable governmental obligations maturing principal interest amounts times provide sufficient moneys without reinvestment make payment provided trustee shall received opinion bond counsel effect deposit affect exclusion interest bonds gross income recipients thereof federal income tax purposes eg causing bonds classified arbitrage bond within meaning section 148 code provided credit facility held trustee governmental obligations shall deposit trustee separate segregated account period three hundred sixtyseven 367 days prior event bankruptcy occurred governmental obligations purchased available moneys cno bonds respect deposit subsection b made shall deemed paid within meaning article unless trustee satisfied amounts deposited sufficient make payments might become due bonds including purchase price payments bonds tendered option owners purchased company lieu redemption notwithstanding foregoing delivery trustee subsection c shall deemed payment bonds redeemed prior stated maturity bonds shall irrevocably called designated redemption date thereafter bonds may redeemed accordance provisions indenture issuer shall given trustee form satisfactory trustee irrevocable instructions give notice redemption neither obligations moneys deposited trustee pursuant section shall withdrawn used purpose shall segregated held trust payment principal redemption price purchase price applicable interest bonds respect deposit made event moneys obligations applied payment principal redemption price bonds sixty 60 days following deposit thereof trustee shall mail notice stating moneys obligations deposited identifying bonds payment moneys obligations held owners bonds addresses shown bond register danything article xiv contrary notwithstanding moneys governmental obligations deposited set aside trustee pursuant article payment principal redemption price including purchase price applicable bonds interest thereon principal redemption price including purchase price applicable bonds moneys governmental obligations constitute available moneys amendment provisions article shall made without consent owner bonds affected thereby enotwithstanding foregoing provisions relating purchase bonds upon demand bondholders maturity bonds interest payments dates thereof dates premiums notice requirements optional mandatory redemption purchase trustees remedies respect thereto provisions relating exchange transfer registration bonds replacement mutilated destroyed lost stolen bonds safekeeping cancellation bonds nonpresentment bonds holding moneys trust repayments company credit facility issuer bond fund duties trustee connection foregoing fees expenses indemnities trustee shall remain effect shall binding upon trustee issuer company bondholders notwithstanding release discharge lien indenture payment full outstanding bonds section 1402deposit funds payment bondssection 1402deposit funds payment bonds tc section 1402deposit funds payment bonds l 2 principal redemption price bonds become due either maturity call redemption otherwise together interest accruing thereon due date paid provision therefor made accordance section 1401 hereof interest bonds shall cease accrue due date liability issuer respect bonds shall likewise cease except hereinafter provided thereafter owners bonds shall restricted exclusively funds deposited claim whatsoever nature respect bonds trustee shall hold funds trust owners section 1403effect purchase bondssection 1403effect purchase bonds tc section 1403effect purchase bonds l 2 purchase bonds pursuant section 303 hereof shall deemed payment redemption bonds portion thereof purchase operate extinguish discharge indebtedness evidenced bonds article xv miscellaneous provisions article provisions section 1501covenants issuer bind successorssection 1501covenants issuer bind successors tc section 1501covenants issuer bind successors l 2 event dissolution issuer covenants stipulations obligations agreements contained indenture behalf benefit issuer shall bind inure benefit successor successors issuer time officer board commission authority agency instrumentality power duty affecting covenants stipulations obligations agreements shall transferred accordance law term issuer used indenture shall include successor successors section 1502noticessection 1502notices tc section 1502notices l 2 aany notice demand direction request instrument authorized required indenture given filed issuer trustee company credit facility issuer shall writing shall deemed given filed purposes indenture delivered hand delivery mailed first class mail postage prepaid registered certified mail addressed follows 1if issuer tothe rutherford county industrial facilities pollution control financing authority co county manager county office building 601 north main street rutherfordton north carolina 28139 attention chairman 2if company towatts regulator co 815 chestnut street north andover 01845 attention william c mccartney corporate controller copy tojohn r leclaire pc goodwin procter hoar exchange place boston 02109 3if trustee tothe first national bank boston 150 royall street mail stop 450215 canton 02021 attention corporate trust division 4if credit facility issuer tofirst union national bank north carolina 301 south college street t7 charlotte nc 28288 attention international operations corp10 sent telegraph telegram telecopy addressed time date appearing report delivery notwithstanding foregoing delivery bonds optional tender notices trustee tender agent made telegraph telegram telecopy must made delivery hard copy overnight delivery date delivery telegraph telegram telecopy shall effective actual receipt thereof trustee tender agent case may ba duplicate copy notice communication given hereunder either issuer trustee shall also given company call documents received trustee provisions indenture photographic copies thereof shall retained possession indenture shall released accordance provisions indenture subject reasonable times inspection issuer bondholders agents representatives thereof dthe issuer trustee company credit facility issuer may notice given hereunder designate different addresses subsequent notices certificates communications shall sent section 1503trustee paying agent bond registrarsection 1503trustee paying agent bond registrar tc section 1503trustee paying agent bond registrar l 2 trustee hereby designated agrees act payment agent bond registrar respect bonds amounts received credit facility loan agreement section 1504rights indenturesection 1504rights indenture tc section 1504rights indenture l 2 except herein otherwise expressly provided nothing indenture expressed implied intended shall construed confer upon person firm corporation parties hereto company owners bonds issued secured indenture rights indenture provisions hereof indenture provisions intended sole exclusive benefit parties hereto company owners time bonds issued hereunder section 1505form certificates opinionssection 1505form certificates opinions tc section 1505form certificates opinions l 2 except otherwise provided indenture request notice certificate instrument issuer company trustee shall deemed signed proper party parties signed issuer representative company representative respectively trustee may accept rely upon certificate signed issuer representative action taken issuer company representative action taken company section 1506section severability case one provisions indenture bonds issued hereunder shall reason held illegal invalid illegality invalidity shall affect provisions indenture bonds indenture bonds shall construed enforced illegal invalid provision contained therein case covenant stipulation obligation agreement issuer contained indenture bonds shall reason held violation law covenant stipulation obligation agreement issuer shall enforced full extent permitted law section 1507covenants issuer covenants officials individuallysection 1507covenants issuer covenants officials individually tc section 1507covenants issuer covenants officials individually covenants stipulations obligations agreements issuer contained indenture shall deemed covenants stipulations obligations agreements issuer full extent permitted constitution laws state covenant stipulation obligation agreement contained herein shall deemed covenant stipulation obligation agreement present future officer member agent employee issuer individual capacity officer issuer executing bonds shall liable personally bonds subject personal liability accountability reason issuance thereof officer agent employee issuer shall incur personal liability acting proceeding acting proceeding accordance terms indenture section 1508state law governssection 1508state law governs tc section 1508state law governs indenture shall governed construed accordance laws state section 1509payments due days business dayssection 1509payments due days business days tc section 1509payments due days business days case date maturity interest principal bonds date fixed redemption bonds shall city payment day business day payment interest principal need made date may made next succeeding business day force effect made date maturity date fixed redemption provided interest shall accrue period extension section 1510execution indenture may executed multiple counterparts shall regarded purposes original counterparts shall constitute one instrument one counterpart need executed parties witness whereof rutherford county industrial facilities pollution control financing authority caused indenture executed name behalf chairman vice chairman issuer official seal issuer impressed hereon attested secretary assistant secretary issuer trustee caused indenture executed name behalf authorized officer corporate seal impressed hereon attested responsible officer date year first written rutherford county industrial facilities pollution control financing authority chairman attest secretary first national bank boston trustee attest assistant cashier exhibit form bondholders optional tender notice date first national bank boston tender agent bonds issued trust indenture dated september 1 1994 indenture first national bank boston trustee rutherford county industrial facilities pollution control financing authority attention corporate trust department rethe rutherford county industrial facilities pollution control financing authority industrial development revenue refunding bonds watts regulator co project series 1994 numbered cusip aggregate principal amount 5000000 bonds 1the undersigned hereby certifies lawful registered owner bonds described date hereof bonds free clear lien encumbrance 2pursuant provisions indenture undersigned hereby irrevocably requests purchase bonds described 3the date bonds shall purchased shall 19 note date must business day defined indenture least seven days delivery notice tender agent 4the person persons whose order proceeds purchase bonds paid address addresses payee payees 5the undersigned hereby irrevocably authorizes instructs trustee bond registrar defined bonds effect transfer bonds exchanged therefor upon payment purchase price therefor purchasers thereof whether delivers bonds agreed pursuant paragraph 7 hereof 6the undersigned hereby acknowledges even fails deliver bonds may nevertheless purchased pursuant indenture event proposed purchase date set forth paragraph 3 hereof bonds cease outstanding purposes indenture evidence indebtedness issuer respect thereto bear interest 7the undersigned hereby undertakes deliver bonds tender agent 150 royall street mail stop 450110 canton massachusetts 02021 attention manager special projects least five days prior registered investment company holders prior 1000 proposed purchase date set forth paragraph 3 duly endorsed blank transfer name bondholder type print signature guaranteed name institution date exhibit bexhibit b tc exhibit b notice conversion name address owner undersigned officer first national bank boston trustee respect captioned bonds pursuant provisions section 202e certain trust indenture dated 1 1994 rutherford county industrial facilities pollution control financing authority trustee hereby notifies interest rate borne captioned bonds shall converted variable rate fixed rate follows capitalized terms used herein shall meanings provided indenture 1the conversion date 2the placement agent 3the credit facility issuer 4 owners bonds required tender bonds conversion date tender agent address set forth purchase conversion date event owner bonds shall fail tender bonds purchase conversion date bonds shall deemed tendered purchase conversion date 5the address tender agent follows first national bank boston po box 1666 ms 450110 boston 02105 attention managerspecial project 6after seventeenth 17th day preceding conversion date entitled deliver optional tender notice tenth day preceding conversion date entitled tender bond purchase 7in order receive payment purchase price bond deemed tendered must deliver bond office tender agent address shown 1000 conversion date 8interest bond payable including conversion date 9the delivery company trustee letter bond counsel confirming opinion received pursuant notification condition precedent conversion fixed rate event company fails deliver trustee letter bond counsel herein referred conversion interest bonds fixed rate shall take effect bonds shall continue bear interest variable rate day first national bank boston trustee title copy notice delivered tender agent address exhibit 13 municipal water graphic plumbing heating water quality graphic industrial oil gas graphic steam graphic watts industries inc 1995 annual report watts industries inc annual report 1995 financial highlights 1995 1994 amounts thousands except per share information net sales 657666 518541 465796 net earnings 45738 41010 34745 earnings per share 154 138 116 average shares outstanding 29755 29717 30099 stockholders equity 405954 361551 335120 return average stockholders investment 119 118 84 cash dividends per share 24 20 16 43 million environmental restructuring related expenses 31 million cumulative effect accounting change page fifteen year history 2 shareholders 3 growth story continues 4 acquisitions 12 financial section 14 directors officers 32 watts industries inc one worlds largest independent valve companies designs manufactures sells extensive line valves plumbing heating water quality municipal water steam industrial oil gas markets excluding joint ventures watts 4200 employees 28 manufacturing plants worldwide annual sales 658 million fiscal year ended june 30 1995 currently reporting 19 years record sales completing eleventh year aggressive acquisition program 121yearold company established objective reach 1 billion sales end decade strive achieve ambitious growth continuous internal development new products entry new markets specialized valves related products strategic acquisitions complementary businesses united states around world watts industries fifteenyear history net sales dollars millions compounded annual growth rate 18 graphic bar chart describing data 66 72 77 103 124 137 1981 1982 1983 1984 1985 1986 net sales dollars millions compounded annual growth rate 18 146 181 224 292 351 424 1987 1988 1989 1990 1991 1992 net sales dollars millions compounded annual growth rate 18 466 519 658 1993 1994 1995 net income dollars millions compounded annual growth rate 19 52 64 73 95 114 128 1981 1982 1983 1984 1985 1986 43 million environmental restructuring related expenses 31 million cumulative effect accounting change net income dollars millions compounded annual growth rate 19 143 189 23 277 317 347 1987 1988 1989 1990 1991 1992 43 million environmental restructuring related expenses 31 million cumulative effect accounting change net income dollars millions compounded annual growth rate 19 366 41 457 1993 1994 1995 43 million environmental restructuring related expenses 31 million cumulative effect accounting change stockholders equity dollars millions compounded annual growth rate 20 31 37 45 53 64 76 1981 1982 1983 1984 1985 1986 stockholders equity dollars millions compounded annual growth rate 20 105 123 144 171 236 315 1987 1988 1989 1990 1991 1992 stockholders equity dollars millions compounded annual growth rate 20 335 362 406 1993 1994 1995 shareholders pleased report watts industries inc recorded another record year sales earnings net sales fiscal 1995 increased 27 658 million representing 19th consecutive year increased sales net income increased 12 457 million marking 18th year last 19 years record net income fully diluted earnings per share 154 versus 138 last year experienced busiest acquisition year ever purchase three companies two product lines formation two joint ventures china incremental sales annualized basis acquisitions approximately 135 million two chinese joint ventures 60 controlled watts provide sales base excess 20 million fiscal 1996 diverse acquisitions joint ventures allowed us round oil gas valve package domestic international markets expanded presence europe enhanced business strategy china asian markets initiated entry important fast growing consumer doit retail market nationwide home center retailers current annualized sales retail market acquisitions jameco july 28 1994 andersonbarrows march 1 1995 50 million acquisitions joint ventures described greater detail beginning page 4 report excluding acquisitions overall operating results mixed amongst domestic companies higher interest rates doubledigit cost increases brass bronze stainless steel plastic important materials plumbing heating water quality groups negatively impacted operating profits decreased 1 sales increased 8 year tempered economy plumbing heating commercial sectors competitive pricing allow increased costs offset price increase customers therefore focus fiscal 1996 improve margins operating profits cost reduction product redesign efforts operating efficiency improvements integrate newly acquired lines jameco anderson barrows plumbing heating group excluding acquisitions industrial oil gas group sales increase 6 operating profit increase 3 year domestic sales increased industrial oil gas product lines offset decline international oil gas project awards inclusion pibiviesse spa pbvs acquired november 18 1994 oil gas valve product offering expanded fiscal 1996 allowing kf pbvs offer complete quotation package international projects pbvs manufacturing design engineering capabilities especially high pressure large bore diameter ball valves complement kfs expertise smaller lower pressure range products circle seal controls strong year sales profits experienced fiscal 1994 believe bottoming aerospace side business inclusion cryolab zevco product lines acquired fiscal year circle seal controls balance aerospace industrial sales distributionthe domestic municipal water group rebound compared fiscal 1994 sales increase 6 increase operating profits 39 leader group henry pratt accounted increases strong project bookings improved shipments compared prior yearwhile steam products group serves mature domestic market experienced 4 sales growth 14 operating profit improvement led leslie controls spence engineering european water oriented valve companies experienced 16 improvement sales 68 attributable currency exchange factors operating profits increased 2 profit adversely affected inflationary cost pressures experienced domestic plumbing heating water quality groups first joint venture tianjin tanggu watts valve co ltd experienced sales profit growth augurs well fiscal 1996 sales commencing september 1 1994 effective date joint venture 115 million last quarters sales 5 million providing momentum new fiscal year operating profits exceeded 12 sales continue improve additional products manufactured joint venture china market export second joint venture suzhou valve factory located 60 miles northwest shanghai concentrate ball valves oil gas primarily china market also export suzhou valve factory iso 9001 american petroleum institute api certified contributed existing ball valve business joint venture business license issued june 1 1995 expect operations begin end first quarter fiscal 1996 sales outside united states increased 26 represented 29 total sales momentum continues propel us towards objective attaining 1 billion sales end decade fiscal 1996 exploit synergies existing valve companies order improve profit growth consistent sales growth focus consolidation manufacturing support operations eliminate dundant organizational overhead structures maintain commitment participate global economy consistent theme remaining within framework know best namely manufacture valves pipeline accessories theme supported continuous sales profit growth 9 times compared 15 years ago excited prospects next five years beyond july 5 1995 watts industries commenced trading new york stock exchange ticker symbol wts timothy p horne timothy p horne chairman board president chief executive officer growth story continues traditionally watts industries grown responding new opportunities markets served core businesses fiscal 1995 company continued tradition decade acquisition expanding geographically new domestic niches north america watts acquired two businesses complement existing plumbing heating product lines provide entry consumer doityourself market important growth industry two joint ventures china completion major acquisition europe increased companys worldwide presence new domestic niche doityourself north america watts undertaken strategy expand new valve product niches distribution channels within traditional plumbing heating group fiscal 1995 company entered rapidly growing us canadian retailmarkets acquisitions jameco industries wyandanch new york andersonbarrows palmdale california jameco founded 1931 manufactures metal plastic water supply products including stop valves tubular products sink strainers decorative plumbing products net sales 65 million 12 months ended june 30 1995 andersonbarrows founded 1952 annual sales 25 million manufactures compression flare fittings plastic tubing braided metal hose connectors companies target residential construction home repair remodeling segments plumbing heating market complement watts plumbing heating division strong wholesaler distribution presence jameco andersonbarrows also strong positions doityourself plumbing segment new watts together sell 50 million products annually north americas largest home centers building material outlets hardware chains home depot lowes companies payless cashways builders square ace hardware retail doityourself sector grown significantly past two decades growth expected continue graphic photos plumbing heating water quality graphic photos major products relief valves water pressure regulators backflow preventers ball valves hydronic heating valves butterfly valves steam specialty products automatic control valves drainage products water supply stops tubular specialty water supply products flexible water supply connectors fittings tubing products float valves water conditioning valves major markets residential commercial construction new repair remodeling irrigation fire protection heating ventilation air conditioning steam heating refrigeration water distribution original equipment manufacturers principal distribution methods professional contractors installers distributors doit market national catalog distribution companies hardware stores retail home center chains direct sales original equipment manufacturers graphic photos municipal water graphic photos major products butterfly valves ball valves cone valves plug valves venturi flow meters major markets water treatment transmission distribution wastewater treatment power generation principal distribution methods direct contractors municipalities investorowned water companies utilities waterworks distributors graphic photos graphic photos integration jameco andersonbarrows increases manufacturing efficiencies also create opportunities new product development joint marketing programs efficient distribution methods platform launch watts plumbing heating product lines rapidly growing retail market refrigeration fiscal year 1995 watts introduced new line mechanically operated flow control valves refrigeration market new leakproof ball check packed angle diaphragm packless pressure relief valves specifically designed containment chlorofluorocarbon hydrochlorofluorocarbon refrigerants widely considered contribute ozone depletion global warming applications include supermarket refrigeration food storage refrigerated transport chilled water airconditioning systems large scale ice production refrigeration products form synergistic adjunct current plumbing heating product lines enabling watts offer broad comprehensive flow control package heating ventilation airconditioning refrigeration industry joint ventures china presents unique opportunity watts demand valves increases rapid industrialization china developing countries southeast asia markets served china also manufacturing costs developed countries increase many customers north america europe choose buy valves lower costs developing countries china full capability supply market exploit export market example ample oil reserves lacks technology produce highquality valves necessary offshore drilling pipeline transmission consequently china invites joint ventures western companies order gain access advanced technology management knowhow well existing worldwide distribution systems hard currency completion two joint ventures china watts positioned compete oil gas water distribution industrial markets fastest growing economies world twt joint venture fiscal 1995 watts completed joint venture tianjin tanggu valve plant companys first expansion asian market became operational september 1 1994 joint venture watts 60 controlling interest manufactures butterfly valves valve products water distribution industrial markets china export parts world tianjin tanggu valve plant founded 1956 one chinas first valve factories obtain iso 9001 certification one countrys major valve manufacturers existing business part joint venture named tianjin tanggu watts valve co ltd twt 900 employees located tianjin 70 miles southeast beijing first year operation joint venture introduced several new butterfly valves plans introduce fiscal 1996 automatic control valves rubber bonded disc gate valves new valve technology conformance applicable iso standards often required outside north america twt plant supplies several watts divisions north america valves water industrial applications also operates support individual component sourcing china watts divisions number manufacturing improvements made plant including realignment workshops provide cellular manufacturing better work flow introducing cutting tool technology manufacturing engineering programs improvements assembly process increase productivity foundry improvement programs increased floor molding capacity better quality twt joint venture provides valuable base watts grow rapidly expanding chinese market supplies products worldwide markets existing distribution channels sufawatts joint venture watts latest joint venture suzhou valve factory sufa announced april 1995 produce sell ball valves petrochemical industrial markets china export parts world sufawatts watts 60 controlling interest complement businesses kf industries united states pbvs italy create global ball valve business oil gas industrial markets founded 1952 sufa leader china valve market one countrys largest valve manufacturersthe ball valve business sufa contributing sufawatts joint venture initially provide approximately 25 million sales products include flanged welded end floating trunnion ball valves sizes 6 36 new facility built suzhou joint venture estimated 1993 china imported approximately 100 million ball valves use offshore oil platforms alone sufawatts joint venture places watts position participate market well benefit increasing demand high tech nology high performance valves growing europe since 1987 watts made five acquisitions western europe serve plumbing heating water quality municipal water markets manufacturing distribution facilities netherlands france italy spain united kingdom well sales distribution centers germany belgium austria switzerland graphic photos steam graphic photos major products control valves steam pressure regulators steam water heaters relief valves butterfly valves ball valves shutoff valves check valves desuperheaters noise suppression products traps strainers major markets commercial industrial buildings power generation industrial processing including chemicals petroleum refining pulp paper transportation us navy shipboard commercial marine heat ventilation air conditioning original equipment manufacturers principal distribution methods specialty distributors manufacturers representatives direct end users graphic photos industrial oil gas graphic photos major products floating trunnion ball valves butterfly valves electric pneumatic actuators oil field check valves needle valves gate valves aerospace industrial check valves safety relief valves solenoid motor operated valves hydraulic pneumatic service major markets us process industries including chemical processing petroleum refining pulp paper food processing textile power generation domestic inter national oil gas production pipeline construction maintenance aerospace military commercial aircraft manufacturing maintenance principal distribution methods us process industries distributors domestic oil gas stocking supply stores internationally commissioned agents aerospace aircraft specialty distributors manufacturers representatives graphic photos graphic photos growing industrialization countries eastern europe provides new opportunities watts products six sales people poland two czech republic one russia total sales former eastern bloc countries doubled past year 1 million 25 million pbvs italy november 1994 watts announced acquisition pibiviesse spa pbvs mazzo di rho italy manufacturer ball valves oil gas markets pbvs annual sales approximately 25 million extensive experience international pipeline projects especially north sea middle east founded 1981 pbvs developed complete range trunnion mounted ball valves manufacturing capabilities 60 diameter including class 2500 pressure ratings meet demanding international oil gas pipeline production requirements pbvs complement watts major oil gas subsidiary kf industries oklahoma city acquired 1988 also manufactures valves oil gas industries kf developed strong product range floating ball trunnion mounted ball valves small medium size range extending 36 kf pbvs provide sales outlet others products acquisition pbvs gives watts european base access emerging oil field business states former soviet union eastern europe middle east full range product offerings kf pbvs well combined strengths engineering manufacturing international selling increases watts overall capabilities bidding major pipeline projects throughout world years ahead looking toward future leader valve technology well century watts industries strive continue growth internal development entry new markets strategic acquisitions around world company remain focused traditional business specialized valves related products essential process requires controlling flow water steam gas oil chemicals fluids acquisitions fiscal year watts regulator company founded spence engineering companywalden new york hale oilfield productshouston texas james jones companyel monte california prier frostproof hydrantsfranklin new hampshire muesco valve companyhouston texas flippen float valveschesnee south carolina ocean bv abeerbeek netherlands asme steam pop relief valvesburlington ontario canada epps mfg ltd woodbridge ontario canada taras valvechesnee south carolina kf industries incoklahoma city oklahoma eagle valve companyoklahoma city oklahoma leslie controlstampa florida nicholson steam trapwalden new york circle seal controlscorona california sfrfressenneville france baileytampa florida henry pratt companyaurora illinois contromaticsfranklin new hampshire waletzko armatureneerbeek netherlands rockford controlsoklahoma city oklahoma intermes groupcaldaro italy edward barber company ltdtottenham england enpoco ltdburlington ontario canada ancon industriesburlington ontario canada jameco industries incwyandanch ny tianjin tanggu watts valve co ltdtianjin peoples republic china cryolabcorona california pbvsmazzo di rho italy zevcocorona california andersonbarrowspalmdale california suzhou watts valve co ltdsuzhou peoples republic china joint venture graphic world may cities indicated facility locations plumbing heating water quality municipal water steam industrial oil gas graphic pie charts describing data sales business segment plumbing heating 421 water quality 97 municipal water 144 oil gas 133 30 industrial 111 steam 94 sales geographic region north america 767 europe 173 asia 30 total sales 658 million watts industries inc annual report 1995 financial section graphic photos page consolidated financial statements 15 report independent auditors 15 managements discussion 26 quarterly information 29 fifteen year financial summary 30 consolidated statements earnings amounts thousands except per share information fiscal year ended june 30 1995 1994 1993 net sales 657666 518541 465796 cost goods sold 424680 322336 292103 gross profit 232986 196205 173693 selling general administrative expenses 149033 121597 111550 unusual charges 7000 operating earnings 83953 74608 55143 income expense interest income 1985 2986 4397 interest expense 10685 8779 9152 1606 1480 1248 10306 7273 6003 earnings income taxes cumulative effect change accounting 73647 67335 49140 provision income taxes 27909 26325 18734 earnings cumulative effect change accounting 45738 41010 30406 cumulative effect change accounting income taxes 3132 net earnings 45738 41010 27274 earnings per common share earnings cumulative effect change accounting 154 138 101 cumulative effect change accounting income taxes 10 net earnings 154 138 91 dividends paid per common share 24 20 16 weighted average number common shares 29755 29717 30099 accompanying notes integral part consolidated financial statements report ernst young llp independent auditors board directors watts industries inc audited accompanying consolidated balance sheets watts industries inc subsidiaries june 30 1995 1994 related consolidated statements earnings stockholders equity cash flows three years period ended june 30 1995 financial statements responsibility companys management responsibility express opinion financial statements based audits audit financial statements watts industries europe bv whollyowned subsidiary statements reflect total assets 171700000 107700000 june 30 1995 1994 respectively total revenues 108700000 fiscal year 1995 79700000 fiscal year 1994 57600000 fiscal year 1993 statements audited auditors deloitte touche whose reports furnished us opinion insofar relates data included watts industries europe bv based solely reports conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free materialmisstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits reports auditors provide reasonable basis opinion based audits reports auditors financial statements referred present fairly material respects consolidated financial position watts industries inc subsidiaries june 30 1995 1994 consolidated results operations cash flows three years period ended june 30 1995 conformity generally accepted accounting principles discussed note 4 consolidated financial statements fiscal year 1993 company changed method accounting income taxes ernst youngentob august 8 1995 consolidated balance sheets amounts thousands except share information 1995 1994 current assets cash equivalents 4257 6231 shortterm investments 4483 58769 trade accounts receivable less allowance 5828 1995 4488 1994 doubtful accounts 118769 79342 inventories finished goods 82638 60104 work process 42034 39671 raw materials 76155 53305 200827 153080 prepaid expenses current assets 13588 8484 deferred income taxes 13206 14973 total current assets 355130 320879 assets goodwill net accumulated amortization 10827 1995 7232 1994 149078 89500 17351 12222 166429 101722 property plant equipment land 14306 11263 buildings improvements 74804 62279 machinery equipment 181446 149652 construction progress 9414 7181 279970 230375 less allowance depreciation 111558 94126 168412 136249 689971 558850 liabilities stockholders equity current liabilities accounts payable 40726 24672 accrued expenses liabilities 46193 36840 accrued compensation 10796 8355 income taxes payable 3625 3340 current portion longterm debt 11767 1141 total current liabilities 113107 74348 longterm debt net current portion 132821 97479 deferred income taxes 17569 16357 liabilities 14098 9115 minority interest 6422 stockholders equity preferred stock 10 par value 5000000 shares authorized shares issued outstanding class common stock 10 par value 80000000 shares authorized 18218216 shares 1995 18009822 1994 issued outstanding 1822 1801 class b common stock 10 par value 25000000 shares authorized 11404470 shares 1995 11472470 shares 1994 issued outstanding 1140 1147 additional paidin capital 95496 92996 retained earnings 307493 268706 foreign currency translation adjustment 3 3099 405954 361551 689971 558850 accompanying notes integral part consolidated financial statements accompanying notes integral part consolidated financial statements accompanying notes integral part consolidated financial statements notes consolidated financial statements 1 description business company designs manufactures sells extensive line valves water plumbing heating municipal water quality industrial steam oil gas markets 2 accounting policies principles consolidation consolidated financial statements include accounts watts industries inc majorityand whollyowned subsidiaries company upon consolidation significant intercompany accounts transactions eliminated foreign currency translation balance sheet accounts foreign subsidiaries translated united states dollars fiscal yearend exchange rates operating accounts translated weighted average exchange rates year net translation gains losses adjusted directly separate component stockholders equity cash equivalents shortterm investments cash equivalents consist investments maturities three months less date purchase shortterm investments consist corporate municipal bonds participation mutual funds whose portfolios consist principally united states government securities shortterm investments valued market concentrations credit risk financial instruments potentially subject company concentration credit risk consist principally cash equivalents shortterm investments trade receivables company places cash equivalents shortterm investments high credit quality financial institutions policy limits amount credit exposure one financial institution concentrations credit risk respect trade receivables limited due large number customers included companys customer base dispersion across many different industries geographic areas june 30 1995 company significant concentrations credit risk inventories stated principally lower cost firstin firstout method market property plant equipment property plant equipment recorded cost depreciation provided straight line basis estimated useful lives assets income taxes deferred income taxes recognized temporary differences financial statement income tax bases assets liabilities goodwill represents excess cost fair value net assets businesses acquired balance amortized 40 years using straightline method carrying value goodwill reviewed facts circumstances suggest may impaired review indicates goodwill recoverable determined based undiscounted operating cash flows entity acquired remaining amortization period companys carrying value goodwill reduced fair value earnings per common share earnings per common share calculated using weighted average number class b common shares outstanding period common stock equivalents attributable dilutive effect class common stock options basis presentation certain amounts fiscal years 1994 1993 reclassified permit comparison 1995 presentation 3 business acquisitions fiscal year 1995 company completed acquisition five businesses commenced one joint venture valve manufacturers principally include jameco industries inc july 1994 tianjin tanggu watts valve co ltd peoples republic china august 1994 pibiviesse spa italy november 1994 andersonbarrows metals corporation march 1995 aggregate purchase price investments amounted approximately 81000000 acquisitions accounted purchase method results operations acquired businesses included consolidated financial statements dates acquisition acquisitions occurred beginning fiscal year 1995 1994 effect operating results would material 4 income taxes fiscal year 1993 company adopted statement financial accounting standards 109 accounting income taxes cumulative effect change accounting principle decreased fiscal year 1993 net earnings 31 million 10 per share significant components companys deferred tax liabilities assets follows total income taxes reported different would computed applying federal statutory tax rate earnings income taxes reasons difference follows june 30 1995 company foreign net operating loss carryforwards 52 million income tax purposes expire fiscal years 1996 2005 addition foreign net operating losses 45 million carried forward indefinitely carryforwards resulted primarily business acquisitions undistributed earnings companys foreign subsidiaries amounted approximately 43 million 36 million 29 million june 30 1995 1994 1993 respectively earnings considered indefinitely reinvested accordingly provision us federal state income taxes provided thereon upon distribution earnings form dividends otherwise company subject us income taxes subject adjustment foreign tax credits withholding taxes payable various foreign countries determination amount us income tax liability would incurred practicable complexities associated hypothetical calculation however unrecognized foreign tax credits would available reduce portion us income tax liability withholding taxes approximately 31 million would payable upon remittance previously unremitted earnings june 30 1995 company made income tax payments 252 million 314 million 205 million 1995 1994 1993 respectively 5 accrued expenses liabilities 6 financing arrangements longterm debt consists following principal payments next five fiscal years due follows 1996d 11767000 1997d2659000 1998d2003000 1999d1613000 2000d32201000 interest paid fiscal years 1995 1994 1993 approximates interest expense certain companys loan agreements contain covenants require among items maintenance certain minimum financial ratios limit companys ability enter secured borrowing arrangements amounts exceeding 10 companys consolidated stockholders equity unless 83u8 notes secured ratably borrowings restrictive loan covenant company 33 million available june 30 1995 payment dividends 7 common stock january 18 1994 board directors declared twoforone stock split effective march 15 1994 form dividend one additional share companys common stock class b share owned stockholders record close business march 1 1994 par value remained 10 per share earnings per share cash dividends per common share weighted average common shares outstanding common stock option information restated reflect stock split though occurred july 1 1992 class common stock class b common stock equal dividend liquidation rights share companys class common stock entitled one vote matters submitted stockholders share class b common stock entitled ten votes matters shares class b common stock convertible shares class common stock onetoone basis option holder company reserved total 14554722 shares class common stock issuance incentive stock option plan nonqualified stock option plan conversion shares classeb common stock class common stock 8 qualified nonqualified stock option plans company established qualified incentive stock option plan 1986 whereunder options purchase 1980000 shares class common stock may granted key employees options granted exercise price equal 100 fair market value per share date grant addition company established nonqualified stock option plan 1989 whereunder options purchase 2000000 shares class common stock may granted key employees options granted exercise price determined board directors less 50 fair market value per share date grant outstanding options generally vest rate 20 per year june 30 1995 1994 options purchase 248771 238312 shares respectively exercisable 2131414 2234914 options respectively available future grants companys stock option plans 9 employee benefit plans company sponsors 401k savings plan substantially domestic non union employees plan company matches specified percentage employee contributions subject certain limitations addition company sponsors defined benefit plans covering substantially domestic non union employees companys funding policy contribute annually maximum amount deducted federal income tax purposes june 30 1995 1994 fair value assets held trust companys defined benefit plans approximated related projected benefit obligation expenses related plans immaterial three years period ended june 30 1995 10 commitments contingencies company engaged various claims litigation arising operations opinion management uninsured losses resulting matters material adverse impact consolidated financial position future results operations company named potentially responsible party respect identified contaminated sites level contamination varies significantly site remediation efforts underway various stages certain cases remediation begun company evaluated potential exposure based currently available information recorded estimate liability environmental matters 11 financial instruments fair value longterm debt fair value companys 83u8 notes due 2003 based quoted market prices fair value companys variable rate debt approximates carrying value carrying amount estimated fair market value companys longterm debt including current portion follows forward exchange contracts company time enters forward exchange contracts hedge certain firm purchase commitments third parties present foreign exchange risk effect practice reduce impact foreign exchange movements companys operating income capital expenditures company also hedges using forward exchange contracts certain intercompany transactions present foreign exchange risk company engage currency speculation gains losses contracts including related intercompany activity hedge specific foreign currency commitments third parties deferred accounted part transaction hedged gains losses intercompany hedges included determination net income amounts hedged programs fiscal year 1995 immaterial outstanding hedge contracts june 30 1995 12 unusual charges december 1992 company recorded unusual charges 7 million unusual charges related environmental matters costs associated downsizing restructuring certain previously acquired companies charges include approximately 2 million relating resolution environmental litigation arising cercla comprehensive environmental response compensation liability act involving manufacturing facility sold 1978 cleanup costs principally relating certain companys foundry operations 3 million accrual estimated future environmental cleanup costs 2 million relating downsizing certain previously acquired operations unfavorably impacted reduced military spending consolidation relocation operations previously acquired business 13 financial information geographic area financial information geographic area summarized follows transfer prices foreign subsidiaries intended produce profit margins commensurate sales marketing efforts included domestic sales export sales 43 million fiscal year 1995 454 million fiscal year 1994 316 million fiscal year 1993 14 quarterly financial information unaudited amounts thousands except share information earnings per share dividends paid per share restated reflect stock split effected march 1994 though occurred july 1 1993 managements discussion analysis financial condition results operations results operations fiscal year ended june 30 1995 compared fiscal year ended june 30 1994 net sales increased 139125000 268 657666000 increase attributable inclusion net sales acquired companies establishment companys chinese joint venture increased unit shipments certain product lines net sales jameco industries inc jameco acquired july 1994 located new york pibiviesse spa pbvs acquired november 1994 located italy andersonbarrows metals corporation anderson barrows acquired march 1995 located california establishment tianjin tanggu watts valve co ltd twt joint venture august 1994 located tianjin peoples republic china represented approximately 98054000 increase net sales company increased unit shipments plumbing heating valves industrial valves steam valves company increased net sales europe 12900000 68 increase due strength foreign currencies versus us dollar international sales 193000000 represented 29 total net sales company intends maintain strategy seeking acquisition opportunities well expanding existing market position achieve sales growth gross profit increased 36781000 188 232986000 decreased percentage net sales 378 354 decreased percentage primarily attributable inclusion acquired companies currently operate lower gross margins rest company gross profit percentage also adversely affected increased raw materials costs primarily bronze ingot brass rod selling general administrative expenses increased 27436000 226 149033000 decreased percentage net sales 235 227 increase expense primarily attributable inclusion expenses acquired companies discussed increased international selling expenses commissions associated increased sales volumes interest income decreased 1001000 335 1985000 due decreased levels cash shortterm investments interest expense increased 1906000 217 10685000 increase attributable increased levels debt incurred association acquisitions discussed effective tax rate company 379 year ended june 30 1995 compared 391 year ended june 30 1994 decreased percentage primarily attributable lower effective tax rates experienced germany holland due tax planning strategies executed year result prior european acquisitions guarantee lower effective tax rate continue future also companys earnings china currently exempt taxation china period two years net earnings increased 4728000 115 45738000 companys return investment year ended june 30 1995 119 compared 118 year ended june 30 1994 change foreign exchange rates since june 30 1994 material impact results operations financial condition company results operations fiscal year ended june 30 1994 compared fiscal year ended june 30 1993 net sales increased 52745000 113 518541000 increase attributable inclusion net sales acquired companies increased unit shipments certain product lines net sales intermes spa intermes acquired november 1992 edward barber company ebco acquired may 1993 ancon products inc ancon acquired july 1993 enpoco canada ltd enpoco acquired november 1993 represented approximately 56 increase company increased unit shipments plumbing heating valves water quality valves oil gas valves increases partially offset decreased unit shipments municipal water valves aerospacemilitary valves international sales increased 23 29 total sales principally result acquisitions discussed export sales increased almost 14000000 44 45400000 primarily due increased shipments oil gas valves gross profit increased 22512000 130 196205000 increased percentage net sales 373 378 increased percentage primarily attributable improved manufacturing performance increased volume particularly plumbing heating water quality segments well decreased costs bronze ingot selling general administrative expenses increased 3047000 26 121597000 company recorded 7000000 unusual charges year ended june 30 1993 environmental matters costs associated downsizing restructuring certain acquired companies excluding effect charge selling general administrative expenses would increased 10047000 90 period ended june 30 1994 increase primarily attributable inclusion expenses acquired companies increased commissions associated higher sales volume increases partially offset decreased spending several subsidiaries result downsizing programs implemented last fiscal year interest income decreased 1411000 321 2986000 due decreased levels cash shortterm investments net earnings increased 13736000 504 41010000 company incurred 7000000 unusual charges cumulative effect change accounting method fiscal 1993 net earnings would increased 185 companys return investment fiscal year ended june 30 1994 118 companys return investment fiscal year ended june 30 1993 change accounting method 7000000 unusual charges 104 compares 137 fiscal year 1992 158 fiscal year 1991 176 fiscal year 1990 primary reasons declining percentages increase stockholders equity associated conversion companys 44000000 convertible debentures prior march 15 1992 sale february 28 1991 920000 shares class common stock public offering price public 4050 per share stockholders equity increased 78732000 result transactions also resulted relatively high level cash shortterm investments also effect decreasing return investment ratio due lower return earned assets compared return earned operating assets change foreign exchange rates since june 30 1993 material impact results operations financial condition company weighted average number common shares giving effect two one stock split described note 7 accompanying consolidated financial statements outstanding june 30 1994 decreased 29716531 30098712 fully diluted earnings per share decrease result repurchase company prior stock split 342700 shares class common stock primary fully diluted earnings per share 138 period ended june 30 1994 compared 116 unusual charges cumulative effect change accounting method period june 30 1993 liquidity capital resources year ended june 30 1995 company one wholly owned subsidiaries company invested five acquisitions commenced one joint venture july 1994 company purchased jameco industries inc located wyandanch new york jameco manufacturer metal plastic water supply products including valves tubular products sink strainers sold primarily residential construction home repair remodeling markets united states jameco net sales approximately 56000000 twelve months ended june 30 1994 august 1994 company entered joint venture valve company tianjin peoples republic china manufacture butterfly valves chinese export markets companys investment 8500000 represented 60 interest joint venture joint venture immediately purchased 3500000 inventory minority partner accordance joint venture agreement remainder joint venture investment 5000000 utilized working capital fixed asset purchases november 1994 company purchased pibiviesse spa located mazzo di rho italy pbvs manufacturer valves primarily oil gas applications pbvs net sales approximately 34000000 twelve months ended june 30 1994 august december 1994 company acquired two product lines first line cryogenic valves used industrial applications second line check relief valves used aerospace military applications march 1995 company purchased andersonbarrows metals corporation located palmdale california anderson barrows manufacturer compression flare fittings plastic tubing braided metal hose connectors sold primarily domestic residential construction home repair remodeling markets anderson barrows net sales approximately 21000000 twelve months ended december 31 1994 aggregate purchase price investments 81008000 certain adjustments plus acquired debt 33701000 company repaid 18729000 debt acquired three companies year ended june 30 1995 company spent 31025000 capital expenditures primarily manufacturing machinery equipment part commitment continuously improve manufacturing capabilities working capital june 30 1995 242023000 compared 246531000 june 30 1994 cash shortterm investments 8740000 june 30 1995 compared 65000000 june 30 1994 ratio current assets current liabilities 31 1 june 30 1995 compared 43 1 june 30 1994 debt percentage total capital employed 263 june 30 1995 compared 214 june 30 1994 order support companys acquisition program working capital requirements arise acquisitions general corporate purposes company entered five year commitment unsecured line credit 125000000 expiring august 1999 please see note 6 accompanying consolidated financial statements june 30 1995 company net borrowings 31000000 credit facility company time involved environmental proceedings incurs costs ongoing basis related environmental matters company named potentially responsible party respect currently identified contaminated sites various stages remediation process company evaluated potential exposure based currently available information recorded estimate liability environmental matters ultimate outcome environmental matters cannot determined company currently anticipates incur significant expenditures fiscal 1996 connection environmentally contaminated sites please see note 10 accompanying consolidated financial statements subsequent year end company entered joint venture suzhou valve factory suzhou peoples republic china company invest total 6000000 60 interest joint venture fiscal year 1996 joint venture manufacture oil gas valves chinese export markets company anticipates available funds provided current operations sufficient meet current operating requirements anticipated capital expenditures least next 24 months graphic photo board directors board directors left right frederic b horne gordon w moran noah herndon wendy e lane kenneth j mcavoy timothy p horne daniel j murphy iii david bloss sr graphic photo corporate officers corporate officers front row left right timothy p horne david bloss sr middle row left right kenneth j mcavoy william c mccartney top row left right robert mclaurin suzanne zabitchuck michael fifer shown frederic b horne directors timothy p horne chairman board president chief executive officer corporation david bloss sr executive vice president corporation kenneth j mcavoy chief financial officer treasurer secretary corporation frederic b horne corporate vice president corporation noah herndon partner brown brothers harriman company wendy e lane chairman lane holdings inc gordon w moran president chief executive officer hollingsworth vose company daniel j murphy iii chairman northmark bank corporate officers timothy p horne chairman board president chief executive officer david bloss sr executive vice president kenneth j mcavoy chief financial officer executive vice president european operations frederic b horne corporate vice president suzanne zabitchuck corporate counsel assistant secretary william c mccartney vice president finance controller robert mclaurin corporate vice president asian operations michael fifer vice president corporate development corporate information executive offices 815 chestnut street north andover 018456098 tel 5086881811 fax 5086885841 registrar transfer agent first national bank boston 100 federal street boston 02110 counsel goodwin procter hoar exchange place boston 02109 auditors ernst young llp 200 clarendon street boston 02116 annual meeting october 17 1995 1000 andover inn andover stock listing new york stock exchange ticker symbol wts form 10k stockholders may obtain without charge copy companys recent annual report form 10k filed securities exchange commission writing watts industries inc attn chief financial officer 815 chestnut st north andover 018456098 watts industries inc 815 chestnut street north andover massachusetts 018456098 ar 9536 printed usa exhibit 21 direct indirect subsidiaries watts industries inc 9195 domestic watts international sales corp massachusetts watts investment company delaware watts regulator company massachusetts watts securities corp massachusetts circle seal controls inc delaware green country castings inc oklahoma henry pratt company delaware james jones company california kf industries inc oklahoma kf sales corp delaware rudolph labranche inc new hampshire leslie controls inc new jersey nicholson steam trap inc delaware spence engineering company inc delaware ancon usa inc delaware andersonbarrows metals corp california jameco acquisition corp delaware jameco industries inc new york rg laurence company inc new jersey international watts industries canada inc canada watts industries europe bv netherlands watts industries france sa france watts industries germany gmbh germany wattsco international us virgin islands watts ocean bv netherlands societe des etablissements rene trubert france watts sfr sa france watts uk ltd united kingdom edward barber co ltd united kingdom edward barber uk ltd united kingdom grc controls sa spain hst ag switzerland hst gmbh austria intermes spa italy intermes uk ltd united kingdom kf industries europe bv netherlands kingsworth products ltd united kingdom leslie international vi virgin islands mtr gmbh germany ocean bv netherlands pibiviesse spa italy philabel bv netherlands watts ag switzerland watts ocean nv belgian jameco export sales corporation us virgin islands watts intermes lda portugal yet incorporated wig armaturen vertriebs gmbh germany wsa heizungs und sanitartechnik gmbh germnay wic verwaltungs und beteiligungs gmbh germany londa spa italy addition foregoing company 80 interest de martin srl italy 59 interest isi spa italy 60 interest tianjin tanggu watts valve company limited chinese joint venture 60 interest suzhou watts valve co ltd chinese joint ventureitem 14 exhibits financial statement schedules reports form 8k a1 financial statements following financial statements included separate section report commencing page numbers specified report independent auditors 24 consolidated statements operations three years period ended june 30 1996 25 consolidated balance sheets june 30 1996 1995 26 consolidated statements stockholders equity three years period ended june 30 1996 27 consolidated statements cash flows three years period ended june 30 1996 28 notes consolidated financial statements 29 a2 schedules schedule ii valuation qualifying accounts three years period ended june 30 1996 42 schedules provision made applicable accounting regulations securities exchange commission required related instructions inapplicable therefore omitted a3 exhibits 101106 106i 106ii 106iii 108 1022 1022i 1030 constitute management contracts compensation plans arrangements company required filed exhibits annual report upon written request stockholder chief financial officer companys principal executive office company provide exhibits listed exhibit description 31 restated certificate incorporation amended 13 32 amended restated bylaws 1 91 horne family voting trust agreement1991 dated october 31 1991 2 92 amendment dated december 18 1995 horne family voting trust agreement1991 dated october 31 1991 101 employment agreement effective september 1 1996 registrant timothy p horne 102 supplemental compensation agreement effective september 1 1996 registrant timothy p horne 103 deferred compensation agreement registrant timothy p horne amended 4 104 1986 incentive stock option plan amended including form option agreement 3 105 1989 nonqualified stock option plan including form option agreement 3 106 watts industries inc retirement plan salaried employees dated december 30 1994 amended restated effective january 1 1994 13 106i amendment number 1 watts industries inc retirement plan salaried employees dated april 16 1996 effective january 1 1994 106ii amendment number 2 watts industries inc retirement plan salaried employees dated october 17 1995 effective september 30 1995 106iii amendment number 3 watts industries inc retirement plan salaried employees dated april 16 1996 effective january 1 1996 107 registration rights agreement dated july 25 19865 108 executive incentive bonus plan amended 13 109 indenture dated december 1 1991 registrant first national bank boston trustee including form 838 note due 2003 8 1010 loan agreement mortgage among industrial development authority state new hampshire watts regulator co arlington trust company dated august 1 1985 4 1011 amendment agreement relating watts regulator co canaan franklin new hampshire facilities financing dated december 31 1985 4 1012 sale agreement village walden industrial development agency spence engineering company inc dated june 1 1994 12 1013 letter credit reimbursement guaranty agreement dated june 1 1994 among registrant spence engineering company inc first union national bank north carolina 12 1013i amendment number 1 letter credit reimbursement guaranty agreement dated june 1 1994 among registrant spence engineering company inc first union national bank north carolina 1014 trust indenture village walden industrial development agency first national bank boston trustee dated june 1 1994 12 1015 loan agreement hillsborough county industrial development authority leslie controls inc dated july 1 1994 12 1016 letter credit reimbursement guaranty agreement dated july 1 1994 among registrant leslie controls inc first union national bank north carolina 12 1016i amendment number 1 letter credit reimbursement guaranty agreement dated july 1 1994 among registrant leslie controls inc first union national bank north carolina 1017 trust indenture hillsborough county industrial development authority first national bank boston trustee dated july 1 1994 12 1018 loan agreement rutherford county industrial facilities pollution control financing authority watts regulator company dated september 1 199413 1019 letter credit reimbursement guaranty agreement dated september 1 1994 among registrant watts regulator company first union national bank north carolina 13 1019i amendment 1 letter credit reimbursement guaranty agreement dated september 1 1994 among registrant watts regulator company first union national bank north carolina 1020 trust indenture rutherford county industrial facilities pollution control financing authority first national bank boston trustee dated september 1 1994 13 1021 amended restated stock restriction agreement dated october 30 19912 1022 watts industries inc 1991 nonemployee directors nonqualified stock option plan 7 1022i amendment 1 watts industries inc 1991 nonemployee directors nonqualified stock option plan 1023 letters credit relating retrospective paid loss insurance programs 11 1024 form stock restriction agreement management stockholders 5 1025 revolving credit agreement dated december 23 1987 nederlandse creditbank nv watts regulator nederland bv related guaranty watts industries inc watts regulator co dated december 14 1987 6 1026 loan agreement dated september 1987 related mortgage nv sallandsche bank 6 1027 agreement plan merger dated august 22 1991 relating acquisition registrant henry pratt company 9 1028 agreement sale shares intermes spa riaf holding ag participations multiscope due srl dated november 6 1992 10 1029 revolving credit agreement dated august 30 1994 among watts investment company certain financial institutions first national bank boston agent registrant guarantor 12 1029i amendment number 1 dated june 30 1995 revolving credit agreement dated august 30 1994 1029ii amendment number 2 dated april 15 1996 revolving credit agreement dated august 30 1994 1030 watts industries inc management stock purchase plan dated october 17 199514 11 statement regarding computation earnings per common share 21 subsidiaries 231 consent ernst young llp independent auditors 232 consent deloitte touche independent auditors 27 financial data schedule 1 incorporated reference relevant exhibit registrants current report form 8k filed securities exchange commission may 15 1992 2 incorporated reference relevant exhibit registrants current report form 8k filed securities exchange commission november 14 1991 3 incorporated reference relevant exhibit registrants annual report form 10k filed securities exchange commission september 28 1989 4 incorporated reference relevant exhibit registrants registration statement form s1 336515 filed securities exchange commission june 17 1986 5 incorporated reference relevant exhibit registrants registration statement form s1 336515 filed securities exchange commission part second amendment registration statement august 21 1986 6 incorporated reference relevant exhibit registrants registration statement form s1 3327101 filed securities exchange commission february 16 1989 7 incorporated reference relevant exhibit registrants amendment 1 form 10k fiscal 1992 filed securities exchange commission march 11 1993 8 incorporated reference relevant exhibit registrants annual report form 10k filed securities exchange commission september 16 1992 9 incorporated reference exhibit 1033 registrants annual report form 10k filed securities exchange commission september 24 1991 10 incorporated reference relevant exhibit registrants amendment 2 form 8k dated november 6 1992 filed securities exchange commission february 22 1993 11 incorporated reference relevant exhibit registrants annual report form 10k filed securities exchange commission september 24 1993 12 incorporated reference relevant exhibit registrants annual report form 10k filed securities exchange commission september 26 1994 13 incorporated reference relevant exhibit registrants annual report form 10k filed securities exchange commission september 28 1995 14 incorporated reference relevant exhibit registrants registration statement form s8 3364627 filed securities exchange commission november 29 1995 filed exhibit report securities exchange commission b reports form 8k registrant file reports form 8k last quarter period covered annual report signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized watts industries inc timothy p horne timothy p horne chairman board president chief executive officer dated september 3 1996 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated signature title date timothy p horne chairman board september 3 1996 president chief executive timothy p horne officer principal executive officer director kenneth j mcavoy chief financial officer september 3 1996 treasurer principal kenneth j mcavoy financial accounting officer secretary director david bloss sr executive vice president september 3 1996 director david bloss sr frederic b horne corporate vice president september 3 1996 director frederic b horne noah herndon director september 3 1996 noah herndon wendy e lane director september 3 1996 wendy e lane gordon w moran director september 3 1996 gordon w moran daniel j murphy iii director september 3 1996 daniel j murphy iii report ernst young llp independent auditors board directors watts industries inc audited accompanying consolidated balance sheets watts industries inc subsidiaries june 30 1996 1995 related consolidated statements operations stockholders equity cash flows three years period ended june 30 1996 audits also included financial statement schedule listed index item 14a financial statements schedule responsibility companys management responsibility express opinion financial statements schedule based audits audit financial statements watts industries europe bv whollyowned subsidiary statements reflect total assets 136500000 165700000 june 30 1996 1995 respectively net sales 118700000 fiscal year 1996 93500000 fiscal year 1995 67000000 fiscal year 1994 statements schedule audited auditors deloitte touche whose reports furnished us opinion insofar relates data included watts industries europe bv based solely reports conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits reports auditors provide reasonable basis opinion based audits report auditors consolidated financial statements referred present fairly material respects consolidated financial position watts industries inc subsidiaries june 30 1996 1995 consolidated results operations cash flows three years period ended june 30 1996 conformity generally accepted accounting principles also opinion based audits report auditors related financial statement schedule considered relation basic financial statements taken whole presents fairly material respects information set forth therein discussed note 2 consolidated financial statements fiscal year 1996 company adopted statement financial accounting standard 121 accounting impairment longlived assets longlived assets disposed ernst young llp august 6 1996 boston massachusetts watts industries inc subsidiaries consolidated statements operations amounts thousands except per share information accompanying notes integral part consolidated financial statements watts industries inc subsidiaries consolidated balance sheets amounts thousands except share information accompanying notes integral part consolidated financial statements watts industries inc subsidiaries consolidated statements stockholders equity amounts thousands except share information accompanying notes integral part consolidated financial statements watts industries inc subsidiaries consolidated statements cash flows amounts thousands accompanying notes integral part consolidated financial statements watts industries inc subsidiaries notes consolidated financial statements 1 description business company designs manufactures sells extensive line valves water plumbing heating water quality industrial oil gas markets located predominately north america europe asia 2 accounting policies estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates principles consolidation consolidated financial statements include accounts watts industries inc majority whollyowned subsidiaries company upon consolidation significant intercompany accounts transactions eliminated foreign currency translation balance sheet accounts foreign subsidiaries translated united states dollars fiscal yearend exchange rates operating accounts translated weighted average exchange rates year net translation gains losses adjusted directly separate component stockholders equity cash equivalents shortterm investments cash equivalents consist investments maturities three months less date purchase shortterm investments consist corporate municipal bonds participation mutual funds whose portfolios consist principally united states government securities shortterm investments valued market approximates cost concentrations credit risk financial instruments potentially subject company concentration credit risk consist principally trade receivables concentrations credit risk respect trade receivables limited due large number customers included companys customer base dispersion across many different industries geographic areas june 30 1996 company significant concentrations credit risk watts industries inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued inventories stated principally lower cost firstin firstout method market property plant equipment property plant equipment recorded cost depreciation provided straightline basis estimated useful lives assets income taxes deferred income taxes recognized temporary differences financial statement income tax bases assets liabilities goodwill represents excess cost fair value net assets businesses acquired balance amortized 40 years using straightline method carrying value goodwill reviewed facts circumstances suggest may impaired review indicates goodwill recoverable determined based undiscounted operating cash flows entity acquired remaining amortization period companys carrying value goodwill would reduced fair value impact recently issued accounting standards march 1995 financial accounting standards board issued statement 121 accounting impairment longlived assets longlived assets disposed requires impairment losses recorded longlived assets used operations indicators impairment present undiscounted cash flows estimated generated assets less assets carrying amount statement 121 also addresses accounting longlived assets expected disposed company adopted statement 121 third quarter fiscal year 1996 recorded 63065000 charge income stock based compensation company grants stock options fixed number shares key employees exercise price equal fair value shares date grant company accounts stock option grants accordance apb opinion 25 accounting stock issued employees intends continue accordingly recognizes compensation expense stock option grants earnings per common share earnings per common share calculated using weighted average number class b common shares outstanding period common stock equivalents attributable dilutive effect class common stock options watts industries inc subsidiaries notes consolidated financial statements continued 2 accounting polices continued basis presentation certain amounts fiscal years 1995 1994 reclassified permit comparison 1996 presentation 3 management initiatives quarter ended march 31 1996 company decided restructure business improve efficiency companys worldwide operations nature changes related effects summarized discontinued operations company announced intention divest stock municipal water group businesses includes henry pratt company james jones company edward barber co fourth quarter company executed definitive purchase sale agreement covering divestiture sale expected occur first quarter fiscal year 1997 results operations companies reported income discontinued operations net income taxes income statements fiscal years ended june 30 1995 1994 reclassified conform 1996 presentation unassigned corporate interest expense allocated based upon ratio net assets discontinued operations consolidated net assets unassigned debt company following table summarizes results operations municipal water group fiscal year ended june 30 1996 1995 1994 thousands revenues 86179 80815 74057 costs expenses 80278 75358 71494 income taxes 5901 5457 2563 income taxes 2421 2182 953 income discontinued operations 3480 3275 1610 net assets held sale reported accompanying consolidated balance sheets consists following june 30 1996 1995 thousands accounts receivable 15843 14756 inventories 19301 23756 goodwill 31835 32796 property plant equipment 20409 22639 assets 5415 3017 current liabilities 10900 9625 liabilities 3502 3952 net assets 78401 83387 watts industries inc subsidiaries notes consolidated financial statements continued 3 management initiatives continued impairment longlived assets impairment longlived assets charge mainly pertains companys italian subsidiaries due change interpretation italian tax law regarding deductibility goodwill amortization coupled decreasing margins operating profits resulted goodwill intermes impaired addition pbvs experienced significant losses since acquisition response circumstances management implemented various restructuring initiatives consisting mainly downsizing relocating consolidating italian operations connection reevaluation business strategy italy management concluded impairment event occurred recorded loss adjusting value affected longlived assets primarily goodwill restructuring company also decided undertake certain restructuring initiatives aimed improving efficiency certain continuing operations two significant initiatives relocation jameco industries inc jameco downsizing pibiviesse spa pbvs company decided relocate manufacturing operations jameco wyandanch new york watts regulator plant spindale north carolina company expects relocation project completed fiscal 1997 company also decided implement plan streamline downsize operations pbvs subsidiary addition company identified efficiencies expects improve operations number divisions connection implementing reorganization plans company recorded exit costs 7700000 severance costs 290 employees 9300000 asset writedowns assets abandoned sold 8400000 inventory writedowns 9500000 accrued expenses 13800000 substantially charges restructuring recorded provision severance plant closure costs asset writedowns included restructuring line statement operations inventory writedown included cost sales accrued expenses included operating expenses severance paid june 30 1996 1660000 representing reduction 97 personnel 4 business acquisitions fiscal year 1996 company completed acquisition four businesses valve manufacturers aggregate purchase price 13415000 invested 6000000 suzhou watts valve company ltd joint venture significant acquisitions purchase societe des etablissements rene trubert sa located chartres france acquisitions accounted purchase method results operations acquired businesses included consolidated financial statements date acquisition acquisitions occurred beginning fiscal year 1996 1995 effect operating results would material watts industries inc subsidiaries notes consolidated financial statements continued 5 income taxes significant components companys deferred tax liabilities assets follows fiscal year ended june 30 1996 1995 thousands deferred tax liabilities excess tax book depreciation 10959 11598 2883 4774 total deferred tax liabilities 13842 16372 deferred tax assets accrued expenses 20345 8712 5656 4569 total deferred tax assets 26001 13281 valuation allowance deferred tax assets 1339 645 net deferred tax assets 24662 12636 net deferred tax assets liabilities 10820 3736 provision income taxes based following pretax income loss arising continuing operations fiscal year ended june 30 1996 1995 1994 thousands domestic 19816 59760 55954 foreign 69226 8430 8818 49410 68190 64772 watts industries inc subsidiaries notes consolidated financial statements continued 5 income taxes continued provision benefit income taxes consists following fiscal year ended june 30 1996 1995 1994 thousands current tax expense federal 15739 18299 18809 foreign 1176 685 2382 state 1996 3430 3586 18911 22414 24777 deferred tax expense benefit federal 8458 764 604 foreign 3964 2411 120 state 2134 138 111 14556 3313 595 tax provision continuing operations 4355 25727 25372 total income taxes reported continuing operations different would computed applying federal statutory tax rate income loss continuing operations income taxes reasons difference follows fiscal year ended june 30 1996 1995 1994 thousands computed expected federal income tax expense benefit 17294 23867 22670 state income taxes net federal tax benefit 90 2319 2403 goodwill writedown amortization 17443 807 570 foreign tax rate regulation differential 3830 791 190 net 466 475 461 4355 25727 25372 watts industries inc subsidiaries notes consolidated financial statements continued 5 income taxes continued june 30 1996 company foreign net operating loss carryforwards 107 million income tax purposes expire fiscal years 1997 2004 addition foreign net operating losses 45 million carried forward indefinitely undistributed earnings companys foreign subsidiaries amounted approximately 37 million 43 million 36 million june 30 1996 1995 1994 respectively earnings considered indefinitely reinvested accordingly provision us federal state income taxes provided thereon upon distribution earnings form dividends otherwise company subject us income taxes subject adjustment foreign tax credits withholding taxes payable various foreign countries determination amount us income tax liability would incurred practicable complexities associated hypothetical calculation however unrecognized foreign tax credits would available reduce portion us income tax liability withholding taxes approximately 26 million would payable upon remittance previously unremitted earnings june 30 1996 company made income tax payments 278 million 252 million 314 million 1996 1995 1994 respectively 6 accrued expenses liabilities accrued expenses liabilities consist following june 30 1996 1995 thousands restructuring costs 21342 commissions sales incentives payable 10276 8714 accrued insurance costs 10652 9040 36303 28366 78573 46120 watts industries inc subsidiaries notes consolidated financial statements continued 7 financing arrangements longterm debt consists following june 30 1996 1995 thousands 8 38 notes due 2003 75000 125 million revolving line credit accruing interest libor plus 25 basis points 5625 june 30 1996 expiring august 1999 61300 31000 industrial revenue bonds maturing periodically 2006 2019 accruing interest variable rate based weekly taxexempt interest rates 36 june 30 1996 17265 9585 20975 163150 144240 less current portion 2907 11751 160243 132489 principal payments next five fiscal years due follows 19972907000 19981620000 19991525000 200062433000 2001414000 interest paid periods presented accompanying financial statements approximates interest expense certain companys loan agreements contain covenants require among items maintenance certain minimum financial ratios limit companys ability enter secured borrowing arrangements amounts exceeding 10 companys consolidated stockholders equity unless 8 38 notes secured ratably borrowings restrictive loan covenant company 246 million available june 30 1996 payment dividends 8 common stock fiscal year 1996 companys board directors authorized purchase 2000000 shares companys class common stock open market completed july 17 1996 company utilized line credit making purchases july 17 1996 companys board directors authorized purchase additional 1000000 shares companys class common stock open market watts industries inc subsidiaries notes consolidated financial statements continued 8 common stock continued class common stock class b common stock equal dividend liquidation rights share companys class common stock entitled one vote matters submitted stockholders share class b common stock entitled ten votes matters shares class b common stock convertible shares class common stock onetoone basis option holder company reserved total 3391630 shares class common stock issuance option plans 11365627 shares conversion class b common stock class common stock 9 stock option purchase plans august 6 1996 board directors adopted subject shareholder approval 1996 stock option plan 1996 plan replace 1986 incentive stock option plan expired 1996 1989 nonqualified stock option plan 1989 plan upon earlier expiration 1999 shares reserved issuance plan exhausted terms conditions 1996 plan substantially consistent 1986 1989 plans allow granting options purchase 3000000 share companys class common stock companys 1986 plan allowed granting options purchase 1980000 shares class common stock key employees exercise price equal 100 fair market value per share date grant addition companys 1989 stock option plan allowed granting options purchase 2000000 shares class common stock key employees options granted exercise price determined board directors less 50 fair market value per share date grant outstanding options generally vest rate 20 per year summary activity plans follows watts industries inc subsidiaries notes consolidated financial statements continued 9 stock option purchase plans continued june 30 1996 1995 options purchase 423596 348190 shares respectively exercisable 1254914 2131414 options respectively available future grants companys stock option plans october 1995 company adopted watts industries inc management stock purchase plan allows granting restricted stock units key employees purchase 1000000 shares class common stock 75 fair market value date grant restricted stock units generally vest annually three year period date grant restricted stock units outstanding june 30 1996 10 employee benefit plans company sponsors 401k savings plan substantially domestic nonunion employees plan company matches specified percentage employee contributions subject certain limitations addition company sponsors defined benefit plans covering substantially domestic nonunion employees companys funding policy contribute annually maximum amount deducted federal income tax purposes june 30 1996 1995 fair value assets held trust companys defined benefit plans approximated related projected benefit obligation 11 commitments contingencies company engaged various claims litigation arising operations opinion management uninsured losses resulting matters material adverse impact consolidated financial position future results operations company named potentially responsible party respect identified contaminated sites level contamination varies significantly site remediation efforts underway various stages certain cases remediation begun company evaluated potential exposure based currently available information recorded estimate liability environmental matters watts industries inc subsidiaries notes consolidated financial statements continued 12 financial instruments fair value longterm debt fair value companys 8 38 notes due 2003 based quoted market prices fair value companys variable rate debt approximates carrying value carrying amount estimated fair market value companys longterm debt including current portion follows june 30 1996 1995 thousands carrying amount 163150 144240 estimated fair value 166994 150709 watts industries inc subsidiaries notes consolidated financial statements continued 13 financial information geographic area financial information geographic area summarized follows transfer prices foreign subsidiaries intended produce profit margins commensurate sales marketing efforts watts industries inc subsidiaries notes consolidated financial statements continued 13 financial information geographic area continued included domestic sales export sales 435 million fiscal year 1996 397 million fiscal year 1995 387 million fiscal year 1994 14 quarterly unaudited financial information schedule iivaluation qualifying accounts watts industries inc subsidiaries amounts thousands 1 uncollectible accounts written net recoveries 2 balance acquired connection acquisition trubert artec fiscal 1996 jameco andersonbarrows fiscal 1995 ancon inc fiscal 1994 exhibit index listed indexed exhibits filed part report certain exhibits incorporated reference documents previously filed company securities exchange commission pursuant rule 12b32 securities exchange act 1934 amended exhibit description 31 restated certificate incorporation amended 13 32 amended restated bylaws 1 91 horne family voting trust agreement1991 dated october 31 1991 2 92 amendment dated december 18 1995 horne family voting trust agreement1991 dated october 31 1991 101 employment agreement effective september 1 1996 registrant timothy p horne 102 supplemental compensation agreement effective september 1 1996 registrant timothy p horne 103 deferred compensation agreement registrant timothy p horne amended 4 104 1986 incentive stock option plan amended including form option agreement 3 105 1989 nonqualified stock option plan including form option agreement3 106 watts industries inc retirement plan salaried employees dated december 30 1994 amended restated effective january 1 1994 13 106i amendment number 1 watts industries inc retirement plan salaried employees dated april 16 1996 effective january 1 1994 106ii amendment number 2 watts industries inc retirement plan salaried employees dated october 17 1995 effective september 30 1995 106iii amendment number 3 watts industries inc retirement plan salaried employees dated april 16 1996 effective january 1 1996 107 registration rights agreement dated july 25 1986 5 108 executive incentive bonus plan amended 13 109 indenture dated december 1 1991 registrant first national bank boston trustee including form 838 note due 2003 8 1010 loan agreement mortgage among industrial development authority state new hampshire watts regulator co arlington trust company dated august 1 1985 4 1011 amendment agreement relating watts regulator co canaan franklin new hampshire facilities financing dated december 31 1985 4 1012 sale agreement village walden industrial development agency spence engineering company inc dated june 1 1994 12 1013 letter credit reimbursement guaranty agreement dated june 1 1994 among registrant spence engineering company inc first union national bank north carolina12 1013i amendment number 1 letter credit reimbursement guaranty agreement dated june 1 1994 among registrant spence engineering company inc first union national bank north carolina 1014 trust indenture village walden industrial development agency first national bank boston trustee dated june 1 1994 12 1015 loan agreement hillsborough county industrial development authority leslie controls inc dated july 1 199412 1016 letter credit reimbursement guaranty agreement dated july 1 1994 among registrant leslie controls inc first union national bank north carolina 12 1016i amendment number 1 letter credit reimbursement guaranty agreement dated july 1 1994 among registrant leslie controls inc first union national bank north carolina 1017 trust indenture hillsborough county industrial development authority first national bank boston trustee dated july 1 199412 1018 loan agreement rutherford county industrial facilities pollution control financing authority watts regulator company dated september 1 1994 13 1019 letter credit reimbursement guaranty agreement dated september 1 1994 among registrant watts regulator company first union national bank north carolina 13 1019i amendment 1 letter credit reimbursement guaranty agreement dated september 1 1994 among registrant watts regulator company first union national bank north carolina 1020 trust indenture rutherford county industrial facilities pollution control financing authority first national bank boston trustee dated september 1 1994 13 1021 amended restated stock restriction agreement dated october 30 1991 2 1022 watts industries inc 1991 nonemployee directors nonqualified stock optionplan 7 1022i amendment 1 watts industries inc 1991 nonemployee directors nonqualified stock option plan 1023 letters credit relating retrospective paid loss insurance programs 11 1024 form stock restriction agreement management stockholders 5 1025 revolving credit agreement dated december 23 1987 nederlandse creditbank nv watts regulator nederland bv related guaranty watts industries inc watts regulator co dated december 14 1987 6 1026 loan agreement dated september 1987 related mortgage nv sallandsche bank 6 1027 agreement plan merger dated august 22 1991 relating acquisition registrant henry pratt company 9 1028 agreement sale shares intermes spa riaf holding ag participations multiscope due srl dated november 6 1992 10 1029 revolving credit agreement dated august 30 1994 among watts investment company certain financial institutions first national bank boston agent registrant guarantor 12 1029i amendment number 1 dated june 30 1995 revolving credit agreement dated august 30 1994 1029ii amendment number 2 dated april 15 1996 revolving credit agreement dated august 30 1994 1030 watts industries inc management stock purchase plan dated october 17 1995 14 11 statement regarding computation earnings per common share 21 subsidiaries 231 consent ernst young llp independent auditors 232 consent deloitte touche independent auditors 27 financial data schedule 1 incorporated reference relevant exhibit registrants current report form 8k filed securities exchange commission may 15 1992 2 incorporated reference relevant exhibit registrants current report form 8k filed securities exchange commission november 14 1991 3 incorporated reference relevant exhibit registrants annual report form 10k filed securities exchange commission september 28 1989 4 incorporated reference relevant exhibit registrants registration statement form s1 336515 filed securities exchange commission june 17 1986 5 incorporated reference relevant exhibit registrants registration statement form s1 336515 filed securities exchange commission part second amendment registration statement august 21 1986 6 incorporated reference relevant exhibit registrants registration statement form s1 3327101 filed securities exchange commission february 16 1989 7 incorporated reference relevant exhibit registrants amendment 1 form 10k fiscal 1992 filed securities exchange commission march 11 1993 8 incorporated reference relevant exhibit registrants annual report form 10k filed securities exchange commission september 16 1992 9 incorporated reference exhibit 1033 registrants annual report form 10k filed securities exchange commission september 24 1991 10 incorporated reference relevant exhibit registrants amendment 2 form 8k dated november 6 1992 filed securities exchange commission february 22 1993 11 incorporated reference relevant exhibit registrants annual report form 10k filed securities exchange commission september 24 1993 12 incorporated reference relevant exhibit registrants annual report form 10k filed securities exchange commission september 26 1994 13 incorporated reference relevant exhibit registrants annual report form 10k filed securities exchange commission september 28 1995 14 incorporated reference relevant exhibit registrants registration statement form s8 3364627 filed securities exchange commission november 29 1995 filed exhibit report securities exchange commission exhibit 92 amendment voting trust agreement whereas timothy p horne frederic b horne trustees horne family voting trust agreement 1991 dated october 31 1991 agreement whereas timothy p horne george b horne trustees george b horne trust 1982 effective date hereof deposited trustees stock certificate representing 80000 shares class b common stock watts industries inc pursuant agreement trustees issued delivered timothy p horne george b horne trustees george b horne trust 1982 voting trust certificate representing interests deposited stock whereas timothy p horne george b horne trustees george b horne trust 1982 effective date hereof gifted timothy p horne george b horne trustees george b horne grandchildrens 1995 irrevocable trust fbo tara v horne ii timothy p horne george b horne trustees george b horne grandchildrens 1995 irrevocable trust fbo tiffany r horne iii frederic b horne george b horne trustees george b horne grandchildrens 1995 irrevocable trust fbo kristina horne portion voting trust certificates issued agreement whereas trustees desire amend schedule agreement reflect gifts therefore parties hereby agree follows 1 schedule agreement hereby amended restated entirety read follows schedule stockholder shares class b cert timothy p horne tph 2751220 126161 frederic b horne fbh 1355166 129159 timothy p horne george b horne gbh trustees george b horne trust 1982 2004600 132158184 frederic b horne trustee peter w horne trust 1976 1285840 156 175 stockholder shares class b cert fbh gbh trustees gbh grandchildrens 1995 irrevocable trust fbo kristina horne 22600 184 tph gbh trustees gbh grandchildrens 1995 irrevocable trust fbo tara v horne 30200 184 tph gbh trustees gbh grandchildrens 1995 irrevocable trust fbo tiffany r horne 22600 184 timothy p horne trustee deborah horne trust 1976 1335840 138157 timothy p horne trustee daniel w horne trust 1980 1335840 134155 tara v horne 50000 126 judith rae horne trustee tiffany rae horne trust 1984 50000 126 adjusted reflect twoforone stock split effected means stock dividend payable march 15 1994 2 except hereinabove provided parties ratify confirm agreement respects parties hereto executed amendment agreement one counterparts seal december 18 1995 timothy p horne trustee horne family voting trust 1991 frederic b horne trustee horne family voting trust 1991 exhibit 101 employment agreement employment agreement entered 1st day september 1996 watts industries inc delaware corporation principal place business north andover massachusetts company timothy p horne individual residing andover massachusetts mr horne witnesseth whereas company mr horne parties existing employment agreement dated may 1 1993 hereinafter referred existing employment agreement whereas company mr horne mutually desire enter new employment agreement set forth terms conditions companys subsequent employment mr horne whereas company desires arrange employment mr horne terms conditions set forth mr horne desires employment therefore consideration premises mutual covenants set forth good valuable consideration receipt hereby acknowledged party parties hereto agree follows 1 employment term employment 11 revocation existing employment agreement company mr horne hereby agree effective september 1 1996 existing employment agreement parties shall terminate force effect terms conditions agreement set forth shall control employment mr horne company term agreement 12 position commencing september 1 1996 hereinafter referred effective date agreement company employ mr horne chairman board directors chief executive officer andor capacity capacities may mutually agreed upon writing company mr horne mr horne accept employment 13 duties chairman board directors chief executive officer company mr horne general charge supervisory control companys business financial affairs subject authority board directors company term employment pursuant agreement mr horne shall perform additional duties shall assigned authority board directors company consistent position title 14 vacation term employment pursuant agreement mr horne shall entitled less three 3 months vacation year 15 indemnification absence proof bad faith expressly agreed mr horne shall liable actions omissions act officer employee director company affiliated business organizations company shall indemnify hold harmless claims whatever kind person arising way related activities behalf position positions company affiliated business organizations company shall also promptly reimburse mr horne reasonable business expenses incurred connection claim proceeding including without limitation reasonable fees expenses counsel provided mr horne hereby undertakes repay advance made respect claim upon final determination court competent jurisdiction indemnification may paid respect claim terms agreement foregoing shall addition lieu indemnification expense reimbursement mr horne entitled 16 location notwithstanding anything contained agreement contrary mr horne shall required connection performance obligations agreement relocate permanently area world greater boston area provided however mr hornes sole discretion mr horne shall entitled perform obligations agreement geographical location proximity major facility company 17 term employment term mr hornes employment agreement shall period three 3 years september 1 1996 effective date agreement including august 31 1999 thereafter shall automatically renewed consecutive oneyear periods threeyear period subsequent oneyear periods portions thereof agreement effect referred hereinafter term provided however employment mr horne earlier terminated pursuant provisions hereof mr horne board directors company term employment agreement shall end termination employment 2 compensation benefits 21 compensation company shall pay mr horne compensation services rendered company base salary six hundred sixty thousand dollars 660000 us per year salary time increased hereinafter provided referred hereinafter base salary long employed company provided however base salary shall automatically subject percentage increase anniversary date effective date agreement based amount applicable respect year ended percentage increase determined reference aggregate percentage increase preceding twelve months consumer price index urban consumers published united states department labor provided however board directors may time increase base salary pay additional bonuses compensation mr horne may sole discretion deem appropriate base salary shall payable equal installments periodic intervals less monthly time applicable respect salaried executive personnel company base salary shall inclusive applicable income social security taxes charges required law withheld company requested withheld mr horne 22 travel business expenses addition compensation described section 21 mr horne shall reimbursed company reasonable necessary travel business expenses incurred connection performance duties hereunder 23 additional benefits mr horne shall also entitled receive benefits otherwise eligible qualified made available time company employees responsibilities similar assigned mr horne shall entitled additional benefits customarily provided senior executive employee holding position positions held mr horne costs expenses shall paid company addition company hereby acknowledges obligation pay mr horne upon retirement company amount equal two hundred thirty three thousand dollars 23300000 represents compensation mr horne deferred prior registration companys common stock securities exchange commission 3 termination employment 31 termination company board directors acting behalf company shall right terminate mr hornes employment company time term agreement upon occurrence willful illegal acts directly relating performance duties behalf company hereunder 32 termination mr horne 321 result action board directors acting behalf company without consent mr horne mr horne shall cease responsibilities duties chairman board directors chief executive officer company without employment terminated pursuant section 31 mr horne shall assigned duties inconsistent previously performed hereunder mr horne shall right terminate employment company time term agreement including renewal year contemplated section 17 upon thirty 30 days written notice board directors mr horne terminates employment pursuant section 321 company shall pay mr horne lump sum payment amount equal greater compensation would payable hereunder date termination third anniversary hereof agreement effect though date rate effect date termination ii two years compensation hereunder rate 322 mr horne shall also right terminate employment company time term agreement upon thirty 30 days written notice company 4 rights termination addition companys obligations mr horne hereunder termination mr hornes employment pursuant agreement whether mr horne board directors acting behalf company shall pay mr horne living beneficiary salary accrued date termination ii additional compensation benefits mr horne beneficiary may entitled purposes section 4 term beneficiary shall mean person persons mr horne may time designate writing company absence effective designation executor administrator estate 5 miscellaneous provisions 51 entire agreement constitutes entire understanding mr horne company respect subject matter supersedes prior agreement arrangement relative terms mr hornes employment company including without limitation existing employment agreement dated may 1 1993 modification waiver provision hereof shall valid unless made writing signed mr horne company 52 governing law agreement shall governed construed accordance laws commonwealth massachusetts shall deemed made massachusetts 53 notices communications relative agreement shall deemed duly given delivered mailed us certified mail postage prepaid return receipt requested address applicable party set forth foot agreement address either party may us certified mail postage prepaid return receipt requested notify party hereto 54 assignment binding effect neither company mr horne may make assignment agreement interest therein operation law otherwise without prior written consent party agreement shall inure benefit binding upon company mr horne respective successors executors administrators heirs andor permitted assigns 55 headings set forth agreement convenience shall considered part agreement way limit amplify terms provisions hereof 56 payment salary expressly agreed parties hereto mr hornes compensation hereunder may paid company andor affiliated business organization company 57 waiver failure either party require performance term obligation agreement waiver either party breach agreement shall prevent subsequent enforcement term obligation deemed waiver subsequent breach 58 counterparts one counterpart agreement may executed parties hereto counterparts taken together shall deemed constitute one agreement witness whereof company caused agreement executed delivered mr horne duly executed delivered agreement sealed instrument date first written attest watts industries inc secretary title compensation committee chairman corporate seal address 815 chestnut street north andover mass 01845 timothy p horne address 94 porter road andover mass 01810 exhibit 102 supplemental compensation agreement supplemental compensation agreement made 1st day september 1996 watts industries inc delaware corporation principal place business north andover massachusetts company timothy p horne individual residing andover massachusetts mr horne witnesseth whereas mr horne employ company serving company chairman board directors chief executive officer whereas mr hornes experience knowledge affairs company reputation contacts industry company deems mr hornes continued employment company important future growth whereas order induce mr horne continue employ company pursuant terms employment agreement even date employment agreement company desires provide mr horne certain compensation rights commence following termination status full time employee company subsidiaries therefore consideration premises mutual promises herein contained good valuable consideration receipt sufficiency hereby acknowledged parties agree follows 1 supplemental compensation commencing date mr horne shall ceased full time employee company subsidiary thereof termination date regardless reason termination mr hornes employment reason death continuing date mr hornes death mr horne shall receive supplemental compensation equal annual basis greater onehalf average mr hornes annual base salary employee company three years immediately prior termination date b 400000 provided however amount applicable clause b shall automatically subject percentage increase anniversary date hereof based amount applicable clause b respect year ended percentage increase determined reference aggregate percentage increase preceding twelve months consumer price index urban consumers published united states department labor supplemental compensation shall paid equal monthly installments payable first day month first payment due first day month following termination date event mr hornes death company shall make supplemental compensation payment provided mr hornes estate first day month following date mr hornes death thereby terminating agreement obligation make payments hereunder 2 services mr horne following termination mr hornes status employee company subsidiaries whether full part time mr horne hereby agrees make available serve company subsidiaries long physically able upon request board directors consultant chairman board directors minimum 300 hours per year commencing termination date provided however event shall mr horne required devote 500 hours per year performance services hereunder provided however mr hornes physical inability perform services hereunder shall affect limit companys obligation section 1 3 funding nothing contained herein action taken pursuant provisions hereof shall create construed create trust kind fiduciary relationship company mr horne person security interest kind property company favor mr horne person company shall required purchase hold dispose investments order provide obligations hereunder however company elects purchase investments shall continue purposes part general assets company subject claims creditors person company shall virtue provisions agreement otherwise interest assets interest general creditor title beneficial ownership assets company may acquire provide obligations hereunder shall times remain company terms agreement shall provide mr horne estate person direct proprietary interest therein neither mr horne person shall right action specific performance otherwise compel company set aside actually invest funds satisfaction obligations hereunder sole right mr horne shall receive payments times amounts set forth herein 4 alienability mr horne shall power right transfer assign anticipate hypothecate mortgage commute modify otherwise encumber advance rights payment hereunder shall said rights subject seizure payment debts judgments alimony separate maintenance owed mr horne beneficiary transferable operation law event bankruptcy insolvency reason 5 participation plans prior agreement nothing contained agreement shall construed alter abridge manner affect rights privileges mr horne participate covered pension profitsharing group insurance bonus employee benefit plan company may hereafter maintain company hereby agrees mr horne shall also entitled receive benefits otherwise eligible qualified made available time company employees including way illustration way limitation health dental life disability insurance benefits long serves employee company subsidiaries 6 miscellaneous nothing herein shall affect rights mr horne employment agreement restrict right mr horne enter agreement agreements company concerning terms conditions employment b payments contemplated agreement part salary reduction plan arrangement deferring lot bonus salary increase provided addition salary bonus remuneration provided mr horne time company mr horne option take current payment bonus lieu payments c notices communications relative agreement shall deemed duly given delivered mailed us certified mail postage prepaid return receipt requested address applicable party set forth address either party may us certified mail postage prepaid return receipt requested notify party hereto agreement shall inure benefit binding upon company mr horne respective successors executors administrators heirs andor permitted assigns agreement supersedes replaces supplemental compensation agreements company mr horne dated may 1 1993 e headings set forth agreement convenience shall considered part agreement way limit amplify terms provisions hereof f neither agreement term hereof may changed waived discharged terminated instrument writing signed party enforcement change waiver discharge termination sought g one counterpart agreement may executed parties hereto counterparts taken together shall deemed constitute one agreement h agreement shall construed accordance governed laws commonwealth massachusetts witness whereof company caused agreement duly executed corporate seal affixed duly attested secretary mr horne hereunto set hand seal date year first written attest watts industries inc secretary title compensation committee chairman corporate seal address 815 chestnut street north andover mass 01845 timothy p horne address 94 porter road andover mass 01810 exhibit106 amendment number one watts industries inc retirement plan salaried employees whereas watts industries inc sponsoring employer established watts industries inc retirement plan salaried employees plan benefit employees recently amended restated effective january 1 1994 whereas pursuant section 1301 plan sponsoring employer reserved right amend plan whereas sponsoring employer desires amend plan request internal revenue service order receive determination letter therefore plan hereby amended follows 1 section 109 deleted entirety following inserted place 109 compensation shall mean total compensation payable employee employer reportable federal government income tax purposes form w2 form prescribed internal revenue service take place excluding stock option rights compensation also includes contributions made behalf employee employer pursuant salary deferral agreement section 401k code andor salary reduction agreement pursuant cafeteria plan established section 125 code effective january 1 1989 event shall participants compensation taken account plan year exceed 200000 150000 plan years commencing january 1 1994 amount secretary treasury may determine plan year accordance section 401a17 code change dollar amount set forth adjusted secretary treasury accordance section 401a17 code shall apply compensation taken account plan years beginning plan year change effective first adjustment effective january 1 1990 determining compensation participant purposes dollar limitation rules section 414q6 code shall apply except applying rules term family shall include spouse participant lineal descendants participant attained age 19 close year result applying rules dollar limitation exceeded limitation shall prorated among affected family members proportion individuals compensation determined section application dollar limitation effective january 1 1989 compensation plan year prior january 1 1989 taken account determining employees benefit accruing plan year beginning january 1 1989 compensation prior plan year subject annual compensation limit 200000 effective january 1 1994 compensation plan year prior january 1 1994 taken account determining employees benefits accruing plan year beginning january 1 1994 compensation prior plan year subject annual compensation limit 150000 2 section 203 amended adding following subparagraph end thereof f solely purposes determining whether breakinservice occurred respect section 2021 noncompensated hour period absence employer reason employees pregnancy ii reason birth employees child iii reason placement child employee connection adoption child employee iv purposes caring child period beginning immediately following birth placement shall credited employee purposes subsection f following special rules apply hour service credited hereunder respect absence shall credited plan year absence begins employee would prevented incurring breakinservice year solely hours service credited hereunder absence b case immediately following plan year ii hours service shall credited hereunder unless employee furnishes committee information committee may reasonably require form time committee may reasonably require establishing absence work absence described hereunder b number days absence lasted iiiin event shall 501 hours service credited employee hereunder absence reason one pregnancy placement one child hours service credited individual absence described section 203f determined committee reference individuals recent normal work schedule provided committee cannot determine number hours credited shall instead credited eight 8 hours service day absence 3 last sentence section 303biib2 deleted following inserted place terminated participant repay amount upon subsequent retirement termination employment benefit shall calculated using benefit service defined section 205 provided however benefit service prior january 1 1987 shall included 4 section 402 deleted entirety following inserted place except provided participant reached fifthfifth birthday completed least ten years service may elect upon written notice committee early retirement date may first day month subsequent date election prior normal retirement date notwithstanding foregoing case participant hired prior january 1 1992 excluding former participant spence plan henry pratt plan reached fiftyfifth birthday completed least five years service may elect upon written notice committee early retirement date may first day month subsequent date election prior normal retirement date 5 section 503c deleted entirety following inserted place c subject provisions paragraphs e sections 5031 504 annual normal retirement benefit payable participant retires plan january 1 1989 normal retirement date shall amount equal greater ii iii iv 167 times participants final average compensation less maximum offset allowance result multiplied years benefit service maximum 25 years ii 100 times participants final average compensation multiplied years benefit service maximum 25 years iiithe participants accrued benefit march 15 1990 december 31 1988 participant highly compensated employee defined section 414q1a b code iv participants accrued benefit plan determined december 31 preceding date determination 6 section 503d deleted entirety following inserted place participants participated spence plan december 31 1991 notwithstanding foregoing provisions section respect participant participated spence plan december 31 1991 retires plan january 1 1994 annual normal retirement date annual normal retirement benefit shall equal sum b event less c equal sum 1 2 3 4 1 58 1 participants final average compensation multiplied years benefit service earned prior june 1 1975 spence plan 2 34 1 participants final average compensation multiplied years benefit service earned june 1 1975 may 31 1980 spence plan 3 78 1 participants final average compensation multiplied years benefit service earned june 1 1980 may 31 1985 spence plan 4 1 participants final average compensation multiplied years benefit service earned june 1 1985 december 31 1986 spence plan amount benefit calculated accordance paragraph shall actuarially increased reflect change normal form benefit payment 5 year certain continuous annuity single life annuity b equal greater 1 2 1 167 times participants final average compensation less maximum offset allowance result multiplied years benefit service earned spence plan january 1 1987 prior january 1 1992 benefit service earned plan january 1 1992 maximum 25 years 2 100 participants final average compensation multiplied years benefit service earned spence plan january 1 1987 prior january 1 1992 years benefit service earned january 1 1992 plan maximum 25 years notwithstanding foregoing participant credited 1000 hours service spence plan twelvemonth period beginning june 1 1985 ending may 31 1986 twelvemonth period beginning january 1 1986 ending december 31 1986 shall credited 2 years benefit service purposes section 503dia4 reflect change spence plans plan year calendar year c equal greater 1 2 1 actuarial equivalent participants accumulated contributions account 2 participants accrued benefit determined spence plan december 31 1991 7 section 5032 deleted entirety following inserted place 5032 accrued benefit determine participants accrued benefit section 503a b time prior normal retirement date shall first determined amount normal retirement benefit participant would received remained employ employer normal retirement date based final average compensation social security benefit date benefit determined amount shall multiplied fraction numerator number years benefit service including fractions thereof participant completed denominator number years benefit service including fractions thereof participant would completed remained employ employer normal retirement date participants accrued benefit section 503c e benefit defined section 503c e based final average compensation benefit service date accrued benefit determined notwithstanding case participant whose compensation plan year beginning prior january 1 1994 exceeded 150000 participants accrued benefit shall less accrued benefit determined december 31 1993 8 section 508 deleted entirety reserved future use 9 sections 6021a b deleted entirety following inserted place amount deferred vested benefit payable terminated participant section 602a shall equal accrued benefit determined section 5032 notwithstanding foregoing amount deferred vested benefit payable terminated participant employee january 1 1979 shall event less accrued benefit determined accordance provisions section 5031 b amount deferred vested benefit payable terminated participant section 602b shall less actuarial equivalent balance accumulated contribution account 10 section 6022a deleted entirety following inserted place terminated participant entitled vested benefit section 602 may elect benefit commence time eligible elect early retirement date pursuant section 402 case subject provisions paragraph b benefit shall computed section 6021 shall reduced 59 1 first sixty 60 months benefit commencement date precedes normal retirement date 518 1 month thereafter benefit commencement date precedes normal retirement date 11 section 9021 deleted entirety following inserted place benefits payable account period employment employer affiliated employer plan another qualified defined benefit plan toward employer contributes contributed benefits payable plan account period shall reduced actuarial equivalent benefit payable plan calculated form manner benefit payable plan account period service however plan provides similar reduction benefits section shall disregarded respect eligible employee whose recent period participation plan earlier recent period participation plan 12 last sentence section 904 deleted following inserted place accrued benefit determined section 5032 shall reduced actuarial equivalent benefit payable watts fluidair co plan calculated form manner benefit payable plan 13 section 1503 amended adding following subparagraphs end thereof plan year plan top heavy super top heavy substituting 90 60 subparagrapha section 5041dii shall applied substituting 100 125 unless sponsoring employer amends subparagraph bi substituting 3 2 therein e plan year plan super top heavy factor 125 shall changed 100 section 5041dii 14 section 1602a deleted entirety following inserted place event commissioner internal revenueor delegate determines plan initially qualified code employer contributions made plan shall returned employer within one year date initial qualification denied provided application qualification made time prescribed law filing employers return fiscal year plan adopted later date secretary treasury may prescribe witness whereof watts industries inc caused amendment executed authorized officer day 1996 watts industries inc exhibit 106 ii amendment number two watts industries inc retirement plan salaried employees whereas watts industries inc sponsoring employer established watts industries inc retirement plan salaried employees plan amended restated effective january 1 1994 whereas pursuant section 1301 plan sponsoring employer reserved right amend plan whereas sponsoring employer desires amend plan effective october 1 1995 reflect merger jameco industries inc pension plan whereas sponsoring employer desires amend section 504 definition term actuarial equivalent plan effective october 1 1995 permitted retirement protection act 1994 therefore plan hereby amended follows 1 section 102 deleted entirety following inserted place 102actuarial equivalent term similar import wherever used plan means benefit equivalent value determined follows purposes section 1502e 504e actuarial equivalent determined using 5 interest rate up1984 mortality table employees up1984 mortality table set back three years beneficiaries b purposes section 504 actuarial equivalent determined using interest rate 30year treasury constant maturities november plan year prior plan year distribution using mortality based fixed blend 50 percent male mortality rates 50 percent female mortality rates 1983 group annuity mortality table c purposes section 5021 5051 802 803 804 1503b actuarial equivalent determined using 7 interest rate up1984 mortality table employees up1984 mortality table set back three years beneficiaries purposes section 805 actuarial equivalent determined follows prior october 1 1995 using rates mortality table described c except interest rate immediate annuities set pension benefit guaranty corporation month payment used ii distributions made period commencing october 1 1995 ending december 31 1995 using mortality rates based fixed blend 50 male mortality rates 50 female mortality rates 1983 group annuity mortality table using interest rate specified b whichever results greater benefit interest rate 30year treasury constant maturities month november 1994 b interest rate 30year treasury constant maturities month two months prior month participants date termination occurs iiifor distributions made period commencing january 1 1996 ending september 30 1996 using mortality rates based fixed blend 50 male mortality rates 50 female mortality rates 1983 group annuity mortality table using interest rate specified c whichever results greater benefit c interest rate 30year treasury constant maturities month november 1995 interest rate 30year treasury constant maturities month participants date termination occurs iv distributions made october 1 1996 using mortality rates based fixed blend 50 male mortality rates 50 female mortality rates 1983 group annuity mortality table using interest rate 30year treasury constant maturities month november prior plan year distribution e purposes section 1201 except provided g actuarial equivalent determined follows distributions made prior october 1 1995 using interest rate mortality table described c except lump sum payments interest rate immediate annuities set pension benefit guaranty corporation month payment used ii distributions made period commencing october 1 1995 ending december 31 1995 using mortality rates based fixed blend 50 male mortality rates 50 female mortality rates 1983 group annuity mortality table using interest rate specified b whichever results greater benefit interest rate 30year treasury constant maturities month november 1994 b interest rate 30year treasury constant maturities month two months prior month participants date termination occurs iiifor distributions made period commencing january 1 1996 ending september 30 1996 using mortality rates based fixed blend 50 male mortality rates 50 female mortality rates 1983 group annuity mortality table using interest rate specified c whichever results greater benefit c interest rate 30year treasury constant maturities month november 1995 interest rate 30year treasury constant maturities month participants date termination occurs iv distributions made october 1 1996 using mortality rates based fixed blend 50 male mortality rates 50 female mortality rates 1983 group annuity mortality table using interest rate 30year treasury constant maturities month november prior plan year distribution f purposes article 13 section 1402b actuarial equivalent determined specified regulations promulgated pension benefit guaranty corporation 2 sections 504e f g hereby deleted following inserted place e benefit payable participant commences prior participants social security retirement age date attains age 62 maximum annual amount determined paragraph ai shall reduced follows participants social security retirement age 65 59ths 1 month commencement payment benefits precedes month attains age 65 ii participants social security retirement age 66 67 59ths 1 first 36 months 512ths 1 additional month commencement payment benefits precedes month attains social security retirement age benefit payable participant commences age 62 maximum annual amount determined paragraph ai shall reduced accordance applicable regulations actuarial equivalent amount applied benefit beginning age 62 purposes paragraph actuarial equivalent shall determined follows iiiif benefit payable participant form single life annuity spouse joint survivor annuity actuarial equivalent shall determined using rates b whichever results lesser benefit interest rate specified section 102b mortality rate specified section 102b b interest rate specified section 102a mortality rate specified section 102a iv benefit payable participant form single life annuity spouse joint survivor annuity actuarial equivalent shall determined using rates c whichever results lesser benefit c 5 interest rate mortality rate specified section 102b interest rate mortality rate specified section 102a f payment benefits participant commences social security retirement age maximum annual amount determined paragraph ai shall increased actuarial equivalent 90000 benefit multiplied adjustment factor specified paragraph e payable normal form participants social security retirement age purposes paragraph actuarial equivalent shall determined using interest rate equal 5 mortality rate specified section 102b g annual benefit retirement benefit plan payable annually form single life annuity benefit payable participant form single life annuity form spouse joint survivor annuity maximum annual amount determined paragraph shall reduced accordance applicable regulations actuarial equivalent amount payable normal form interest rate mortality assumptions used determine actuarial equivalent rates specified section 102b 3 plan hereby amended adding provisions contained part b attached hereto witness whereof watts industries inc caused instrument executed authorized officer seal affixed day 1996 watts industries inc exhibit 106 iii amendment number three watts industries inc retirement plan salaried employees whereas watts industries inc sponsoring employer established watts industries inc retirement plan salaried employees plan amended restated effective january 1 1994 whereas pursuant section 1301 plan effective january 1 1996 sponsoring employer reserved right amend plan whereas sponsoring employer desires amend plan effective january 1 1996 include employees andersonbarrows metal corporation amend definition compensation include amounts deferred management stock purchase plan therefore plan hereby amended follows 1 section 116 amended adding following sentence end thereof january 1 1996 employer includes andersonbarrows metal corporation 1996 employer includes webster valve inc 2 section 301 amended adding following subparagraph ix subsection b thereof ixeffective january 1 1996 eligible employee andersonbarrows metal corporation shall eligible join plan first day month coinciding next following date attains age 21 completes one year service subject rules plan service andersonbarrows metal corporation prior january 1 1996 shall recognized vesting eligibility purposes service benefit accrual purposes shall begin january 1 1996 3 section 119 amended adding following sentence end thereof respect employees andersonbarrows metal corporation service purposes calculating final average earnings shall include service andersonbarrows metal corporation prior january 1 1996 4 section 109 deleted entirety following inserted place 109 compensation shall mean total compensation payable employee employer reportable federal government income tax purposes form w2 form prescribed internal revenue service take place excluding stock option rights compensation also includes 1 amounts deferred management stock purchase plan 2 contributions made behalf employee employer pursuant salary deferral agreement section 401k code andor salary reduction agreement pursuant cafeteria plan established section 125 code event shall participants compensation taken account plan year exceed 200000 150000 plan years commencing january 1 1994 amount secretary treasury may determine plan year accordance section 401a17 code change dollar amount set forth adjusted secretary treasury accordance section 401a17 code shall apply compensation taken account plan years beginning plan year change effective first adjustment effective january 1 1990 determining compensation participant purposes dollar limitation rules section 414q6 code shall apply except applying rules term family shall include spouse participant lineal descendants participant attained age 19 close year result applying rules dollar limitation exceeded limitation shall prorated among affected family members proportion individuals compensation determined section application dollar limitation purposes section 119 compensation shall also mean compensation paid andersonbarrows inc prior january 1 1996 witness whereof watts industries inc caused instrument executed authorized officer seal affixed day 1996 watts industries inc exhibit 1013 amendment 1 letter credit reimbursement guaranty agreement amendment 1 letter credit reimbursement guaranty agreement dated august 1 1996 among spence engineering company inc delaware corporation borrower watts industries inc delaware corporation guarantor first union national bank north carolina national banking association organized existing laws united states principal offices located charlotte north carolina bank w n e h whereas borrower guarantor bank previously entered letter credit reimbursement guaranty agreement dated june 1 1994 agreement pursuant bank issued irrevocable letter credit dated june 17 1994 whereas borrower guarantor bank desire amend certain provisions agreement therefore consideration premises mutual covenants hereinafter contained good valuable consideration borrower guarantor bank hereby amend agreement follows section 1 article agreement amended article agreement hereby amended inserting following end said article 154 capital assets means fixed assets tangible land buildings fixtures machinery equipment intangible patents copyrights trademarks franchises good provided capital assets shall include item customarily charged directly indirectly expense depreciated useful life twelve 12 months less accordance generally accepted accounting principles 155 capital expenditures means amounts paid indebtedness incurred guarantor borrower subsidiaries connection purchase lease guarantor borrower subsidiaries capital assets would required capitalized show balance sheet person accordance generally accepted accounting principles 156 capitalized leases means leases guarantor borrower subsidiaries lessee obligor discounted future rental payment obligations required capitalized balance sheet lessee obligor accordance generally accepted accounting principles 157 consolidated total interest expense means period aggregate amount interest required paid accrued guarantor borrower subsidiaries period indebtedness guarantor borrower subsidiaries outstanding part period whether interest required reflected item expense capitalized including payments consisting interest respect capitalized leases plus without duplication commitment fees agency fees facility fees balance deficiency fees similar fees expenses connection borrowing money 158 consolidated worth means assets guarantor borrower subsidiaries determined consolidated basis accordance generally accepted accounting principles minus consolidated total liabilities minus extent otherwise includable computation consolidated worth subscriptions receivable purchase capital stock 159 earnings interest taxes depreciation amortization means consolidated net income deficit guarantor borrower subsidiaries period expenses proper charges payment provision income taxes interest expense period plus depreciation amortization period determined accordance generally accepted accounting principles 160 fixed charge coverage ratio means period ratio result earnings interest taxes depreciation amortization minus b capital expenditures ii sum consolidated total interest expense without duplication interest taken account computation fixed charge coverage ratio prior period plus b current maturities long term indebtedness due payable period accordance generally accepted accounting principles case guarantor borrower subsidiaries consolidated basis period 161 restructuring charges means restructuring charge taken borrower guarantor subsidiaries guarantor guarantors fiscal year ending june 30 1996 connection financial accounting standards board statement 121 ii restructuring downsizing consolidation operations borrower guarantor subsidiaries guarantor including limited consolidation selling general administrative functions closure certain manufacturing facilities borrower guarantor subsidiaries guarantor provided however amount restructuring charges shall exceed 95000000 giving effect tax benefits restructuring charges incurred andor paid according generally accepted accounting principles 162 total funded debt means principal amount indebtedness borrowed money including obligations capitalized leases allocable principal guarantor subsidiaries consolidated basis section 2 article agreement amended article agreement amended deleting terms consolidated net income indebtedness entirety inserting lieu thereof following 110 consolidated net income means consolidated net income deficit guarantor borrower subsidiaries deduction expenses taxes proper charges determined accordance generally accepted accounting principles eliminating therefrom extraordinary nonrecurring items income loss 127 indebtedness means obligations contingent otherwise accordance generally accepted accounting principles classified upon obligors balance sheet liabilities reference made footnotes thereto including event whether classified debt similar monetary obligation whether direct indirect including without limitation capitalized lease obligations ii liabilities secured mortgage pledge security interest lien charge encumbrance existing property owned acquired subject thereto whether liability secured thereby shall assumed iii guarantees endorsements contingent obligations whether direct indirect respect indebtedness others including obligation supply funds manner invest directly indirectly debtor purchase indebtedness assure owner indebtedness loss agreement purchase goods supplies services purpose enabling debtor make payment indebtedness held owner otherwise obligations reimburse issuer respect letters credit whether drawn undrawn extent duplicative indebtedness secured letters credit section 3 section 73 agreement amended section 73 agreement hereby amended deleting entirety said section 73 agreement inserting lieu following 73 sale assets dissolution etc neither guarantor borrower subsidiaries become party agree effect dispositions assets including capital stock sale inventory obsolete equipment ordinary course business consistent past practices ii prior occurrence default event default disposition sale assets one armslength transactions cumulative aggregate sales price exceed fiscal year guarantor 100000000 b aggregate august 30 1994 150000000 provided value date disposition noncash assets received guarantor borrower subsidiaries payment portion purchase price shall equal fair market value assets section 4 section 75 agreement amended section 75 agreement hereby amended deleting entirety said section 75 agreement inserting lieu following 75 leverage ratio neither borrower guarantor permit ratio total funded debt ii sum total funded debt plus b consolidated worth date test date occurring period described table set forth exceed ratio set forth opposite period table test date occurs period ratio august 1 1994 december 31 1995 040100 january 1 1996 june 30 1997 045100 july 1 1997 june 30 1998 042100 july 1 1998 thereafter 040100 section 5 section 76 agreement amended section 76 agreement hereby amended deleting entirety said section 76 agreement inserting lieu following 76 fixedcharge coverage ratio neither borrower guarantor permit fixed charge coverage ratio period four consecutive fiscal quarters guarantor less 300100 provided however restructuring charges shall excluded calculation earnings interest taxes depreciation amortization purposes determining fixed charge coverage ratio section 6 section 78 agreement amended section 78 agreement hereby amended deleting entirety said section 78 agreement inserting lieu following 78 consolidated worth guarantor permit time consolidated worth less sum 295000000 plus b cumulative basis 50 positive consolidated net income full fiscal year guarantor subsequent june 30 1996 increases pursuant clause b shall effective first day end fiscal year section 7 effect modification amendment agreement shall deemed modified amended accordance provisions amendment 1 agreement respective rights duties obligations borrower guarantor bank agreement shall remain determined exercised enforced agreement subject respects modifications amendments writing terms conditions amendment 1 agreement shall part terms conditions agreement purposes terms agreement shall continue full force effect subject amendments set forth herein section 8 representations warranties borrower guarantor represent warrant bank follows representations warranties agreement representations warranties borrower guarantor contained agreement true correct made ii giving effect amendment 1 continue true correct date hereof except extent changes resulting transactions contemplated permitted agreement amended hereby changes occurring ordinary course business singly aggregate materially adverse extent representations warranties relate expressly earlier date b authority execution delivery borrower guarantor amendment 1 performance borrower guarantor respective agreements obligations amendment 1 within corporate authority duly authorized necessary corporate action contravene provision charter documents amendment thereof ii conflict result breach material term condition provision constitute default result creation mortgage lien pledge charge security interest encumbrance upon property agreement deed trust indenture mortgage instruments party properties bound including without limitation agreements iii violate contravene provision law statute rule regulation borrower guarantor subject decree order judgment court governmental regulatory authority bureau agency official applicable borrower guarantor iv require waivers consents approvals creditors obtained v require approval consent order authorization license giving notice taking action respect governmental regulatory authority agency provision law except actions taken prior date execution amendment 1 b filings securities exchange commission made prior may 15 1996 c enforceability obligations amendment 1 agreement amended hereby constitute legal valid binding obligations borrower guarantor enforceable borrower guarantor accordance respective terms provided enforcement may limited applicable bankruptcy insolvency reorganization moratorium similar laws general application affecting rights remedies creditors ii availability remedies specific performance injunctive relief may subject discretion court proceedings remedies may brought section 9 counterparts amendment 1 agreement may executed number counterparts shall deemed original together shall constitute one instrument witness whereof borrower guarantor bank caused amendment 1 agreement executed respective names respective seals hereunto affixed attested duly authorized representatives date first written borrower spence engineering company inc title guarantor watts industries inc title bank first union national bank north carolina title attest title corporate seal exhibit 1016 amendment 1 letter credit reimbursement guaranty agreement amendment 1 letter credit reimbursement guaranty agreement dated august 1 1996 among leslie controls inc new jersey corporation borrower watts industries inc delaware corporation guarantor first union national bank north carolina national banking association organized existing laws united states principal offices located charlotte north carolina bank w n e h whereas borrower guarantor bank previously entered letter credit reimbursement guaranty agreement dated july 1 1994 agreement pursuant bank issued irrevocable letter credit dated august 4 1994 whereas borrower guarantor bank desire amend certain provisions agreement therefore consideration premises mutual covenants hereinafter contained good valuable consideration borrower guarantor bank hereby amend agreement follows section 1 article agreement amended article agreement hereby amended inserting following end said article 154 capital assets means fixed assets tangible land buildings fixtures machinery equipment intangible patents copyrights trademarks franchises good provided capital assets shall include item customarily charged directly indirectly expense depreciated useful life twelve 12 months less accordance generally accepted accounting principles 155 capital expenditures means amounts paid indebtedness incurred guarantor borrower subsidiaries connection purchase lease guarantor borrower subsidiaries capital assets would required capitalized show balance sheet person accordance generally accepted accounting principles 156 capitalized leases means leases guarantor borrower subsidiaries lessee obligor discounted future rental payment obligations required capitalized balance sheet lessee obligor accordance generally accepted accounting principles 157 consolidated total interest expense means period aggregate amount interest required paid accrued guarantor borrower subsidiaries period indebtedness guarantor borrower subsidiaries outstanding part period whether interest required reflected item expense capitalized including payments consisting interest respect capitalized leases plus without duplication commitment fees agency fees facility fees balance deficiency fees similar fees expenses connection borrowing money 158 consolidated worth means assets guarantor borrower subsidiaries determined consolidated basis accordance generally accepted accounting principles minus consolidated total liabilities minus extent otherwise includable computation consolidated worth subscriptions receivable purchase capital stock 159 earnings interest taxes depreciation amortization means consolidated net income deficit guarantor borrower subsidiaries period expenses proper charges payment provision income taxes interest expense period plus depreciation amortization period determined accordance generally accepted accounting principles 160 fixed charge coverage ratio means period ratio result earnings interest taxes depreciation amortization minus b capital expenditures ii sum consolidated total interest expense without duplication interest taken account computation fixed charge coverage ratio prior period plus b current maturities long term indebtedness due payable period accordance generally accepted accounting principles case guarantor borrower subsidiaries consolidated basis period 161 restructuring charges means restructuring charge taken borrower guarantor subsidiaries guarantor guarantors fiscal year ending june 30 1996 connection financial accounting standards board statement 121 ii restructuring downsizing consolidation operations borrower guarantor subsidiaries guarantor including limited consolidation selling general administrative functions closure certain manufacturing facilities borrower guarantor subsidiaries guarantor provided however amount restructuring charges shall exceed 95000000 giving effect tax benefits restructuring charges incurred andor paid according generally accepted accounting principles 162 total funded debt means principal amount indebtedness borrowed money including obligations capitalized leases allocable principal guarantor subsidiaries consolidated basis section 2 article agreement amended article agreement amended deleting terms consolidated net income indebtedness entirety inserting lieu thereof following 110 consolidated net income means consolidated net income deficit guarantor borrower subsidiaries deduction expenses taxes proper charges determined accordance generally accepted accounting principles eliminating therefrom extraordinary nonrecurring items income loss 127 indebtedness means obligations contingent otherwise accordance generally accepted accounting principles classified upon obligors balance sheet liabilities reference made footnotes thereto including event whether classified debt similar monetary obligation whether direct indirect including without limitation capitalized lease obligations ii liabilities secured mortgage pledge security interest lien charge encumbrance existing property owned acquired subject thereto whether liability secured thereby shall assumed iii guarantees endorsements contingent obligations whether direct indirect respect indebtedness others including obligation supply funds manner invest directly indirectly debtor purchase indebtedness assure owner indebtedness loss agreement purchase goods supplies services purpose enabling debtor make payment indebtedness held owner otherwise obligations reimburse issuer respect letters credit whether drawn undrawn extent duplicative indebtedness secured letters credit section 3 section 73 agreement amended section 73 agreement hereby amended deleting entirety said section 73 agreement inserting lieu following 73 sale assets dissolution etc neither guarantor borrower subsidiaries become party agree effect dispositions assets including capital stock sale inventory obsolete equipment ordinary course business consistent past practices ii prior occurrence default event default disposition sale assets one armslength transactions cumulative aggregate sales price exceed fiscal year guarantor 100000000 b aggregate august 30 1994 150000000 provided value date disposition noncash assets received guarantor borrower subsidiaries payment portion purchase price shall equal fair market value assets section 4 section 75 agreement amended section 75 agreement hereby amended deleting entirety said section 75 agreement inserting lieu following 75 leverage ratio neither borrower guarantor permit ratio total funded debt ii sum total funded debt plus b consolidated worth date test date occurring period described table set forth exceed ratio set forth opposite period table test date occurs period ratio august 1 1994 december 31 1995 040100 january 1 1996 june 30 1997 045100 july 1 1997 june 30 1998 042100 july 1 1998 thereafter 040100 section 5 section 76 agreement amended section 76 agreement hereby amended deleting entirety said section 76 agreement inserting lieu following 76 fixedcharge coverage ratio neither borrower guarantor permit fixed charge coverage ratio period four consecutive fiscal quarters guarantor less 300100 provided however restructuring charges shall excluded calculation earnings interest taxes depreciation amortization purposes determining fixed charge coverage ratio section 6 section 78 agreement amended section 78 agreement hereby amended deleting entirety said section 78 agreement inserting lieu following 78 consolidated worth guarantor permit time consolidated worth less sum 295000000 plus b cumulative basis 50 positive consolidated net income full fiscal year guarantor subsequent june 30 1996 increases pursuant clause b shall effective first day end fiscal year section 7 effect modification amendment agreement shall deemed modified amended accordance provisions amendment 1 agreement respective rights duties obligations borrower guarantor bank agreement shall remain determined exercised enforced agreement subject respects modifications amendments writing terms conditions amendment 1 agreement shall part terms conditions agreement purposes terms agreement shall continue full force effect subject amendments set forth herein section 8 representations warranties borrower guarantor represent warrant bank follows representations warranties agreement representations warranties borrower guarantor contained agreement true correct made ii giving effect amendment 1 continue true correct date hereof except extent changes resulting transactions contemplated permitted agreement amended hereby changes occurring ordinary course business singly aggregate materially adverse extent representations warranties relate expressly earlier date b authority execution delivery borrower guarantor amendment 1 performance borrower guarantor respective agreements obligations amendment 1 within corporate authority duly authorized necessary corporate action contravene provision charter documents amendment thereof ii conflict result breach material term condition provision constitute default result creation mortgage lien pledge charge security interest encumbrance upon property agreement deed trust indenture mortgage instruments party properties bound including without limitation agreements iii violate contravene provision law statute rule regulation borrower guarantor subject decree order judgment court governmental regulatory authority bureau agency official applicable borrower guarantor iv require waivers consents approvals creditors obtained v require approval consent order authorization license giving notice taking action respect governmental regulatory authority agency provision law except actions taken prior date execution amendment 1 b filings securities exchange commission made prior may 15 1996 c enforceability obligations amendment 1 agreement amended hereby constitute legal valid binding obligations borrower guarantor enforceable borrower guarantor accordance respective terms provided enforcement may limited applicable bankruptcy insolvency reorganization moratorium similar laws general application affecting rights remedies creditors ii availability remedies specific performance injunctive relief may subject discretion court proceedings remedies may brought section 9 counterparts amendment 1 agreement may executed number counterparts shall deemed original together shall constitute one instrument witness whereof borrower guarantor bank caused amendment 1 agreement executed respective names respective seals hereunto affixed attested duly authorized representatives date first written borrower leslie controls inc title guarantor watts industries inc title bank first union national bank north carolina title attest title corporate seal exhibit 1019 amendment 1 letter credit reimbursement guaranty agreement amendment 1 letter credit reimbursement guaranty agreement dated august 1 1996 among leslie controls inc new jersey corporation borrower watts industries inc delaware corporation guarantor first union national bank north carolina national banking association organized existing laws united states principal offices located charlotte north carolina bank w n e h whereas borrower guarantor bank previously entered letter credit reimbursement guaranty agreement dated july 1 1994 agreement pursuant bank issued irrevocable letter credit dated august 4 1994 whereas borrower guarantor bank desire amend certain provisions agreement therefore consideration premises mutual covenants hereinafter contained good valuable consideration borrower guarantor bank hereby amend agreement follows section 1 article agreement amended article agreement hereby amended inserting following end said article 154 capital assets means fixed assets tangible land buildings fixtures machinery equipment intangible patents copyrights trademarks franchises good provided capital assets shall include item customarily charged directly indirectly expense depreciated useful life twelve 12 months less accordance generally accepted accounting principles 155 capital expenditures means amounts paid indebtedness incurred guarantor borrower subsidiaries connection purchase lease guarantor borrower subsidiaries capital assets would required capitalized show balance sheet person accordance generally accepted accounting principles 156 capitalized leases means leases guarantor borrower subsidiaries lessee obligor discounted future rental payment obligations required capitalized balance sheet lessee obligor accordance generally accepted accounting principles 157 consolidated total interest expense means period aggregate amount interest required paid accrued guarantor borrower subsidiaries period indebtedness guarantor borrower subsidiaries outstanding part period whether interest required reflected item expense capitalized including payments consisting interest respect capitalized leases plus without duplication commitment fees agency fees facility fees balance deficiency fees similar fees expenses connection borrowing money 158 consolidated worth means assets guarantor borrower subsidiaries determined consolidated basis accordance generally accepted accounting principles minus consolidated total liabilities minus extent otherwise includable computation consolidated worth subscriptions receivable purchase capital stock 159 earnings interest taxes depreciation amortization means consolidated net income deficit guarantor borrower subsidiaries period expenses proper charges payment provision income taxes interest expense period plus depreciation amortization period determined accordance generally accepted accounting principles 160 fixed charge coverage ratio means period ratio result earnings interest taxes depreciation amortization minus b capital expenditures ii sum consolidated total interest expense without duplication interest taken account computation fixed charge coverage ratio prior period plus b current maturities long term indebtedness due payable period accordance generally accepted accounting principles case guarantor borrower subsidiaries consolidated basis period 161 restructuring charges means restructuring charge taken borrower guarantor subsidiaries guarantor guarantors fiscal year ending june 30 1996 connection financial accounting standards board statement 121 ii restructuring downsizing consolidation operations borrower guarantor subsidiaries guarantor including limited consolidation selling general administrative functions closure certain manufacturing facilities borrower guarantor subsidiaries guarantor provided however amount restructuring charges shall exceed 95000000 giving effect tax benefits restructuring charges incurred andor paid according generally accepted accounting principles 162 total funded debt means principal amount indebtedness borrowed money including obligations capitalized leases allocable principal guarantor subsidiaries consolidated basis section 2 article agreement amended article agreement amended deleting terms consolidated net income indebtedness entirety inserting lieu thereof following 110 consolidated net income means consolidated net income deficit guarantor borrower subsidiaries deduction expenses taxes proper charges determined accordance generally accepted accounting principles eliminating therefrom extraordinary nonrecurring items income loss 127 indebtedness means obligations contingent otherwise accordance generally accepted accounting principles classified upon obligors balance sheet liabilities reference made footnotes thereto including event whether classified debt similar monetary obligation whether direct indirect including without limitation capitalized lease obligations ii liabilities secured mortgage pledge security interest lien charge encumbrance existing property owned acquired subject thereto whether liability secured thereby shall assumed iii guarantees endorsements contingent obligations whether direct indirect respect indebtedness others including obligation supply funds manner invest directly indirectly debtor purchase indebtedness assure owner indebtedness loss agreement purchase goods supplies services purpose enabling debtor make payment indebtedness held owner otherwise obligations reimburse issuer respect letters credit whether drawn undrawn extent duplicative indebtedness secured letters credit section 3 section 73 agreement amended section 73 agreement hereby amended deleting entirety said section 73 agreement inserting lieu following 73 sale assets dissolution etc neither guarantor borrower subsidiaries become party agree effect dispositions assets including capital stock sale inventory obsolete equipment ordinary course business consistent past practices ii prior occurrence default event default disposition sale assets one armslength transactions cumulative aggregate sales price exceed fiscal year guarantor 100000000 b aggregate august 30 1994 150000000 provided value date disposition noncash assets received guarantor borrower subsidiaries payment portion purchase price shall equal fair market value assets section 4 section 75 agreement amended section 75 agreement hereby amended deleting entirety said section 75 agreement inserting lieu following 75 leverage ratio neither borrower guarantor permit ratio total funded debt ii sum total funded debt plus b consolidated worth date test date occurring period described table set forth exceed ratio set forth opposite period table test date occurs period ratio august 1 1994 december 31 1995 040100 january 1 1996 june 30 1997 045100 july 1 1997 june 30 1998 042100 july 1 1998 thereafter 040100 section 5 section 76 agreement amended section 76 agreement hereby amended deleting entirety said section 76 agreement inserting lieu following 76 fixedcharge coverage ratio neither borrower guarantor permit fixed charge coverage ratio period four consecutive fiscal quarters guarantor less 300100 provided however restructuring charges shall excluded calculation earnings interest taxes depreciation amortization purposes determining fixed charge coverage ratio section 6 section 78 agreement amended section 78 agreement hereby amended deleting entirety said section 78 agreement inserting lieu following 78 consolidated worth guarantor permit time consolidated worth less sum 295000000 plus b cumulative basis 50 positive consolidated net income full fiscal year guarantor subsequent june 30 1996 increases pursuant clause b shall effective first day end fiscal year section 7 effect modification amendment agreement shall deemed modified amended accordance provisions amendment 1 agreement respective rights duties obligations borrower guarantor bank agreement shall remain determined exercised enforced agreement subject respects modifications amendments writing terms conditions amendment 1 agreement shall part terms conditions agreement purposes terms agreement shall continue full force effect subject amendments set forth herein section 8 representations warranties borrower guarantor represent warrant bank follows representations warranties agreement representations warranties borrower guarantor contained agreement true correct made ii giving effect amendment 1 continue true correct date hereof except extent changes resulting transactions contemplated permitted agreement amended hereby changes occurring ordinary course business singly aggregate materially adverse extent representations warranties relate expressly earlier date b authority execution delivery borrower guarantor amendment 1 performance borrower guarantor respective agreements obligations amendment 1 within corporate authority duly authorized necessary corporate action contravene provision charter documents amendment thereof ii conflict result breach material term condition provision constitute default result creation mortgage lien pledge charge security interest encumbrance upon property agreement deed trust indenture mortgage instruments party properties bound including without limitation agreements iii violate contravene provision law statute rule regulation borrower guarantor subject decree order judgment court governmental regulatory authority bureau agency official applicable borrower guarantor iv require waivers consents approvals creditors obtained v require approval consent order authorization license giving notice taking action respect governmental regulatory authority agency provision law except actions taken prior date execution amendment 1 b filings securities exchange commission made prior may 15 1996 c enforceability obligations amendment 1 agreement amended hereby constitute legal valid binding obligations borrower guarantor enforceable borrower guarantor accordance respective terms provided enforcement may limited applicable bankruptcy insolvency reorganization moratorium similar laws general application affecting rights remedies creditors ii availability remedies specific performance injunctive relief may subject discretion court proceedings remedies may brought section 9 counterparts amendment 1 agreement may executed number counterparts shall deemed original together shall constitute one instrument witness whereof borrower guarantor bank caused amendment 1 agreement executed respective names respective seals hereunto affixed attested duly authorized representatives date first written borrower leslie controls inc title guarantor watts industries inc title bank first union national bank north carolina title attest title corporate seal exhibit 1022 amendment 1 watts industries inc 1991 nonemployee directors nonqualified stock option plan august 6 1996 1991 nonemployee directors nonqualified stock option plan 1991 plan hereby amended follows 1 section 3b purchase price deleted entirety replaced following effective option grants made november 1 1996 purchase price options shall adjusted current price 2275 closing price companys class common stock october 18 1991 adjusted march 1994 stock split 16375 closing price stock new york stock exchange august 5 1996 2 except provided amendment 1 terms conditions 1991 plan shall remain full force effect executed date first set forth watts industries inc bys kenneth j mcavoy exhibit 1029 amendment 1 dated june 30 1995 amendment 1 amendment dated june 30 1995 revolving credit agreement dated august 30 1994 amended effect time credit agreement among watts investment company borrower watts industries inc parent guarantor first national bank boston lenders may become parties thereto time collectively banks first national bank boston agent banks agent capitalized terms used herein without definition defined credit agreement shall meaning herein credit agreement whereas borrower parent requested banks amend certain terms conditions credit agreement banks subject terms conditions set forth agreed amend credit agreement therefore consideration foregoing premises terms subject conditions set forth herein parties hereto hereby agree follows 1 amendment credit agreement credit agreement hereby amended deleting section 93 entirety inserting lieu thereof following text 93 consolidated net worth neither borrower parent permit time consolidated net worth less sum 350000000 plus b cumulative basis 50 positive consolidated net income full fiscal year subsequent balance sheet date increases pursuant clause b shall effective first day end fiscal year 2 affirmation acknowledgment borrower parent 201 borrower hereby ratifies confirms obligations banks borrower hereby affirms absolute unconditional promise pay banks loans amounts due credit agreement amended hereby 202 parent hereby ratifies confirms guaranteed obligations banks parent hereby affirms unconditional irrevocable guaranty guaranteed obligations credit agreement amended hereby 3 representation warranties borrower parent represent warrant banks agent follows 301 representations warranties credit agreement representations warranties borrower parent contained credit agreement true correct made ii giving effect amendment continue true correct date hereof except extent changes resulting transactions contemplated permitted credit agreement amended hereby changes occurring ordinary course business singly aggregate materially adverse extent representations warranties relate expressly earlier date 302 authority execution delivery borrower parent amendment performance borrower parent respective agreements obligations amendment within corporate authority duly authorized necessary corporate action contravene provision charter documents amendment thereof ii conflict result breach material term condition provision constitute default result creation mortgage lien pledge charge security interest encumbrance upon property agreement deed trust indenture mortgage instruments party properties bound including without limitation loan documents iii violate contravene provision law statute rule regulation borrower parent subject decree order judgment court governmental regulatory authority bureau agency official applicable borrower parent iv require waivers consents approvals creditors obtained v require approval consent order authorization license giving notice taking action respect governmental regulatory authority agency provision law except actions taken prior date execution amendment b filings securities exchange commission made prior october 1 1995 303 enforceability obligations amendment credit agreement amended hereby constitute legal valid binding obligations borrower parent enforceable borrower parent accordance respective terms provided enforcement may limited applicable bankruptcy insolvency reorganization moratorium similar laws general application affecting rights remedies creditors ii availability remedies specific performance injunctive relief may subject discretion court proceedings remedies may brought 4 conditions effectiveness amendment shall become effective date hereof subject satisfaction following conditions precedent execution delivery amendment borrower parent majority banks agent form substance satisfactory majority banks ii defaults events default shall occurred continuing iii material adverse change financial condition business borrower parent shall occurred iv proceedings connection execution amendment documents incident thereto shall satisfactory substance form majority banks agent agents special counsel banks agent counsel shall received information counterpart originals certified copies documents agent may reasonably request 5 miscellaneous provisions 501 except otherwise expressly provided amendment terms conditions provisions credit agreement shall remain declared agreed parties hereto credit agreement amended hereby shall continue full force effect 502 amendment intended take effect agreement seal shall construed according governed laws commonwealth massachusetts 503 amendment may executed number counterparts shall together constitute one instrument making proof amendment shall necessary produce account one counterpart signed party hereto enforcement hereof sought 504 borrower agrees pay agent demand agent reasonable outofpocket costs expenses incurred sustained agent connection amendment including reasonable legal fees witness whereof undersigned duly executed amendment seal date first written watts investment company name title first national bank boston individually agent name title first union national bank north carolina name title mellon bank na name title northern trust company name title credit lyonnais cayman island branch name title brown brothers harriman co name title watts industries inc guarantor name title exhibit 1029 ii amendment 2 dated april 15 1996 amendment 2 amendment dated april 15 1996 revolving credit agreement dated august 30 1994 amended effect time credit agreement among watts investment company borrower watts industries inc parent guarantor first national bank boston lenders may become parties thereto time collectively banks first national bank boston agent banks agent capitalized terms used herein without definition defined credit agreement shall meaning herein credit agreement whereas borrower parent requested banks amend certain terms conditions credit agreement banks subject terms conditions set forth agreed amend credit agreement follows therefore consideration foregoing premises terms subject conditions set forth herein parties hereto hereby agree follows 1 amendments credit agreement credit agreement hereby amended follows section 11 hereby amended inserting following definition appropriate place designated alphabetical order restructuring charges restructuring charge taken borrower parent subsidiaries parent parents fiscal year ending june 30 1996 connection financial accounting standards board statement 121 ii restructuring downsizing consolidation operations borrower parent subsidiaries parent including limited consolidation selling general administrative functions closure certain manufacturing facilities borrower parent subsidiaries parent provided however amount restructuring charges shall exceed 95000000 giving effect tax benefits restructuring charges incurred andor paid according generally accepted accounting principles b section 852 credit agreement hereby amended deleting amount 70000000 set forth ninth line thereof replacing amount 100000000 section 852 credit agreement amended deleting amount 100000000 set forth tenth line thereof replacing amount 150000000 c section 91 credit agreement hereby amended inserting immediately period end thereof following new phrase provided however restructuring charges shall excluded calculation earnings interest taxes depreciation amortization purposes determining fixed charge coverage ratio section 92 credit agreement hereby amended deleting beta92 entirety inserting following new beta92 place thereof 92 leverage ratio neither borrower parent permit ratio total funded debt ii sum total funded debt plus b consolidated net worth date test date occurring period described table set forth exceed ratio set forth opposite period table test date occurs period ratio closing date december 31 1995 040100 january 1 1996 june 30 1997 045100 july 1 1997 june 30 1998 042100 july 1 1998 thereafter 040100 e section 93 credit agreement hereby amended deleting beta93 entirety inserting following new beta93 place thereof 93 consolidated net worth neither borrower parent permit time consolidated net worth less sum 295000000 plus b cumulative basis 50 positive consolidated net income full fiscal year parent subsequent june 30 1996 increases pursuant clause b shall effective first day end fiscal year f credit agreement hereby amended inserting following new beta94 immediately following beta93 immediately preceding beta10 thereof 94 profitable operations neither borrower parent permit consolidated net income deficit less loss 10000000 fiscal quarter parent b loss 20000000 complete fiscal year parent case loss resulting restructuring charges 2 affirmation acknowledgment borrower parent 201 borrower hereby ratifies confirms obligations banks borrower hereby affirms absolute unconditional promise pay banks loans amounts due credit agreement amended hereby 202 parent hereby ratifies confirms guaranteed obligations banks parent hereby affirms unconditional irrevocable guaranty guaranteed obligations credit agreement amended hereby 3 representations warranties borrower parent represent warrant banks agent follows 301 representations warranties credit agreement representations warranties borrower parent contained credit agreement true correct made ii giving effect amendment continue true correct date hereof except extent changes resulting transactions contemplated permitted credit agreement amended hereby changes occurring ordinary course business singly aggregate materially adverse extent representations warranties relate expressly earlier date 302 authority execution delivery borrower parent amendment performance borrower parent respective agreements obligations amendment within corporate authority duly authorized necessary corporate action contravene provision charter documents amendment thereof ii conflict result breach material term condition provision constitute default result creation mortgage lien pledge charge security interest encumbrance upon property agreement deed trust indenture mortgage instruments party properties bound including without limitation loan documents iii violate contravene provision law statute rule regulation borrower parent subject decree order judgment court governmental regulatory authority bureau agency official applicable borrower parent iv require waivers consents approvals creditors obtained v require approval consent order authorization license giving notice taking action respect governmental regulatory authority agency provision law except actions taken prior date execution amendment b filings securities exchange commission made prior may 15 1996 303 enforceability obligations amendment credit agreement amended hereby constitute legal valid binding obligations borrower parent enforceable borrower parent accordance respective terms provided enforcement may limited applicable bankruptcy insolvency reorganization moratorium similar laws general application affecting rights remedies creditors ii availability remedies specific performance injunctive relief may subject discretion court proceedings remedies may brought 4 conditions effectiveness amendment shall become effective date hereof subject satisfaction following conditions precedent execution delivery amendment borrower parent majority banks agent form substance satisfactory majority banks ii payment amendment fee amount 37500 agent pro rata accounts banks accordance respective commitment percentages iii giving effect provisions amendment default events default shall occurred continuing iv except contemplated provisions amendment material adverse change financial condition business borrower parent shall occurred v proceedings connection execution amendment documents incident thereto shall satisfactory substance form majority banks agent agents special counsel banks agent counsel shall received information counterpart originals certified copies documents agent may reasonably request 5 miscellaneous provisions 501 except otherwise expressly provided amendment terms conditions provisions credit agreement shall remain declared agreed parties hereto credit agreement amended hereby shall continue full force effect 502 amendment intended take effect agreement seal shall construed according governed laws commonwealth massachusetts 503 amendment may executed number counterparts shall together constitute one instrument making proof amendment shall necessary produce account one counterpart signed party hereto enforcement hereof sought 504 borrower agrees pay agent demand agent reasonable outofpocket costs expenses incurred sustained agent connection amendment including reasonable legal fees witness whereof undersigned duly executed amendment seal date first written watts investment company name title first national bank boston individually agent name title first union national bank north carolina name title mellon bank na name title northern trust company name title credit lyonnais cayman island branch name title brown brothers harriman co name title watts industries inc guarantor name title exhibit 11 exhibit 11 computation net income per common share watts industries inc amounts thousands except per share information exhibit 21 exhibit 21 direct indirect subsidiaries watts industries inc 81596 domestic watts international sales corp massachusetts watts investment company delaware watts regulator company massachusetts watts securities corp massachusetts circle seal controls inc delaware green country castings inc oklahoma henry pratt company delaware james jones company california kf industries inc oklahoma kf sales corp delaware rudolph labranche inc new hampshire leslie controls inc new jersey nicholson steam trap inc delaware spence engineering company inc delaware ancon usa inc delaware andersonbarrows metals corp california jameco acquisition corp delaware jameco industries inc new york rg laurence company inc new jersey webster valve inc new hampshire international watts industries canada inc canada watts investment company canada ltd canada watts industries europe bv netherlands watts industries france sa france watts industries germany gmbh germany wattsco international us virgin islands watts ocean bv netherlands societe des etablissements rene trubert sa france watts sfr sa france watts uk ltd united kingdom edward barber co ltd united kingdom edward barber uk ltd united kingdom grc controls sa spain hst ag switzerland hst gmbh austria intermes spa italy intermes uk ltd united kingdom kf industries europe bv netherlands kingsworth products ltd united kingdom leslie international vi virgin islands mtr gmbh germany artec gmbh germany ocean bv netherlands pibiviesse spa italy philabel bv netherlands watts ag switzerland watts ocean nv belgian jameco export sales corporation us virgin islands wig armaturen vertriebs gmbh germany wsa heizungs und sanitartechnik gmbh germnay wic verwaltungs und beteiligungs gmbh germany londa spa italy isi spa italy addition foregoing company holds 80 interest de martin srl italy 60 interest tianjin tanggu watts valve company limited chinese joint venture 60 interest suzhou watts valve co ltd chinese joint venture exhibit 231 exhibit 231consent ernst young llp independent auditors consent incorporation reference registration statements posteffective amendment 1 form s8 3330377 pertaining 1986 incentive stock option plan form s8 3337926 pertaining nonqualified stock option plan form s8 3369422 pertaining 1991 nonemployee directors nonqualified stock option plan watts industries inc form s8 3364627 pertaining watts industries inc management stock purchase plan related prospectuses report dated august 6 1996 respect consolidated financial statements included annual report form 10k watts industries inc ernst young llp boston massachusetts september 9 1996 exhibit 232 exhibit 232 consent deloitte touche independent auditors deloitte touche kanaalpark 143 telephone 31 71 5352352 2321 jv leiden telefax 31 71 5352360 po box 402 2300 ak leiden netherlands date reference september 6 1996 pc spaargaren ra consent deloitte touche independent auditors consent incorporation reference registration statements posteffective amendment 1 form s8 3330377 3337926 3369422 3364627 related prospectuses report dated august 6 1996 respect consolidatedcombined financial statements watts industries europe bv included herein report dated august 6 1996 respect financial statement schedule watts industries europe bv included herein deloitte touche deloitte touche august 6 1996 kanaalpark 143 telephone 31 71 5352352 2321 jv leiden telefax 31 71 5352360 po box 402 2300 ak leiden netherlands report independent auditors audited financial statements including consolidatedcombined financial statements watts industries europe bv wholly owned subsidiary watts industries inc june 30 1996 1995 three years period ended june 30 1996 issued report thereon dated august 6 1996 audits also included financial statement schedule ii watts industries europe bv presented separately herein included related schedule watts industries inc form 10k financial statement schedule responsibility companys management responsibility express opinion based audits opinion financial statement schedule watts industries europe bv referred considered relation basic financial statements taken whole presents fairly material respects information set forth therein deloitte touche deloitte touche august 6 1996 kanaalpark 143 telephone 31 71 5352352 2321 jv leiden telefax 31 71 5352360 po box 402 2300 ak leiden netherlands independent auditors report board directors watts industries europe bv audited accompanying financial statements including consolidatedcombined balance sheets watts industries europe bv eerbeek june 30 1996 1995 statements operations three years period ended june 30 1996 separately presented herein expressed dutch guilders financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance auditing standards generally accepted netherlands united states america standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statements presentation believe audits provide reasonable basis opinion consolidatedcombined financial statements watts industries europe bv eerbeek present fairly consolidatedcombined financial position watts industries europe bv june 30 1996 1995 results three years period ended june 30 1996 accordance accounting principles generally accepted netherlands comply legal requirements financial statements included part 9 book 2 netherlands civil code generally accepted accounting principles netherlands vary certain significant respects generally accepted accounting principles united states application latter would affected determination consolidatedcombined net earnings years ended june 30 1996 1995 1994 determination stockholders equity june 30 1996 1995 extent summarized note g deloitte toucheitem 14 exhibits financial statement schedules reports form 8k a1 financial statements following financial statements included separate section report commencing page numbers specified report independent auditors 16 consolidated statements operations three years period ended june 30 1997 17 consolidated balance sheets june 30 1997 1996 18 consolidated statements stockholders equity three years period ended june 30 1997 19 consolidated statements cash flows three years period ended june 30 1997 20 notes consolidated financial statements 21 a2 schedules schedule ii valuation qualifying accounts three years period ended june 30 1997 33 schedules provision made applicable accounting regulations securities exchange commission required related instructions inapplicable therefore omitted a3 exhibits 101106 108 1022 1029 constitute management contracts compensation plans arrangements company required filed exhibits annual report upon written request stockholder chief financial officer companys principal executive office company provide exhibits listed exhibit description location 31 restated certificate incorporation amended 12 32 amended restated bylaws 1 91 horne family voting trust agreement1991 dated october 31 1991 2 amendments dated november 19 1996 february 24 1997 june 5 1997 august 26 1997 92 george b horne voting trust agreement1997 dated august 26 1997 101 employment agreement effective september 1 1996 registrant timothy p horne 14 102 supplemental compensation agreement effective september 1 1996 registrant timothy p horne 14 103 deferred compensation agreement registrant timothy p horne amended 4 104 1996 stock option plan dated october 15 1996 15 105 1989 nonqualified stock option plan 3 106 watts industries inc retirement plan salaried employees dated december 30 1994 amended restated effective january 1 1994 12 amendment 1 14 amendment 2 14 amendment 3 14 amendment 4 dated september 4 1996 107 registration rights agreement dated july 25 1986 5 108 executive incentive bonus plan amended 12 109 indenture dated december 1 1991 registrant first national bank boston trustee including form 838 note due 2003 8 1010 loan agreement mortgage among industrial development authority state new hampshire watts regulator co arlington trust company dated august 1 1985 4 1011 amendment agreement relating watts regulator co canaan franklin new hampshire facilities financing dated december 31 1985 4 1012 sale agreement village walden industrial development agency spence engineering company inc dated june 1 1994 11 1013 letter credit reimbursement guaranty agreement dated june 1 1994 among registrant spence engineering company inc first union national bank north carolina 11 amendment 1 14 amendment 2 dated october 1 1996 1014 trust indenture village walden industrial development agency first national bank boston trustee dated june 1 1994 11 1015 loan agreement hillsborough county industrial development authority leslie controls inc dated july 1 1994 11 1016 letter credit reimbursement guaranty agreement dated july 1 1994 among registrant leslie controls inc first union national bank north carolina 11 amendment 1 14 amendment 2 dated october 1 1996 1017 trust indenture hillsborough county industrial development authority first national bank boston trustee dated july 1 1994 11 1018 loan agreement rutherford county industrial facilities pollution control financing authority watts regulator company dated september 1 1994 12 1019 letter credit reimbursement guaranty agreement dated september 1 1994 among registrant watts regulator company first union national bank north carolina 12 amendment 1 14 amendment 2 dated october 1 1996 1020 trust indenture rutherford county industrial facilities pollution control financing authority first national bank bostonas trustee dated september 1 1994 12 1021 amended restated stock restriction agreement dated october 30 1991 2 amendment dated august 26 1997 1022 watts industries inc 1991 nonemployee directors nonqualified stock option plan 7 amendment 1 14 1023 letters credit relating retrospective paid loss insurance programs 10 1024 form stock restriction agreement management stockholders 5 1025 revolving credit agreement dated december 23 1987 nederlandse creditbank nv watts regulator nederland bv related guaranty watts industries inc watts regulator co dated december 14 1987 6 1026 loan agreement dated september 1987 related mortgage nv sallandsche bank 6 1027 agreement sale shares intermes spa riaf holding ag participations multiscope due srl dated november 6 1992 9 1028 revolving credit agreement dated august 30 1994 among watts investment company certain financial institutions first national bank boston agent registrant guarantor 11 amendment 1 14 amendment 2 14 1029 watts industries inc management stock purchase plan dated october 17 1995 13 amendment 1 dated august 5 1997 1030 stock purchase agreement dated june 19 1996 among mueller co tyco valves limited watts investment company tyco international ltd watts industries inc 16 11 statement regarding computation earnings per common share 21 subsidiaries 231 consent kpmg peat marwick llp 232 consent ernst young llp independent auditors predecessor auditors 233 consent deloitte touche independent auditors predecessor auditors 27 financial data schedule incorporated reference 1 relevant exhibit registrants form 8k dated may 15 1992 2 relevant exhibit registrants form 8k dated november 14 1991 3 relevant exhibit registrants form 10k year ended june 30 1989 4 relevant exhibit registrants form s1 no336515 dated june 17 1986 5 relevant exhibit registrants form s1 336515 part second amendment form s1 dated august 21 1986 6 relevant exhibit registrants form s1 3327101 dated february 16 1989 7 relevant exhibit registrants amendment 1 form 10k year ended june 30 1992 8 relevant exhibit registrants form 10k year ended june 30 1992 9 relevant exhibit registrants amendment 2 dated february 22 1993 form 8k dated november 6 1992 10 relevant exhibit registrants form 10k year ended june 30 1993 11 relevant exhibit registrants form 10k year ended june 30 1994 12 relevant exhibit registrants form 10k year ended june 30 1995 13 relevant exhibit registrants form s8 3364627 dated november 29 1995 14 relevant exhibit registrants form 10k year ended june 30 1996 15 relevant exhibit registrants form s8 33332685 dated august 1 1997 16 relevant exhibit registrants form 8k dated september 4 1996 filed exhibit report securities exchange commission b reports form 8k report form 8k filed securities exchange commission april 11 1997 following items reported form 8k 1 item 4 changes registrants certifying accountant 2 item 7 c financial statements pro forma financial information exhibits letters ernst young llp deloitte touche filed exhibits letter change certifying accountant signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized watts industries inc timothy p horne timothy p horne chairman board chief executive officer dated september 8 1997 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated independent auditors report board directors watts industries inc audited accompanying consolidated balance sheet watts industries inc subsidiaries june 30 1997 related consolidated statements operations stockholders equity cash flows year ended connection audit consolidated financial statements also audited accompanying financial statement schedule valuation qualifying accounts year ended june 30 1997 consolidated financial statements schedule responsibility companys management responsibility express opinion consolidated financial statements schedule based audit accompanying consolidated financial statements schedule valuation qualifying accounts watts industries inc subsidiaries june 30 1996 years two year period ended audited auditors whose report thereon dated august 6 1996 included explanatory paragraph discussed note 4 consolidated financial statements described companys adoption statement financial accounting standards 121 accounting impairment longlived assets longlived assets disposed conducted audit accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audit provides reasonable basis opinion 1997 consolidated financial statements referred present fairly material respects financial position watts industries inc subsidiaries june 30 1997 results operations cash flows year ended conformity generally accepted accounting principles also opinion related financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein kpmg peat marwick llp august 1 1997 boston massachusetts accompanying notes integral part consolidated financial statements watts industries inc subsidiaries consolidated balance sheets amounts thousands except per share information june 30 1997 1996 assets currentassets cash equivalents 13904 0 shortterm investments 518 0 trade accounts receivable less allowance doubtful accounts 7945 1997 8822 1996 121349 116370 inventories raw materials 64261 64182 work process 26030 30994 finished goods 80926 86922 171217 182098 prepaid expenses assets 13087 9283 deferred income taxes 22480 29998 net assets held sale 3037 78401 total current assets 345592 416150 assets goodwill net accumulated amortization 13484 1997 10450 1996 110928 79489 12869 12705 property plant equipment land 10147 11503 buildings improvements 66191 63821 machinery equipment 192581 170304 construction progress 12312 14700 281231 260328 accumulated depreciation 128537 112378 152694 147950 total assets 622083 656294 liabilities stockholders equity current liabilities accounts payable 48896 46022 accrued expenses liabilities 53738 73260 accrued compensation benefits 15834 7756 current portion longterm debt 2422 2907 total current liabilities 120890 129945 longterm debt net current portion 125937 160243 deferred income taxes 16675 19178 noncurrent liabilities 13796 16291 minority interest 11146 11054 stockholders equity preferred stock 10 par value 5000000 shares authorized shares issued outstanding 0 class common stock 10 par value 80000000 shares authorized 1 vote per share 15797460 shares 1997 16856838 shares 1996 issued outstanding 1580 1686 class b common stock 10 par value 25000000 shares authorized 10 votes per share 11215627 shares 1997 11365627 shares 1996 issued outstanding 1121 1136 additional paidin capital 44643 67930 retained earnings 293170 249415 currency translation adjustment 6875 584 total stockholders equity 333639 319583 total liabilities stockholders equity 622083 656294 accompanying notes integral part consolidated financial statements accompanying notes integral part consolidated financial statements accompanying notes integral part consolidated financial statements watts industries inc subsidiaries notes consolidated financial statements 1 description business company designs manufactures sells extensive line valves plumbing heating water quality industrial oil gas markets located predominately north america europe asia 2 accounting policies principles consolidation consolidated financial statements include accounts watts industries inc majority whollyowned subsidiaries company upon consolidation significant intercompany accounts transactions eliminated revenue recognition revenue recognized net provision estimated returns allowances upon shipment cash equivalents shortterm investments cash equivalents consist investments maturities three months less date purchase shortterm investments consist participation mutual funds whose portfolios consist principally united states government securities shortterm investments valued cost approximates market concentrations credit risk financial instruments potentially subject company concentration credit risk consist principally trade receivables concentrations credit risk respect trade receivables limited due large number customers included companys customer base dispersion across many different industries geographic areas june 30 1997 company significant concentrations credit risk inventories stated principally lower cost firstin firstout method market goodwill represents excess cost fair value net assets businesses acquired balance amortized 40 years using straightline method carrying value goodwill reviewed facts circumstances suggest may impaired review indicates goodwill recoverable determined based undiscounted operating cash flows entity acquired remaining amortization period carrying value goodwill reduced fair value determined using discounted cash flow approach property plant equipment property plant equipment recorded cost depreciation provided straightline basis estimated useful lives assets range 10 40 years buildings improvements 3 15 years machinery equipment longlived assets impairment losses recorded longlived assets used operations indicators impairment present undiscounted cash flows estimated generated assets less assets carrying amount instances carrying value longlived assets reduced estimated fair value determined using discounted cash flow approach income taxes deferred income taxes recognized temporary differences financial statement income tax bases assets liabilities watts industries inc subsidiaries notes consolidated financial statements continued foreign currency translation balance sheet accounts foreign subsidiaries translated united states dollars fiscal yearend exchange rates operating accounts translated weighted average exchange rates year net translation gains losses adjusted directly separate component stockholders equity stock based compensation allowed statement financial accounting standards sfas 123 accounting stockbased compensation company accounts stockbased employee compensation plans accordance provisions apb opinion 25 accounting stock issued employees earnings per common share earnings per common share calculated using weighted average number class b common shares outstanding period common stock equivalents dilutive derivative financial instruments derivative financial instruments used company principally management foreign currency exposures certain anticipated intercompany transactions gains losses contracts designated hedges existing assets liabilities recognized income foreign currency gains losses exchange rates change gains losses contracts designated hedges identifiable foreign currency firm commitments deferred included related foreign currency transaction estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates basis presentation certain amounts fiscal years 1996 1995 reclassified permit comparison 1997 presentation new accounting standards sfas 128 earnings per share become effective fiscal year 1998 time company required exclude effect dilutive common stock equivalents primary earnings per share calculation restate prior periods basis effect implementation new standard expected material june 1997 financial accounting standards board issued sfas 130 reporting comprehensive income sfas 131 disclosure segments enterprise related information company currently evaluating effects new standards 3 discontinued operations restructuring matters discontinued operations september 4 1996 company divested municipal water group businesses included henry pratt company james jones company edward barber company ltd selling stock entity realizing 32 million aftertax gain results operations companies reported discontinued operations net income taxes consolidated statements operations unassigned corporate interest expense allocated based ratio net assets discontinued operations consolidated net assets unassigned debt company watts industries inc subsidiaries notes consolidated financial statements continued following table summarizes results operations municipal water group fiscal year ended june 30 1997 1996 1995 thousands revenues 14027 86179 80815 costs expenses 13900 80278 75358 income taxes 127 5901 5457 income taxes 48 2421 2182 income discontinued operations 79 3480 3275 net assets municipal water group classified net assets held sale accompanying consolidated balance sheet june 30 1996 consisted accounts receivable 15843000 inventories 19301000 goodwill 31835000 property plant equipment 20409000 assets 5415000 current liabilities 10900000 liabilities 3502000 restructuring fiscal year 1996 company decided undertake certain restructuring initiatives aimed improving efficiency certain continuing operations two significant initiatives consolidation downsizing pibiviesse spa pibiviesse relocation jameco industries inc jameco connection restructuring plan company recorded 25415000 restructuring charge fiscal year 1996 restructuring charge consisted 9300000 severance costs 7715000 plant closure costs 8400000 asset writedowns cash payments accrued employee severance plant closure costs 3780000 fiscal year 1996 companys remaining accrued restructuring liability 12819000 june 30 1996 fiscal year 1997 cash payments amounted 8918000 companys remaining accrued restructuring liability 3874000 june 30 1997 expected consolidation downsizing pibiviesse completed fiscal year 1998 jameco relocation substantially complete june 30 1997 operations integrated company plant spindale north carolina since commencement restructuring plan related net reduction 205 employees june 30 1997 expected approximately 119 additional restructuring related employee terminations occur matters fiscal year 1996 company recorded 138 million selling general administrative expense charge principally product liability costs environmental remediation reserves bad debt reserves company also recorded 95 million cost goods sold charge fiscal year 1996 write inventories estimated market value 4 longlived asset impairment fiscal year 1996 company adopted statement financial accounting standards 121 accounting impairment longlived assets longlived assets disposed recorded 63065000 charge longlived asset impairment losses occurred principally italian subsidiaries result declining margins operating profits subsidiaries potential nondeductibility goodwill income tax purposes connection reevaluation business strategy italy management concluded impairment occurred recorded loss reducing carrying value affected longlived assets primarily goodwill fair value determined using discounted cash flow approach watts industries inc subsidiaries notes consolidated financial statements continued 5 business acquisitions fiscal year 1997 company acquired ames company inc woodland california consolidated precision corporation riviera beach florida fiscal year 1996 company acquired four businesses significant purchase etablissements trubert sa located chartres france five businesses acquired company fiscal year 1995 significant purchases jameco industries inc andersonbarrows metals corporation pibiviesse spa italy acquired companies valve manufacturers aggregate purchase price acquisitions approximately 1244 million goodwill resulted acquisitions amortized straightline basis 40 year period unless circumstances indicate impairment loss occurred see note 4 acquisitions accounted purchase method results operations acquired businesses included consolidated financial statements date acquisition acquisitions occurred beginning fiscal year 1997 1996 effect operating results would material 6 income taxes significant components companys deferred income tax liabilities assets follows june 30 1997 1996 thousands deferred income tax liabilities excess tax book depreciation 8855 10959 inventory 5962 5336 1858 2883 total deferred income tax liabilities 16675 19178 deferred income tax assets accrued expenses 18727 20345 net operating loss carryforward 6054 4449 1906 6543 total deferred income tax assets 26687 31337 valuation allowance deferred income tax assets 4207 1339 net deferred income tax assets 22480 29998 net deferred income tax asset 5805 10820 components provision income taxes follows fiscal year ended june 30 1997 1996 1995 thousands continuing operations 27127 4355 25727 discontinued operations 3412 2421 2182 30539 6776 27909 watts industries inc subsidiaries notes consolidated financial statements continued provision income taxes continuing operations based following pretax income loss fiscal year ended june 30 1997 1996 1995 thousands domestic 60530 19816 59760 foreign 15057 69226 8430 75587 49410 68190 provision income taxes continuing operations consists following fiscal year ended june 30 1997 1996 1995 thousands current tax expense benefit federal 20417 15739 18299 foreign 369 1176 685 state 1714 1996 3430 21762 18911 22414 deferred tax expense benefit federal 1377 8458 764 foreign 3747 3964 2411 state 241 2134 138 5365 14556 3313 27127 4355 25727 actual income taxes reported continuing operations different would computed applying federal statutory tax rate income loss continuing operations income taxes reasons difference follows fiscal year ended june 30 1997 1996 1995 thousands computed expected federal income tax expense benefit 26455 17294 23867 state income taxes net federal tax benefit 1271 90 2319 goodwill writedown amortization 898 17443 807 foreign tax rate regulation differential 1893 3830 791 net 396 466 475 27127 4355 25727 june 30 1997 company foreign net operating loss carryforwards 115 million income tax purposes expire fiscal years 1998 2005 addition foreign net operating losses 46 million carried forward indefinitely undistributed earnings companys foreign subsidiaries amounted approximately 28 million 37 million 43 million june 30 1997 1996 1995 respectively earnings considered indefinitely reinvested accordingly provision us federal state income taxes recorded thereon upon distribution earnings form dividends otherwise company subject us income taxes subject adjustment foreign tax credits withholding taxes payable various foreign countries determination amount us watts industries inc subsidiaries notes consolidated financial statements continued income tax liability would incurred practicable complexities associated hypothetical calculation however unrecognized foreign tax credits would available reduce portion us income tax liability withholding taxes approximately 21 million would payable upon remittance previously unremitted earnings june 30 1997 company made income tax payments 302 million 278 million 252 million fiscal years 1997 1996 1995 respectively 7 accrued expenses liabilities accrued expenses liabilities consist following june 30 1997 1996 thousands restructuring costs 3874 12819 commissions sales incentives payable 8606 10276 accrued insurance costs 10626 10652 30632 39513 53738 73260 8 financing arrangements longterm debt consists following june 30 1997 1996 thousands 838 notes due december 2003 75000 125 million revolving line credit accruing interest variable rate libor plus 25 basis points banks prime rate 655 june 30 1997 expiring august 1999 29000 61300 industrial revenue bonds maturing periodically 2003 2020 accruing interest variable rate based weekly taxexempt interest rates 425 june 30 1997 17265 7094 9585 128359 163150 less current portion 2422 2907 125937 160243 june 30 1997 96000000 available borrowing companys 125 million revolving line credit principal payments next five fiscal years due follows 19982422000 19992067000 200030132000 2001438000 2002358000 interest paid periods presented accompanying consolidated financial statements approximates interest expense watts industries inc subsidiaries notes consolidated financial statements continued certain companys loan agreements contain covenants require among items maintenance certain financial ratios net worth limit companys ability enter secured borrowing arrangements restrictive loan covenant requires company maintain net worth less sum 295 million 50 cumulative consolidated net income periods subsequent june 30 1996 company 128 million available june 30 1997 payment dividends 9 common stock companys board directors authorized purchase 1500000 2000000 shares companys common stock open market private purchases fiscal years 1997 1996 respectively june 30 1997 2780200 shares companys common stock purchased retired since commencement purchase plan class common stock class b common stock equal dividend liquidation rights share companys class common stock entitled one vote matters submitted stockholders share class b common stock entitled ten votes matters shares class b common stock convertible shares class common stock onetoone basis option holder company reserved total 6231108 shares class common stock issuance stockbased compensation plans 11215627 shares conversion class b common stock class common stock 10 stockbased compensation company several stock option plans key employees outside directors granted incentive isos nonqualified nsos options purchase companys class common stock generally options become exercisable fiveyear period rate 20 per year expire ten years date grant isos nsos granted plans exercise prices less 100 50 fair market value common stock date grant respectively june 30 1997 4882914 shares class common stock authorized future grants options companys stock option plans following summary stock option activity related information watts industries inc subsidiaries notes consolidated financial statements continued following table summarizes information options outstanding june 30 1997 company management stock purchase plan allows granting restricted stock units rsus key employees purchase 1000000 shares class common stock 75 fair market value date grant rsus generally vest annually threeyear period date grant june 30 1997 46419 rsus outstanding pro forma information regarding net income loss net income loss per share required sfas 123 awards granted june 30 1995 company accounted stockbased awards employees fair value method sfas 123 weighted average grant date fair value options granted fiscal years 1997 1996 1995 372 569 603 respectively fair value companys stockbased awards employees estimated using blackscholes option pricing model following assumptions options 1997 1996 expected life years 50 expected stock price volatility 150 expected dividend yield 18 11 riskfree interest rate 656 617 companys pro forma information follows fiscal year ended june 30 1997 1996 thousands except per share information net income loss reported 51747 50285 net income loss pro forma 51132 50613 primary net income loss per share reported 189 170 primary net income loss per share pro forma 186 171 sfas 123 applicable awards granted subsequent june 30 1995 pro forma effect fully reflected fiscal year 2000 11 employee benefit plans company sponsors defined benefit pension plans covering substantially domestic nonunion employees benefits based primarily years service employees compensation funding policy company plans contribute annually maximum amount deducted federal income tax purposes june 30 1997 fair value assets held trust companys defined benefit plans approximated related projected benefit obligation watts industries inc subsidiaries notes consolidated financial statements continued components net pension expense follow fiscal year ended june 30 1997 1996 1995 thousands defined benefit plans service cost benefits earned 1516 1620 1736 interest cost projected benefit obligation 2189 2200 1915 actual return plan assets 1976 3689 802 net amortization deferral 346 1447 1369 total pension expense 1383 1578 1480 funded status companys principal defined benefit plans amounts recognized consolidated balance sheets june 30 follows 1997 1996 1995 thousands vested benefit 22804 22429 20013 nonvested benefit 1299 1774 1307 accumulated benefit obligation 24103 24203 21320 benefit obligation related future compensation levels 5002 5699 3245 projected benefit obligation 29105 29902 24565 fair value plan assets invested primarily equities debt securities 28014 29348 24635 plan assets greater less projected benefit obligation 1091 554 70 unrecognized transition asset obligation 2225 2543 2862 unrecognized prior service cost 1055 546 602 unrecognized net gain loss 676 9 430 minimum liability adjustment 217 420 469 net accrued pension cost included consolidated balance sheets 3154 2962 2229 primary assumptions used determining related obligations plans discount rate 8 increases compensation levels 5 longterm rates return assets 8 fiscal years 1997 1996 1995 company sponsors 401k savings plan substantially domestic nonunion employees plan company matches specified percentage employee contributions subject certain limitations company expense incurred connection plan 330000 350000 260000 fiscal years 1997 1996 1995 respectively 12 contingencies environmental remediation contingencies lawsuits proceedings claims arising ordinary course operations pending threatened company subsidiaries company established reserves presently believes adequate light probable estimable exposure pending threatened litigation knowledge basis information presently available management opinion additional liability resulting matters material adverse effect consolidated financial position results operations liquidity company environmental remediation company named potentially responsible party respect identified contaminated sites level contamination varies significantly site related levels remediation efforts environmental liabilities watts industries inc subsidiaries notes consolidated financial statements continued recorded based probable cost known estimated minimum cost remediation companys accrued estimated environmental liabilities based assumptions subject number factors uncertainties circumstances affect reliability precision estimates include identification additional sites environmental regulations level cleanup required technologies available number financial condition contributors remediation time period remediation may occur company recognizes changes estimates new remediation requirements defined new information becomes available company estimates accrued environmental remediation liabilities likely paid next five ten years 13 financial instruments fair value longterm debt fair value companys 838 notes due december 2003 based quoted market prices fair value companys variable rate debt approximates carrying value carrying amount estimated fair market value companys longterm debt including current portion follows june 30 1997 1996 thousands carrying amount 128359 163150 estimated fair value 133774 166994 use derivatives company uses foreign currency forward exchange contracts reduce impact currency fluctuations certain anticipated intercompany purchase transactions expected occur within fiscal year related gains losses recognized contracts expire generally period underlying foreign currency denominated transaction contracts subject company significant market risk exchange movement offset gains losses balances transactions hedged june 30 1997 1996 open foreign currency forward exchange contracts 14 financial information geographic area financial information geographic area summarized follows transfer prices foreign subsidiaries intended produce profit margins commensurate sales marketing efforts watts industries inc subsidiaries notes consolidated financial statements continued included domestic sales export sales 541 million fiscal year 1997 435 million fiscal year 1996 397 million fiscal year 1995 watts industries inc subsidiaries notes consolidated financial statements continued 15 quarterly financial information unaudited exhibit index exhibits 101106 108 1022 1029 constitute management contracts compensation plans arrangements company required filed exhibits annual report upon written request stockholder chief financial officer companys principal executive office company provide exhibits listed exhibit description location 31 restated certificate incorporation amended 12 32 amended restated bylaws 1 91 horne family voting trust agreement1991 dated october 31 1991 2 amendments dated november 19 1996 february 24 1997 june 5 1997 august 26 1997 92 george b horne voting trust agreement1997 dated august 26 1997 101 employment agreement effective september 1 1996 registrant timothy p horne 14 102 supplemental compensation agreement effective september 1 1996 registrant timothy p horne 14 103 deferred compensation agreement registrant timothy p horne amended 4 104 1996 stock option plan dated october 15 1996 15 105 1989 nonqualified stock option plan 3 106 watts industries inc retirement plan salaried employees dated december 30 1994 amended restated effective january 1 1994 12 amendment 1 14 amendment 2 14 amendment 3 14 amendment 4 dated september 4 1996 107 registration rights agreement dated july 25 1986 5 108 executive incentive bonus plan amended 12 109 indenture dated december 1 1991 registrant first national bank boston trustee including form 838 note due 2003 8 1010 loan agreement mortgage among industrial development authority state new hampshire watts regulator co arlington trust company dated august 1 1985 4 1011 amendment agreement relating watts regulator co canaan franklin new hampshire facilities financing dated december 31 1985 4 1012 sale agreement village walden industrial development agency spence engineering company inc dated june 1 1994 11 1013 letter credit reimbursement guaranty agreement dated june 1 1994 among registrant spence engineering company inc first union national bank north carolina 11 amendment 1 14 amendment 2 dated october 1 1996 1014 trust indenture village walden industrial development agency first national bank boston trustee dated june 1 1994 11 1015 loan agreement hillsborough county industrial development authority leslie controls inc dated july 1 1994 11 1016 letter credit reimbursement guaranty agreement dated july 1 1994 among registrant leslie controls inc first union national bank north carolina 11 amendment 1 14 amendment 2 dated october 1 1996 1017 trust indenture hillsborough county industrial development authority first national bank boston trustee dated july 1 1994 11 1018 loan agreement rutherford county industrial facilities pollution control financing authority watts regulator company dated september 1 199412 1019 letter credit reimbursement guaranty agreement dated september 1 1994 among registrant watts regulator company first union national bank north carolina 12 amendment 1 14 amendment 2 dated october 1 1996 1020 trust indenture rutherford county industrial facilities pollution control financing authority first national bank bostonas trustee dated september 1 1994 12 1021 amended restated stock restriction agreement dated october 30 1991 2 amendment dated august 26 1997 1022 watts industries inc 1991 nonemployee directors nonqualified stock option plan 7 amendment 1 14 1023 letters credit relating retrospective paid loss insurance programs 10 1024 form stock restriction agreement management stockholders 5 1025 revolving credit agreement dated december 23 1987 nederlandse creditbank nv watts regulator nederland bv related guaranty watts industries inc watts regulator co dated december 14 1987 6 1026 loan agreement dated september 1987 related mortgage nv sallandsche bank 6 1027 agreement sale shares intermes spa riaf holding ag participations multiscope due srl dated november 6 1992 9 1028 revolving credit agreement dated august 30 1994 among watts investment company certain financial institutions first national bank boston agent registrant guarantor 11 amendment 1 14 amendment 2 14 1029 watts industries inc management stock purchase plan dated october 17 1995 13 amendment 1 dated august 5 1997 1030 stock purchase agreement dated june 19 1996 among mueller co tyco valves limited watts investment company tyco international ltd watts industries inc 16 11 statement regarding computation earnings per common share 21 subsidiaries 231 consent kpmg peat marwick llp 232 consent ernst young llp independent auditors predecessor auditors 233 consent deloitte touche independent auditors predecessor auditors 27 financial data schedule incorporated reference 1 relevant exhibit registrants form 8k dated may 15 1992 2 relevant exhibit registrants form 8k dated november 14 1991 3 relevant exhibit registrants form 10k year ended june 30 1989 4 relevant exhibit registrants form s1 336515 dated june 17 1986 5 relevant exhibit registrants form s1 336515 part second amendment form s1 dated august 21 1986 6 relevant exhibit registrants form s1 3327101 dated february 16 1989 7 relevant exhibit registrants amendment 1 form 10k year ended june 30 1992 8 relevant exhibit registrants form 10k year ended june 30 1992 9 relevant exhibit registrants amendment 2 dated february 22 1993 form 8k dated november 6 1992 10 relevant exhibit registrants form 10k year ended june 30 1993 11 relevant exhibit registrants form 10k year ended june 30 1994 12 relevant exhibit registrants form 10k year ended june 30 1995 13 relevant exhibit registrants form s8 no3364627 dated november 29 1995 14 relevant exhibit registrants form 10k year ended june 30 1996 15 relevant exhibit registrants form s8 no33332685 dated august 1 1997 16 relevant exhibit registrants form 8k dated september 4 1996 filed exhibit report securities exchange commissionitem 14 exhibits financial statement schedules reports form 8k a1 financial statements following financial statements included separate section report commencing page numbers specified report independent auditors 19 consolidated statements operations three years period ended june 30 1998 20 consolidated balance sheets june 30 1998 1997 21 consolidated statements stockholders equity three years period ended june 30 1998 22 consolidated statements cash flows three years period ended june 30 1998 23 notes consolidated financial statements 24 a2 schedules schedule ii valuation qualifying accounts three years period ended june 30 1998 36 schedules provision made applicable accounting regulations securities exchange commission required related instructions inapplicable therefore omitted a3 exhibits 101106 108 1022 1029 constitute management contracts compensation plans arrangements company required filed exhibits annual report upon written request stockholder chief financial officer companys principal executive office company provide exhibits listed incorporated reference 1 relevant exhibit registrants form 8k dated may 15 1992 2 relevant exhibit registrants form 8k dated november 14 1991 3 relevant exhibit registrants form 10k year ended june 30 1989 4 relevant exhibit registrants form s1 336515 dated june 17 1986 5 relevant exhibit registrants form s1 336515 part second amendment form s1 dated august 21 1986 6 relevant exhibit registrants form s1 3327101 dated february 16 1989 7 relevant exhibit registrants amendment no1 form 10k year ended june 30 1992 8 relevant exhibit registrants form 10k year ended june 30 1992 9 relevant exhibit registrants amendment 2 dated february 22 1993 form 8k dated november 6 1992 10 relevant exhibit registrants form 10k year ended june 30 1993 11 relevant exhibit registrants form 10k year ended june 30 1994 12 relevant exhibit registrants form 10k year ended june 30 1995 13 relevant exhibit registrants form s8 3364627 dated november 29 1995 14 relevant exhibit registrants form 10k year ended june 30 1996 15 relevant exhibit registrants form s8 33332685 dated august 1 1997 16 relevant exhibit registrants form 8k dated september 4 1996 17 relevant exhibit registrants form 10q quarter ended march 31 1998 18 relevant exhibit registrants form 10k year ended june 30 1997 19 notes consolidated financial statements note 10 report filed exhibit report securities exchange commission b reports form 8k registrant file reports form 8k fourth quarter period covered annual report signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized watts industries inc timothy p horne timothy p horne chairman board chief executive officer dated september 10 1998 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated signature title date timothy p horne chairman board september 10 1998 timothy p horne chief executive officer principal executive officer director kenneth j mcavoy chief financial officer september 10 1998 kenneth j mcavoy treasurer principal financial accounting officer secretary director david bloss sr president chief operating september 10 1998 david bloss sr officer director noah herndon director september 10 1998 noah herndon wendy e lane director september 10 1998 wendy e lane gordon w moran director september 10 1998 gordon w moran daniel j murphy iii director september 10 1998 daniel j murphy iii independent auditors report board directors stockholders watts industries inc audited accompanying consolidated balance sheets watts industries inc subsidiaries june 30 1998 1997 related consolidated statements operations stockholders equity cash flows years ended connection audits consolidated financial statements also audited accompanying financial statement schedules valuation qualifying accounts years ended june 30 1998 1997 consolidated financial statements schedules responsibility companys management responsibility express opinion consolidated financial statements schedules based audits accompanying consolidated financial statements watts industries inc subsidiaries year ended june 30 1996 schedule valuation qualifying accounts year ended june 30 1996 audited auditors whose report thereon dated august 6 1996 expressed unqualified opinion conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion 1998 1997 consolidated financial statements referred present fairly material respects financial position watts industries inc subsidiaries june 30 1998 1997 results operations cash flows years ended conformity generally accepted accounting principles also opinion related financial statement schedules considered relation basic consolidated financial statements taken whole present fairly material respects information set forth therein august 5 1998 boston massachusetts watts industries inc subsidiaries consolidated statements operations amounts thousands except per share information watts industries inc subsidiaries consolidated balance sheets amounts thousands except share information watts industries inc subsidiaries consolidated statements stockholders equity amounts thousands except share information watts industries inc subsidiaries consolidated statements cash flows amounts thousands watts industries inc subsidiaries notes consolidated financial statements 1 description business company designs manufactures sells extensive line valves plumbing heating water quality industrial oil gas markets located predominately north america europe asia 2 accounting policies principles consolidation consolidated financial statements include accounts watts industries inc majority whollyowned subsidiaries company upon consolidation significant intercompany accounts transactions eliminated revenue recognition revenue recognized net provision estimated returns allowances upon shipment cash equivalents shortterm investments cash equivalents consist investments maturities three months less date purchase shortterm investments consist participation mutual funds whose portfolios consist principally united states government securities shortterm investments valued cost approximates market concentrations credit risk financial instruments potentially subject company concentration credit risk consist principally trade receivables concentrations credit risk respect trade receivables limited due large number customers included companys customer base dispersion across many different industries geographic areas june 30 1998 company significant concentrations credit risk inventories stated lower cost principally firstin firstout method market goodwill represents excess cost fair value net assets businesses acquired balance amortized 40 years using straightline method carrying value goodwill reviewed facts circumstances suggest may impaired review indicates goodwill recoverable determined based undiscounted operating cash flows entity acquired remaining amortization period carrying value goodwill reduced fair value determined using discounted cash flow approach property plant equipment property plant equipment recorded cost depreciation provided straightline basis estimated useful lives assets range 10 40 years buildings improvements 3 15 years machinery equipment longlived assets impairment losses recorded longlived assets used operations indicators impairment present undiscounted cash flows estimated generated assets less assets carrying amount instances carrying value longlived assets reduced estimated fair value determined using appraisal discounted cash flow approach appropriate income taxes deferred income taxes recognized temporary differences financial statement income tax bases assets liabilities foreign currency translation balance sheet accounts foreign subsidiaries translated united states dollars fiscal yearend exchange rates operating accounts translated weighted average exchange rates year net translation gains losses adjusted directly separate component stockholders equity stock based compensation allowed statement financial accounting standards sfas 123 accounting stockbased compensation company accounts stockbased employee compensation plans accordance provisions apb opinion 25 accounting stock issued employees earnings per share fiscal year 1998 company adopted sfas 128 earnings per share sfas 128 required company change method formerly used compute earnings per share eps restate prior periods presented requirements calculating basic earnings per share exclude dilutive effect securities diluted earnings per share assumes conversion dilutive securities see note 10 derivative financial instruments company uses foreign currency forward exchange contracts manage currency exchange exposures certain foreign currency denominated transactions gains losses contracts designated hedges deferred recognized time related foreign currency denominated transactions estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates basis presentation certain amounts fiscal years 1997 1996 reclassified conform 1998 presentation new accounting standards sfas 130 reporting comprehensive income sfas 131 disclosure segments enterprise related information sfas 132 employers disclosures pensions postretirement benefits become effective fiscal year 1999 adopted time since new standards require additional disclosure adoption effect companys results operations financial condition sfas 133 accounting derivative instruments hedging activities becomes effective fiscal year 2000 new standard require company recognize derivative instruments either assets liabilities fair value consolidated balance sheet company currently evaluating effect new standard 3 discontinued operations restructuring matters discontinued operations september 4 1996 company divested municipal water group businesses included henry pratt company james jones company edward barber company ltd selling stock entity realizing 32 million aftertax gain results operations companies reported discontinued operations net income taxes consolidated statements operations unassigned corporate interest expense allocated based ratio net assets discontinued operations consolidated net assets unassigned debt company following table summarizes results operations municipal water group prior divestiture fiscal year ended june 30 1997 1996 thousands revenues 14027 86179 costs expenses 13900 80278 income taxes 127 5901 income taxes 48 2421 income discontinued operations 79 3480 restructuring fiscal year 1996 company decided undertake certain restructuring initiatives aimed improving efficiency certain continuing operations two significant initiatives consolidation downsizing pibiviesse spa pibiviesse relocation jameco industries inc jameco connection restructuring plan company recorded 25415000 restructuring charge fiscal year 1996 restructuring charge consisted 9300000 severance costs 7715000 plant closure costs 8400000 asset writedowns june 30 1998 restructuring initiatives substantially complete related cash payments approximately amounts accrued restructuring costs fiscal year 1996 matters fiscal year 1996 company recorded 138 million selling general administrative expense charge principally product liability costs environmental remediation reserves bad debt reserves company also recorded 95 million cost goods sold charge fiscal year 1996 write inventories estimated market value 4 longlived asset impairment fiscal year 1996 company adopted sfas 121 accounting impairment longlived assets longlived assets disposed recorded 63065000 charge longlived asset impairment losses occurred principally italian subsidiaries result declining margins operating profits subsidiaries potential nondeductibility goodwill income tax purposes connection reevaluation business strategy italy management concluded impairment occurred recorded loss reducing carrying value affected longlived assets primarily goodwill fair value determined using discounted cash flow approach 5 business acquisitions fiscal year 1998 company acquired six enterprises largest telford valve specialties inc edmonton alberta canada aerodyne controls corporation ronkonkoma new york atkomatic valve company inc indianapolis indiana fiscal year 1997 company acquired ames company inc woodland california consolidated precision corporation riviera beach florida fiscal year 1996 company acquired four businesses significant purchase societe des etablissements rene trubert sa located chartres france acquired companies valve manufacturers aggregate purchase price acquisitions approximately 748 million goodwill resulted acquisitions amortized straightline basis 40 year period acquisitions accounted purchase method results operations acquired businesses included consolidated financial statements date acquisition acquisitions occurred beginning fiscal year 1998 1997 1996 effect operating results would material 6 income taxes significant components companys deferred income tax liabilities assets follows june 30 1998 1997 deferred income tax liabilities thousands excess tax book depreciation 11182 8855 inventory 5428 5962 2246 1858 total deferred income tax liabilities 18856 16675 deferred income tax assets accrued expenses 10969 18727 net operating loss carryforward 12625 6054 bad debt reserve 1815 1580 5934 326 total deferred income tax assets 31343 26687 valuation allowance deferred income tax assets 7761 4207 net deferred income tax assets 23582 22480 net deferred income tax asset 4726 5805 components provision income taxes follows fiscal year ended june 30 1998 1997 1996 thousands continuing operations 27712 27127 4355 discontinued operations 3412 2421 27712 30539 6776 provision income taxes continuing operations based following pretax income loss fiscal year ended june 30 1998 1997 1996 thousands domestic 61204 60530 19816 foreign 19877 15057 69226 81081 75587 49410 provision income taxes continuing operations consists following fiscal year ended june 30 1998 1997 1996 thousands current tax expense benefit federal 19198 20417 15739 foreign 5249 369 1176 state 3483 1714 1996 27930 21762 18911 deferred tax expense benefit federal 472 1377 8458 foreign 772 3747 3964 state 82 241 2134 218 5365 14556 27712 27127 4355 actual income taxes reported continuing operations different would computed applying federal statutory tax rate income loss continuing operations income taxes reasons difference follows june 30 1998 company foreign net operating loss carryforwards 228 million income tax purposes expire fiscal years 1999 2006 addition foreign net operating losses 102 million carried forward indefinitely undistributed earnings companys foreign subsidiaries amounted approximately 34 million 28 million 37 million june 30 1998 1997 1996 respectively earnings considered indefinitely reinvested accordingly provision us federal state income taxes recorded thereon upon distribution earnings form dividends otherwise company subject us income taxes subject adjustment foreign tax credits withholding taxes payable various foreign countries determination amount us income tax liability would incurred practicable complexities associated hypothetical calculation however unrecognized foreign tax credits would available reduce portion us income tax liability withholding taxes approximately 18 million would payable upon remittance previously unremitted earnings june 30 1998 company made income tax payments 215 million 302 million 278 million fiscal years 1998 1997 1996 respectively 7 accrued expenses liabilities accrued expenses liabilities consist following june 30 1998 1997 thousands commissions sales incentives payable 11836 9152 accrued insurance costs 11366 10626 29135 33960 52337 53738 8 financing arrangements longterm debt consists following june 30 1998 106 million available borrowing companys 125 million revolving line credit principal payments next five fiscal years due follows 19991695 20001109 2001385 2002362 200324086 interest paid periods presented accompanying consolidated financial statements approximates interest expense certain companys loan agreements contain covenants require among items maintenance certain financial ratios net worth limit companys ability enter secured borrowing arrangements restrictive loan covenant requires company maintain net worth less sum 295 million 50 cumulative consolidated net income complete fiscal years subsequent june 30 1996 company 265 million available june 30 1998 payment dividends 9 common stock companys board directors authorized purchase 1500000 2000000 shares companys common stock open market private purchases fiscal years 1997 1996 respectively june 30 1998 2880200 shares companys common stock purchased retired since commencement purchase plan class common stock class b common stock equal dividend liquidation rights share companys class common stock entitled one vote matters submitted stockholders share class b common stock entitled ten votes matters shares class b common stock convertible shares class common stock onetoone basis option holder company reserved total 6021608 shares class common stock issuance stockbased compensation plans 10296827 shares conversion class b stock class common stock 10 earnings per share fiscal 1998 company adopted sfas 128 earnings per share following table sets forth reconciliation basic diluted eps 11 stockbased compensation company several stock option plans key employees outside directors granted incentive isos nonqualified nsos options purchase companys class common stock generally options become exercisable fiveyear period rate 20 per year expire ten years date grant isos nsos granted plans exercise prices less 100 50 fair market value common stock date grant respectively june 30 1998 4659514 shares class common stock authorized future grants options companys stock option plans following summary stock option activity related information following table summarizes information options outstanding june 30 1998 company management stock purchase plan allows granting restricted stock units rsus key employees purchase 1000000 shares class common stock 67 fair market value date grant rsus vest annually threeyear period date grant difference rsu price fair market value date award amortized compensation expense ratably vesting period june 30 1998 100899 rsus outstanding dividends declared rsus remain unpaid june 30 1998 total 38000 pro forma information regarding net income loss net income loss per share required sfas 123 awards granted june 30 1995 company accounted stockbased awards employees fair value method sfas 123 weighted average grant date fair value options granted fiscal years 1998 1997 1996 552 372 569 respectively fair value companys stockbased awards employees estimated using blackscholes option pricing model following assumptions 1998 1997 1996 expected life years 50 expected stock price volatility 150 expected dividend yield 13 18 11 riskfree interest rate 554 656 617 companys pro forma information follows fiscal year ended june 30 1998 1997 1996 thousands except per share information net income loss reported 53369 51747 50285 net income loss pro forma 52443 51132 50613 basic eps reported 197 190 171 basic eps pro forma 193 188 172 diluted eps reported 195 189 171 diluted eps pro forma 191 187 172 sfas 123 applicable awards granted subsequent june 30 1995 pro forma effect fully reflected fiscal year 2000 12 employee benefit plans company sponsors defined benefit pension plans covering substantially domestic nonunion employees benefits based primarily years service employees compensation funding policy company plans contribute annually maximum amount deducted federal income tax purposes components net pension expense follow funded status companys principal defined benefit plans amounts recognized consolidated balance sheets june 30 follows primary assumptions used determining related obligations plans discount rate 7 fiscal year 1998 8 fiscal years 1997 1996 increases compensation levels 5 fiscal years 1998 1997 1996 longterm rates return assets 9 fiscal year 1998 8 fiscal years 1997 1996 company sponsors 401k savings plan substantially domestic nonunion employees plan company matches specified percentage employee contributions subject certain limitations company expense incurred connection plan 400000 330000 350000 fiscal years 1998 1997 1996 respectively 13 contingencies environmental remediation contingencies april 1998 company became aware complaint filed seal state california alleging violations california false claims act complaint alleges former subsidiary company sold products utilized municipal water systems failed meet contractually specified standards falsely certified standards met complaint alleges municipal entities suffered tens millions dollars damages result defective products seeks treble damages reimbursement legal costs penalties company intends vigorously contest matter cannot presently determine whether loss result lawsuits proceedings claims arising ordinary course operations also pending threatened company subsidiaries company established reserves presently believes adequate light probable estimable exposure pending threatened litigation knowledge environmental remediation company named potentially responsible party respect identified contaminated sites level contamination varies significantly site related levels remediation efforts environmental liabilities recorded based probable cost known estimated minimum cost remediation companys accrued estimated environmental liabilities based assumptions subject number factors uncertainties circumstances affect reliability precision estimates include identification additional sites environmental regulations level cleanup required technologies available number financial condition contributors remediation time period remediation may occur company recognizes changes estimates new remediation requirements defined new information becomes available company estimates accrued environmental remediation liabilities likely paid next five ten years 14 financial instruments fair value carrying amounts cash equivalents shortterm investments trade receivables trade payables approximate fair value short maturity financial instruments fair value companys 838 notes due december 2003 based quoted market prices fair value companys variable rate debt approximates carrying value carrying amount estimated fair market value companys longterm debt including current portion follows june 30 1998 1997 thousands carrying amount 117076 128359 estimated fair value 124366 133774 use derivatives company uses foreign currency forward exchange contracts reduce impact currency fluctuations certain anticipated intercompany purchase transactions expected occur within fiscal year certain foreign currency transactions related gains losses recognized contracts expire generally period underlying foreign currency denominated transaction contracts subject company significant market risk exchange movement offset gains losses related foreign currency denominated transactions june 30 1998 1997 significant amounts open foreign currency forward exchange contracts related unrealized gains losses 15 financial information geographic area financial information geographic area summarized follows transfer prices foreign subsidiaries intended produce profit margins commensurate sales marketing efforts included domestic sales export sales 578 million fiscal year 1998 541 million fiscal year 1997 435 million fiscal year 1996 16 quarterly financial information unaudited 17 subsequent event unaudited july 1998 company acquired hoke inc hoke manufacturer distributor industrial valves fittings headquartered cresskill new jersey agreed upon purchase price hoke acquisition amounted approximately 85000000 including assumption debt hokes annual sales net income year ended december 31 1997 amounted approximately 70000000 1353000 respectively exhibit index exhibits 101106 108 1022 1029 constitute management contracts compensation plans arrangements company required filed exhibits annual report upon written request stockholder chief financial officer companys principal executive office company provide exhibits listed exhibit description location 31 restated certificate incorporation amended 12 32 amended restated bylaws 1 91 horne family voting trust agreement1991 dated october 31 1991 2 amendments dated november 19 1996 18 february 24 1997 18 june 5 1997 18 august 26 1997 18 october 17 1997 92 george b horne voting trust agreement1997 dated august 26 1997 18 amendments dated october 30 1997 july 31 1998 august 31 1998 101 employment agreement effective september 1 1996 registrant timothy p horne 14 102 supplemental compensation agreement effective september 1 1996 registrant timothy p horne 14 103 deferred compensation agreement registrant timothy p horne amended 4 104 1996 stock option plan dated october 15 1996 15 105 1989 nonqualified stock option plan 3 106 watts industries inc retirement plan salaried employees dated december 30 1994 amended restated effective january 1 1994 12 amendment 1 14 amendment 2 14 amendment 3 14 amendment 4 dated september 4 1996 18 107 registration rights agreement dated july 25 1986 5 108 executive incentive bonus plan amended 12 109 indenture dated december 1 1991 registrant first national bank boston trustee including form 838 note due 2003 8 1010 loan agreement mortgage among industrial development authority state new hampshire watts regulator co arlington trust company dated august 1 1985 4 1011 amendment agreement relating watts regulator cocanaan franklin new hampshire facilities financing dated december 31 1985 4 1012 sale agreement village walden industrial development agency spence engineering company inc dated june 1 1994 11 1013 letter credit reimbursement guaranty agreement dated june 1 1994 among registrant spence engineering company inc first union national bank north carolina 11 amendment 1 14 amendment 2 dated october 1 1996 18 1014 trust indenture village walden industrial development agency first national bank boston trustee dated june 1 1994 11 1015 loan agreement hillsborough county industrial development authority leslie controls inc dated july 1 1994 11 1016 letter credit reimbursement guaranty agreement dated july 1 1994 among registrant leslie controls inc first union national bank north carolina 11 amendment 1 14 amendment 2 dated october 1 1996 18 1017 trust indenture hillsborough county industrial development authority first national bank boston trustee dated july 1 1994 11 1018 loan agreement rutherford county industrial facilities pollution control financing authority watts regulator company dated september 1 1994 12 1019 letter credit reimbursement guaranty agreement dated september 1 1994 among registrant watts regulator company first union national bank north carolina 12 amendment 1 14 amendment 2 dated october 1 1996 18 1020 trust indenture rutherford county industrial facilities pollution control financing authority first national bank bostonas trustee dated september 1 1994 12 1021 amended restated stock restriction agreement dated october 30 1991 2 amendment dated august 26 1997 18 1022 watts industries inc 1991 nonemployee directors nonqualified stock option plan 7 amendment 1 14 1023 letters credit relating retrospective paid loss insurance programs 10 1024 form stock restriction agreement management stockholders 5 1025 revolving credit agreement dated december 23 1987 nederlandse creditbank nv watts regulator nederland bv related guaranty watts industries inc watts regulator co dated december 14 1987 6 1026 loan agreement dated september 1987 related mortgage nv sallandsche bank 6 1027 agreement sale shares intermes spa riaf holding ag participations multiscope due srl dated november 6 1992 9 1028 amended restated revolving credit agreement dated march 27 1998 among watts investment company certain financial institutions bankboston na administrative agent registrant guarantor 17 1029 watts industries inc management stock purchase plan dated october 17 1995 13 amendment 1 dated august 5 1997 18 1030 stock purchase agreement dated june 19 1996 among mueller co tyco valves limited watts investment company tyco international ltd watts industries inc 16 11 statement regarding computation earnings per common share 19 21 subsidiaries 231 consent kpmg peat marwick llp 232 consent ernst young llp independent auditors predecessor auditors 233 consent deloitte touche independent auditors predecessor auditors 27 financial data schedulefiscal 1998 271 financial data schedulefiscal 1997 restated incorporated reference 1 relevant exhibit registrants form 8k dated may 15 1992 2 relevant exhibit registrants form 8k dated november 14 1991 3 relevant exhibit registrants form 10k year ended june 30 1989 4 relevant exhibit registrants form s1 336515 dated june 17 1986 5 relevant exhibit registrants form s1 336515 part second amendment form s1 dated august 21 1986 6 relevant exhibit registrants form s1 3327101 dated february 16 1989 7 relevant exhibit registrants amendment 1 form 10k year ended june 30 1992 8 relevant exhibit registrants form 10k year ended june 30 1992 9 relevant exhibit registrants amendment 2 dated february 22 1993 form 8k dated november 6 1992 10 relevant exhibit registrants form 10k year ended june 30 1993 11 relevant exhibit registrants form 10k year ended june 30 1994 12 relevant exhibit registrants form 10k year ended june 30 1995 13 relevant exhibit registrants form s8 3364627 dated november 29 1995 14 relevant exhibit registrants form 10k year ended june 30 1996 15 relevant exhibit registrants form s8 33332685 dated august 1 1997 16 relevant exhibit registrants form 8k dated september 4 1996 17 relevant exhibit registrants form 10q quarter ended march 31 1998 18 relevant exhibit registrants form 10k year ended june 30 1997 19 notes consolidated financial statements note 10 report filed exhibit report securities exchange commissionitem 14 exhibits financial statement schedules reports form 8k a1 financial statements following financial statements included separate section report commencing page numbers specified report independent auditors 20 consolidated statements operations six months ended december 31 1999 december 31 1998 unaudited twelve months ended june 30 1999 1998 21 consolidated balance sheets december 31 1999 june 30 1999 june 30 1998 22 consolidated statements stockholders equity six months ended december 31 1999 twelve months ended june 30 1999 1998 23 consolidated statements cash flows six months ended december 31 1999 twelve months ended june 30 1999 1998 24 notes consolidated financial statements 25 a2 schedules schedule ii valuation qualifying accounts six months ended december 31 1999 twelve months ended june 30 1999 1998 40 schedules provision made applicable accounting regulations securities exchange commission required related instructions inapplicable therefore omitted a3 exhibits 101106 108 1016 1023 constitute management contracts compensation plans arrangements company required filed exhibits annual report upon written request stockholder chief financial officer companys principal executive office company provide exhibits listed exhibit description location 21 distribution agreement watts industries inc circor international inc 20 31 restated certificate incorporation amended 12 32 amended restated bylaws amended may 11 1999 1 91 horne family voting trust agreement1991 dated october 31 1991 2 amendments dated november 19 1996 18 february 24 1997 18 june 5 1997 18 august 26 1997 18 october 17 1997 21 92 amended restated george b horne voting trust agreement1997 dated september 14 1999 22 101 employment agreement effective september 1 1996 registrant timothy p horne 14 102 supplemental compensation agreement effective september 1 1996 registrant timothy p horne 14 103 deferred compensation agreement registrant timothy p horne amended 4 104 1996 stock option plan dated october 15 1996 15 105 1989 nonqualified stock option plan 3 106 watts industries inc retirement plan salaried employees dated december 30 1994 amended restated effective january 1 1994 12 amendment 1 14 amendment 2 14 amendment 3 14 amendment 4 dated september 4 1996 18 amendment 5 dated january 1 1998 amendment 6 dated may 3 1999 22 amendment 7 dated june 7 1999 22 107 registration rights agreement dated july 25 1986 5 108 executive incentive bonus plan amended 12 109 indenture dated december 1 1991 registrant first national bank boston trustee including form 838 note due 2003 8 1010 loan agreement mortgage among industrial development authority state new hampshire watts regulator co arlington trust company dated august 1 1985 4 1011 amendment agreement relating watts regulator co canaan franklin new hampshire facilities financing dated december 31 1985 4 1012 loan agreement rutherford county industrial facilities pollution control financing authority watts regulator company dated september 1 1994 12 1013 letter credit reimbursement guaranty agreement dated september 1 1994 among registrant watts regulator company first union national bank north carolina 12 amendment 1 14 amendment 2 dated october 1 1996 18 amendment 3 dated october 18 1999 11 1014 trust indenture rutherford county industrial facilities pollution control financing authority first national bank bostonas trustee dated september 1 1994 12 1015 amended restated stock restriction agreement dated october 30 1991 2 amendment dated august 26 1997 18 1016 watts industries inc 1991 nonemployee directors nonqualified stock option plan 7 amendment 1 14 1017 letters credit relating retrospective paid loss insurance programs 10 1018 form stock restriction agreement management stockholders 5 1019 revolving credit agreement dated december 23 1987 nederlandse creditbank nv watts regulator nederland bv related guaranty watts industries inc watts regulator co dated december 14 1987 6 1020 loan agreement dated september 1987 related mortgage nv sallandsche bank 6 1021 agreement sale shares intermes spa riaf holding ag participations multiscope due srl dated november 6 1992 9 1022 amended restated revolving credit agreement dated march 27 1998 among watts investment company certain financial institutions bankboston na administrative agent registrant guarantor 17 first amendment amended restated revolving credit agreement dated october 18 1999 11 1023 watts industries inc management stock purchase plan dated october 17 1995 13 amendment 1 dated august 5 1997 18 1024 stock purchase agreement dated june 19 1996 among mueller co tyco valves limited watts investment company tyco international ltd watts industries inc 16 11 statement regarding computation earnings per common share 19 21 subsidiaries 23 consent kpmg llp 27 financial data schedulefiscal 19995 incorporated reference 1 relevant exhibit registrants form 10q quarter ended march 31 1999 2 relevant exhibit registrants form 8k dated november 14 1991 3 relevant exhibit registrants form 10k year ended june 30 1989 4 relevant exhibit registrants form s1 336515 dated june 17 1986 5 relevant exhibit registrants form s1 336515 part second amendment form s1 dated august 21 1986 6 relevant exhibit registrants form s1 3327101 dated february 16 1989 7 relevant exhibit registrants amendment 1 form 10k year ended june 30 1992 8 relevant exhibit registrants form 10k year ended june 30 1992 9 relevant exhibit registrants amendment 2 dated february 22 1993 form 8k dated november 6 1992 10 relevant exhibit registrants form 10k year ended june 30 1993 11 relevant exhibit registrants form 10q quarter ended september 30 1999 12 relevant exhibit registrants form 10k year ended june 30 1995 13 relevant exhibit registrants form s8 3364627 dated november 29 1995 14 relevant exhibit registrants form 10k year ended june 30 1996 15 relevant exhibit registrants form s8 33332685 dated august 1 1997 16 relevant exhibit registrants form 8k dated september 4 1996 17 relevant exhibit registrants form 10q quarter ended march 31 1998 18 relevant exhibit registrants form 10k year ended june 30 1997 19 notes consolidated financial statements note 2 report 20 exhibit 21 circor international inc amendment 1 registration statement form 10 filed september 22 1999 file 00026961 21 relevant exhibit registrants form 10k year ended june 30 1998 22 relevant exhibit registrants form 10k year ended june 30 1999 filed exhibit report securities exchange commission b reports form 8k report form 8k filed securities exchange commission october 22 1999 following item reported 1 item 5 events financial statements filed signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized watts industries inc timothy p horne timothy p horne chairman board chief executive officer dated march 14 2000 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated signature title date timothy p horne chairman board march 14 2000 chief executive officer timothy p horne principal executive officer director william c mccartney chief financial officer march 14 2000 treasurer principal william c mccartney financial accounting officer secretary kenneth j mcavoy director march 14 2000 kenneth j mcavoy gordon w moran director march 14 2000 gordon w moran daniel j murphy iii director march 14 2000 daniel j murphy iii roger young director march 14 2000 roger young independent auditors report board directors stockholders watts industries inc audited accompanying consolidated balance sheets watts industries inc subsidiaries december 31 1999 june 30 1999 1998 related consolidated statements operations stockholders equity cash flows six month period ended december 31 1999 fiscal years ended june 30 1999 1998 connection audits consolidated financial statements also audited accompanying financial statement schedule valuation qualifying accounts consolidated financial statements schedule responsibility companys management responsibility express opinion consolidated financial statements schedule based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position watts industries inc subsidiaries december 31 1999 june 30 1999 1998 results operations cash flows six month period ended december 31 1999 fiscal years ended june 30 1999 1998 conformity generally accepted accounting principles also opinion related financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein kpmg llp boston massachusetts february 8 2000 watts industries inc subsidiaries consolidated statements operations amounts thousands except per share information accompanying notes integral part consolidated financial statements watts industries inc subsidiaries consolidated balance sheets amounts thousands except share information accompanying notes integral part consolidated financial statements watts industries inc subsidiaries consolidated statements stockholders equity amounts thousands except share information watts industries inc subsidiaries consolidated statements cash flows amounts thousands accompanying notes integral part consolidated financial statements watts industries inc subsidiaries notes consolidated statements 1 description business watts industries inc company designs manufactures sells extensive line valves plumbing heating water quality markets located predominately north america europe asia 2 accounting policies principles consolidation consolidated financial statements include accounts company majority whollyowned subsidiaries upon consolidation significant intercompany accounts transactions eliminated financial statements company reflect industrial oil gas businesses discontinued operations periods prior spinoff transaction completed october 18 1999 see note 3 change fiscal year effective july 1 1999 company changed fiscal year end june 30 december 31 accordingly audited financial statements include results sixmonth period ended december 31 1999 transition period prior two fiscal years ended june 30 1999 fiscal 1999 june 30 1998 fiscal 1998 addition basic audited financial statements related notes unaudited financial information six month period ended december 31 1998 presented enhance comparability cash equivalents cash equivalents consist highly liquid investments maturities three months less date original issuance inventories stated lower cost firstin firstout method market goodwill represents excess cost fair value net assets businesses acquired balance amortized 40 years using straightline method company assesses recoverability intangible asset determining whether amortization goodwill balance remaining life recovered undiscounted future operating cash flows acquired businesses amount goodwill impairment measured based projected discounted future operating cash flows using discount rate reflecting companys average cost funds property plant equipment property plant equipment recorded cost depreciation provided straightline basis estimated useful lives assets range 10 40 years buildings improvements 3 15 years machinery equipment income taxes income taxes accounted asset liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases operating loss tax credit carryforwards deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized income period includes enactment date watts industries inc subsidiaries notes consolidated statements continued foreign currency translation balance sheet accounts foreign subsidiaries translated united states dollars fiscal yearend exchange rates operating accounts translated weighted average exchange rates period net translation gains losses adjusted directly separate component stockholders equity company provide us income taxes foreign currency translation adjustments since provide taxes undistributed earnings foreign subsidiaries stock based compensation allowed statement financial accounting standards sfas 123 accounting stockbased compensation company accounts stockbased employee compensation plans accordance provisions apb opinion 25 accounting stock issued employees net income per common share basic net income per common share calculated dividing net income weighted average number common shares outstanding calculation diluted earnings per share assumes conversion dilutive securities see note 12 net income number shares used compute net income per share continuing operations basic assuming full dilution reconciled derivative financial instruments company uses derivative instruments principally swaps forward contracts options achieve financing strategy hedge foreign currency commodity exposures contracts hedge transactions balances periods consistent committed exposures constitute investments independent exposures company hold issue financial instruments trading purposes party leveraged contracts realized unrealized foreign exchange gains losses financial instruments recognized offset foreign exchange gains losses underlying exposures gain loss financial instrument ceases effective hedge recognized statement operations interest rate differential paid received swap agreements recognized adjustment interest expense estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates watts industries inc subsidiaries notes consolidated statements continued new accounting standards 1998 financial accounting standards board issued sfas 133 accounting derivative instruments hedging activities company adopt sfas 133 january 1 2001 impact sfas 133 consolidated financial statements still evaluated expected material also 1998 american institute certified public accountants issued sop 981 accounting costs computer software developed obtained internal use sop 985 reporting costs startup activities company adopted sop 981 sop 985 july 1 1999 adoption pronouncements material effect consolidated financial statements 3 discontinued operations december 18 1998 company announced intention spinoff industrial oil gas businesses shareholders independent publicly traded company spinoff effected taxfree distribution october 18 1999 distribution date owners watts common stock october 6 1999 received one share common stock circor international inc circor new company every two shares watts class b common stock held coincident distribution date company received 960 million cash circor repayment intercompany loans advances historical operating results circor shown net tax discontinued operations consolidated statements operations net assets discontinued operations consolidated balance sheet include assets liabilities attributable circor businesses june 30 1999 1998 included historical operating results discontinued operations allocation companys interest expense based allocation companys debt discontinued operations income taxes allocated discontinued operations based pretax income calculated separate company basis pursuant requirements statement financial accounting standards 109 condensed operating statement data discontinued operations summarized costs expenses related municipal water group divested 1996 fiscal 1999 relate legal costs associated state california litigation see note 14 watts industries inc subsidiaries notes consolidated statements continued 4 restructuring activities december 2 1999 company announced restructuring operations italy consolidate warehousing manufacturing operations existing italian operation facilities newly acquired italian subsidiary cazzaniga spa program include termination 29 employees primarily manufacturing began december 1999 expected fully completed june 2000 december 31 1999 10 employees terminated connection restructuring accordance eitf 943 company recorded charge operating expenses 1460000 861000 taxes 003 net income per common share fully diluted sixmonth period ended december 31 1999 details restructuring charge follows initial utilized provision 1999 balance thousands severance related benefits 1299000 192000 1107000 lease termination costs 134000 exit costs 27000 total 1460000 192000 1268000 5 business acquisitions 1999 company acquired cazzaniga spa located biassono italy approximately 280 million cazzaniga integrated manufacturer plumbing heating products annual sales approximately 350 million goodwill resulting acquisition approximately 190 million amortized straightline basis 40year period fiscal 1999 1998 company also acquired several valve companies included part industrial oil gas businesses spunoff separate publicly traded company circor aggregate purchase price acquisitions approximately 1180 million acquisitions accounted purchase method accounting results operations since acquisition included companys consolidated financial statements materially affected consolidated financial position results operations liquidity company 6 inventories consist following december 31 june 30 june 30 1999 1998 thousands raw materials 36429 36901 34057 work process 10355 7493 6128 finished goods 66037 66158 64013 112821 110552 104198 watts industries inc subsidiaries notes consolidated statements continued 7 property plant equipment property plant equipment consists following december 31 june 30 june 30 1999 1998 thousands land 7937 7964 5582 buildings improvements 56478 53867 48676 machinery equipment 154490 148952 128339 construction progress 7787 7932 10861 226692 218715 193458 accumulated depreciation 96461 89552 87971 130231 129163 105487 8 income taxes significant components companys deferred income tax liabilities assets follows provision income taxes continuing operations based following pretax income december 31 june 30 june 30 1999 1998 thousands domestic 18424 33787 34609 foreign 6987 11136 6744 25411 44923 41353 watts industries inc subsidiaries notes consolidated statements continued provision income taxes continuing operations consists following actual income taxes reported continuing operations different would computed applying federal statutory tax rate income continuing operations income taxes reasons difference follows december 31 1999 company foreign net operating loss carryforwards 154 million income tax purposes expire 2000 2003 addition foreign net operating losses 94 million carried forward indefinitely undistributed earnings companys foreign subsidiaries amounted approximately 430 million december 31 1999 450 million 330 million june 30 1999 1998 respectively earnings considered indefinitely reinvested accordingly provision us federal state income taxes recorded thereon upon distribution earnings form dividends otherwise company subject us income taxes subject adjustment foreign tax credits withholding taxes payable various foreign countries determination amount us income tax liability would incurred practicable complexities associated hypothetical calculation however unrecognized foreign tax credits would available reduce portion us income tax liability withholding taxes approximately 23 million would payable upon remittance previously unremitted earnings december 31 1999 company made income tax payments 112 million six months ended december 31 1999 248 million 172 million fiscal years ended june 30 1999 1998 respectively watts industries inc subsidiaries notes consolidated statements continued 9 accrued expenses liabilities accrued expenses liabilities consist following watts industries inc subsidiaries notes consolidated statements continued 10 financing arrangements longterm debt consists following coincident distribution date spinoff transaction company received 960 million cash circor repayment intercompany loans advances company amount based formula allocated borrowings company circor based relative levels business acquisition activity based methodology borrowings amounting approximately 970 million 310 million allocated discontinued operations june 30 1999 1998 respectively additionally coincident spinoff transaction companys revolving line credit facility amended thereby reducing maximum available borrowing amount 125 million 100 million principal payments next five fiscal years due follows thousands 2000 5683 2001 1274 2002 6057 2003 97020 2004 18320 interest paid periods presented accompanying consolidated financial statements approximates interest expense certain companys loan agreements contain covenants require among items maintenance certain financial ratios limit companys ability enter secured borrowing arrangements watts industries inc subsidiaries notes consolidated statements continued 11 common stock since fiscal 1997 companys board directors authorized repurchase 3880200 shares companys common stock open market private purchases since inception repurchase program 3595700 shares companys common stock repurchased retired class common stock class b common stock equal dividend liquidation rights share companys class common stock entitled one vote matters submitted stockholders share class b common stock entitled ten votes matters shares class b common stock convertible shares class common stock onetoone basis option holder company reserved total 6110871 shares class common stock issuance stockbased compensation plans 9485247 shares conversion class b stock class common stock 12 stockbased compensation company several stock option plans key employees outside directors granted incentive isos nonqualified nsos options purchase companys class common stock generally options become exercisable fiveyear period rate 20 per year expire ten years date grant isos nsos granted plans exercise prices less 100 50 fair market value common stock date grant respectively december 31 1999 3150710 shares class common stock authorized future grants options companys stock option plans following summary stock option activity related information effective date circor spinoff watts stock options held circor employees terminated replaced new circor stock options b immediately following spinoff number options increased exercise prices decreased modification preserve economic value options existed prior spinoff transaction holders watts stock options c includes 13100 options 1998 exercised exchange 10633 shares outstanding class common shares contributed treasury subsequently retired watts industries inc subsidiaries notes consolidated statements continued following table summarizes information options outstanding december 31 1999 company management stock purchase plan allows granting restricted stock units rsus key employees purchase 1000000 shares class common stock 67 fair market value date grant rsus vest annually threeyear period date grant difference rsu price fair market value date award amortized compensation expense ratably vesting period december 31 1999 265000 rsus outstanding dividends declared rsus remain unpaid december 31 1999 total 70000 pro forma information regarding net income net income per share required sfas 123 awards granted june 30 1995 company accounted stockbased awards employees fair value method sfas 123 weighted average grant date fair value options granted 304 december 31 1999 247 350 june 30 1999 1998 respectively fair value companys stockbased awards employees estimated using blackscholes option pricing model following assumptions companys pro forma information follows sfas 123 applicable awards granted subsequent june 30 1995 pro forma effect fully reflected 2000 watts industries inc subsidiaries notes consolidated statements continued 13 employee benefit plans company sponsors defined benefit pension plans covering substantially domestic nonunion employees benefits based primarily years service employees compensation funding policy company plans contribute annually maximum amount deducted federal income tax purposes additionally substantially companys domestic nonunion employees eligible participate 401k savings plan company matches specified percentage employee contributions subject certain limitations components benefit expense follows funded status defined benefit plan amounts recognized balance sheet follow watts industries inc subsidiaries notes consolidated statements continued weighted average assumptions used determining obligations pension benefit plans shown june 30 december 31 1999 1998 discount rate 775 700 expected return plan assets 900 rate compensation increase 500 subsequent spinoff circor took place october 18 1999 circor became liable payment pension plan benefits earned circor employees prior following spinoff retire spinoff companys pension plan transferred assets circor pension plan amount assets calculated based relative percentage projected benefit obligation amount adjusted comply asset allocation methodology set forth section 4044 employee retirement income security act 1974 amended 14 contingencies environmental remediation contingencies april 1998 company became aware complaint filed seal state california alleging violations california false claims act complaint alleges former subsidiary company sold products utilized municipal water systems failed meet contractually specified standards falsely certified standards met complaint alleges municipal entities suffered tens millions dollars damages result defective products seeks treble damages reimbursement legal costs penalties company intends vigorously contest matter cannot presently determine whether loss result lawsuits proceedings claims arising ordinary course operations also pending threatened company subsidiaries company established reserves presently believes adequate light probable estimable exposure pending threatened litigation knowledge however resolution matters specific period could material effect quarterly annual operating results period environmental remediation company currently party otherwise involved various administrative legal proceedings federal state local environmental laws regulations involving number sites level contamination varies significantly site related levels remediation efforts environmental liabilities recorded based probable cost known estimated minimum cost remediation companys accrued estimated environmental liabilities based assumptions subject number factors uncertainties circumstances affect reliability precision estimates include identification additional sites environmental regulations level cleanup required technologies available number financial condition contributors remediation time period remediation may occur company recognizes changes estimates new remediation requirements defined new information becomes available company estimates accrued environmental remediation liabilities likely paid next five ten years watts industries inc subsidiaries notes consolidated statements continued 15 financial instruments fair value carrying amounts cash equivalents trade receivables trade payables approximate fair value short maturity financial instruments fair value companys 838 notes due december 2003 based quoted market prices fair value companys variable rate debt approximates carrying value carrying amount estimated fair market value companys longterm debt including current portion follows december 31 june 30 june 30 1999 1998 thousands carrying amount 129674 217963 107617 estimated fair value 131452 222441 114907 derivative instruments company uses foreign currency forward exchange contracts reduce impact currency fluctuations certain anticipated intercompany purchase transactions expected occur within fiscal year certain foreign currency transactions related gains losses recognized contracts expire generally period underlying foreign currency denominated transaction contracts subject company significant market risk exchange movement offset gains losses related foreign currency denominated transactions june 30 1999 company forward contracts buy foreign currencies notional value 90 million fair market value 06 million contracts transferred circor part spinoff transaction december 31 1999 company outstanding forward contracts buy foreign currencies company uses commodity futures contracts fix price certain portion certain raw materials used manufacturing process contracts highly correlate actual purchases commodity contract values reflected cost commodity actually purchased june 30 1999 company outstanding contracts notional value 35 million fair value 02 million december 1999 contacts sold company realized gain approximately 05 million gain deferred december 31 1999 offset costs january february 2000 raw material purchases hedged original transaction commodity contracts outstanding december 31 1999 company also enters derivative contracts convert specific variable rate borrowings fixed rate debt instruments december 31 1999 company outstanding interest rate swap converted 20 million euro borrowings variable rate euro line credit fixed rate borrowings 43 swap agreement expires september 2002 fair value 05 million december 31 1999 watts industries inc subsidiaries notes consolidated statements continued 16 segment information following table presents certain operating segment information operating segment individually managed separate financial results reviewed companys chief operating decisionmaker intercompany transactions eliminated intersegment revenues significant watts industries inc subsidiaries notes consolidated statements continued 17 quarterly financial information unaudited watts industries inc subsidiaries notes consolidated statements continued schedule iivaluation qualifying accounts watts industries inc continuing operations dollar amounts thousands 1 uncollectible accounts written net recoveries 2 reclassification balance discontinued operations continuing operations 3 balance acquired acquisition cazzaniga spa fiscal 1999 exhibit index exhibit description location 21 distribution agreement watts industries inc circor international inc 20 31 restated certificate incorporation amended 12 32 amended restated bylaws amended may 11 1999 1 91 horne family voting trust agreement1991 dated october 31 1991 2 amendments dated november 19 1996 18 february 24 1997 18 june 5 1997 18 august 26 1997 18 october 17 1997 21 92 amended restated george b horne voting trust agreement1997 dated september 14 1999 22 101 employment agreement effective september 1 1996 registrant timothy p horne 14 102 supplemental compensation agreement effective september 1 1996 registrant timothy p horne 14 103 deferred compensation agreement registrant timothy p horne amended 4 104 1996 stock option plan dated october 15 1996 15 105 1989 nonqualified stock option plan 3 106 watts industries inc retirement plan salaried employees dated december 30 1994 amended restated effective january 1 1994 12 amendment 1 14 amendment 2 14 amendment 3 14 amendment 4 dated september 4 1996 18 amendment 5 dated january 1 1998 amendment 6 dated may 3 1999 22 amendment 7 dated june 7 1999 22 107 registration rights agreement dated july 25 1986 5 108 executive incentive bonus plan amended 12 109 indenture dated december 1 1991 registrant first national bank boston trustee including form 838 note due 2003 8 1010 loan agreement mortgage among industrial development authority state new hampshire watts regulator co arlington trust company dated august 1 1985 4 1011 amendment agreement relating watts regulator co canaan franklin new hampshire facilities financing dated december 31 1985 4 1012 loan agreement rutherford county industrial facilities pollution control financing authority watts regulator company dated september 1 1994 12 1013 letter credit reimbursement guaranty agreement dated september 1 1994 among registrant watts regulator company first union national bank north carolina 12 amendment 1 14 amendment 2 dated october 1 1996 18 amendment 3 dated october 18 1999 11 1014 trust indenture rutherford county industrial facilities pollution control financing authority first national bank bostonas trustee dated september 1 1994 12 1015 amended restated stock restriction agreement dated october 30 1991 2 amendment dated august 26 1997 18 1016 watts industries inc 1991 nonemployee directors nonqualified stock option plan 7 amendment 1 14 1017 letters credit relating retrospective paid loss insurance programs 10 1018 form stock restriction agreement management stockholders 5 1019 revolving credit agreement dated december 23 1987 nederlandse creditbank nv watts regulator nederland bv related guaranty watts industries inc watts regulator co dated december 14 1987 6 1020 loan agreement dated september 1987 related mortgage nv sallandsche bank 6 1021 agreement sale shares intermes spa riaf holding ag participations multiscope due srl dated november 6 1992 9 1022 amended restated revolving credit agreement dated march 27 1998 among watts investment company certain financial institutions bankboston na administrative agent registrant guarantor 17 first amendment amended restated revolving credit agreement dated october 18 1999 11 1023 watts industries inc management stock purchase plan dated october 17 1995 13 amendment 1 dated august 5 1997 18 1024 stock purchase agreement dated june 19 1996 among mueller co tyco valves limited watts investment company tyco international ltd watts industries inc 16 11 statement regarding computation earnings per common share 19 21 subsidiaries 23 consent kpmg llp 27 financial data schedulefiscal 19995 incorporated reference 1 relevant exhibit registrants form 10q quarter ended march 31 1999 2 relevant exhibit registrants form 8k dated november 14 1991 3 relevant exhibit registrants form 10k year ended june 30 1989 4 relevant exhibit registrants form s1 336515 dated june 17 1986 5 relevant exhibit registrants form s1 336515 part second amendment forms1 dated august 21 1986 6 relevant exhibit registrants form s1 3327101 dated february 16 1989 7 relevant exhibit registrants amendment 1 form 10k year ended june 30 1992 8 relevant exhibit registrants form 10k year ended june 30 1992 9 relevant exhibit registrants amendment 2 dated february 22 1993 form 8k dated november 6 1992 10 relevant exhibit registrants form 10k year ended june 30 1993 11 relevant exhibit registrants form 10q quarter ended september 30 1999 12 relevant exhibit registrants form 10k year ended june 30 1995 13 relevant exhibit registrants form s8 3364627 dated november 29 1995 14 relevant exhibit registrants form 10k year ended june 30 1996 15 relevant exhibit registrants form s8 33332685 dated august 1 1997 16 relevant exhibit registrants form 8k dated september 4 1996 17 relevant exhibit registrants form 10q quarter ended march 31 1998 18 relevant exhibit registrants form 10k year ended june 30 1997 19 notes consolidated financial statements note 2 report 20 exhibit 21 circor international inc amendment 1 registration statement form 10 filed september 22 1999 file 00026961 21 relevant exhibit registrants form 10k year ended june 30 1998 22 relevant exhibit registrants form 10k year ended june 30 1999 filed exhibit report securities exchange commissionitem 14 exhibits financial statement schedules reports form 8k a1 financial statements following financial statements included separate section report commencing page numbers specified report independent auditors 31 consolidated statements operations twelve months ended december 31 2001 2000 1999 unaudited six months ended december 31 1999 1998 unaudited twelve months ended june 30 1999 32 consolidated balance sheets december 31 2001 2000 33 consolidated statements stockholders equity twelve months ended december 31 2001 2000 six months ended december 31 1999 twelve months ended june 30 1999 3435 consolidated statements cash flows twelve months ended december 31 2001 2000 1999 unaudited six months ended december 31 1999 twelve months ended june 30 1999 36 notes consolidated financial statements 3756 schedules provision made applicable accounting regulations securities exchange commission included notes consolidated financial statements required related instructions inapplicable therefore omitted a3 exhibits 101106 108 1016 1023 constitute management contracts compensation plans arrangements company required filed exhibits annual report upon written request stockholder chief financial officer companys principal executive office company provide exhibits listed exhibit description location 21 distribution agreement watts industries inc circor international inc 20 31 restated certificate incorporation amended 12 32 amended restated bylaws amended may 11 1999 1 91 horne family voting trust agreement1991 dated october 31 1991 2 amendments dated november 19 1996 18 february 24 1997 18 june 5 1997 18 august 26 1997 18 october 17 1997 21 extension amendment dated october 25 2001 92 amended restated george b horne voting trust agreement1997 dated september 14 1999 22 101 employment agreement effective september 1 1996 registrant timothy p horne 14 102 supplemental compensation agreement effective september 1 1996 registrant timothy p horne 14 amendment 1 dated july 25 2000 23 103 deferred compensation agreement registrant timothy p horne amended 4 104 1996 stock option plan dated october 15 1996 15 105 1989 nonqualified stock option plan 3 106 watts industries inc retirement plan salaried employees dated december 30 1994 amended restated effective january 1 1994 12 amendment 1 14 amendment 2 14 amendment 3 14 amendment 4 dated september 4 1996 18 amendment 5 dated january 1 1998 amendment 6 dated may 3 1999 22 amendment 7 dated june 7 1999 22 107 registration rights agreement dated july 25 1986 5 108 executive incentive bonus plan amended 12 109 indenture dated december 1 1991 registrant first national bank boston trustee including form 838 note due 2003 8 1010 loan agreement mortgage among industrial development authority state new hampshire watts regulator co arlington trust company dated august 1 1985 4 1011 amendment agreement relating watts regulator co canaan franklin new hampshire facilities financing dated december 31 1985 4 1012 loan agreement rutherford county industrial facilities pollution control financing authority watts regulator company dated september 1 1994 12 1013 letter credit reimbursement guaranty agreement dated september 1 1994 among registrant watts regulator company first union national bank north carolina 12 amendment 1 14 amendment 2 dated october 1 1996 18 amendment 3 dated october 18 1999 11 1014 trust indenture rutherford county industrial facilities pollution control financing authority first national bank boston trustee dated september 1 1994 12 1015 amended restated stock restriction agreement dated october 30 1991 2 amendment dated august 26 1997 18 1016 watts industries inc 1991 nonemployee directors nonqualified stock option plan 7 amendment 1 14 1017 letters credit relating retrospective paid loss insurance programs 10 1018 form stock restriction agreement management stockholders 5 1020 loan agreement dated september 1987 related mortgage nv sallandsche bank 6 1021 agreement sale shares intermes spa riaf holding ag participations multiscope due srl dated november 6 1992 9 1022 amended restated revolving credit agreement dated march 27 1998 among watts investment company certain financial institutions bankboston na administrative agent registrant guarantor 17 first amendment amended restated revolving credit agreement dated october 18 1999 11 1023 watts industries inc management stock purchase plan dated october 17 1995 13 amendment 1 dated august 5 1997 18 amendment 2 dated november 1 1999 1024 stock purchase agreement dated june 19 1996 among mueller co tyco valves limited watts investment company tyco international ltd watts industries inc 16 11 statement regarding computation earnings per common share 19 21 subsidiaries 23 consent kpmg llp incorporated reference 1 relevant exhibit registrants form 10q quarter ended march 31 1999 2 relevant exhibit registrants form 8k dated november 14 1991 3 relevant exhibit registrants form 10k year ended june 30 1989 4 relevant exhibit registrants form s1 336515 dated june 17 1986 5 relevant exhibit registrants form s1 336515 part second amendment form s1 dated august 21 1986 6 relevant exhibit registrants form s1 3327101 dated february 16 1989 7 relevant exhibit registrants amendment 1 form 10k year ended june 30 1992 8 relevant exhibit registrants form 10k year ended june 30 1992 9 relevant exhibit registrants amendment 2 dated february 22 1993 form 8k dated november 6 1992 10 relevant exhibit registrants form 10k year ended june 30 1993 11 relevant exhibit registrants form 10q quarter ended september 30 1999 12 relevant exhibit registrants form 10k year ended june 30 1995 13 relevant exhibit registrants form s8 3364627 dated november 29 1995 14 relevant exhibit registrants form 10k year ended june 30 1996 15 relevant exhibit registrants form s8 33332685 dated august 1 1997 16 relevant exhibit registrants form 8k dated september 4 1996 17 relevant exhibit registrants form 10q quarter ended march 31 1998 18 relevant exhibit registrants form 10k year ended june 30 1997 19 notes consolidated financial statements note 2 report 20 exhibit 21 circor international inc amendment 1 registration statement form 10 filed september 22 1999 file 00026961 21 relevant exhibit registrants form 10k year ended june 30 1998 22 relevant exhibit registrants form 10k year ended june 30 1999 23 relevant exhibit registrants form 10q quarter ended september 30 2000 filed exhibit report securities exchange commission b reports form 8k reports filed form 8k quarter ending december 31 2001 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized watts industries inc timothy p horne timothy p horne chairman board chief executive officer president dated march 14 2002 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated independent auditors report board directors stockholders watts industries inc audited accompanying consolidated balance sheets watts industries inc subsidiaries december 31 2001 2000 related consolidated statements operations stockholders equity cash flows years ended december 31 2001 2000 six month period ended december 31 1999 fiscal year ended june 30 1999 consolidated financial statements responsibility companys management responsibility express opinion consolidated financial statements based audits conducted audits accordance auditing standards generally accepted united states america standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position watts industries inc subsidiaries december 31 2001 2000 results operations cash flows years ended december 31 2001 2000 six month period ended december 31 1999 fiscal year ended june 30 1999 conformity accounting principles generally accepted united states america kpmg llp boston massachusetts february 5 2002 watts industries inc subsidiaries consolidated statements operations amounts thousands except per share information accompanying notes integral part consolidated financial statements watts industries inc subsidiaries consolidated balance sheets amounts thousands except share information accompanying notes integral part consolidated financial statements watts industries inc subsidiaries consolidated statements stockholders equity amounts thousands except share information accompanying notes integral part consolidated financial statements watts industries inc subsidiaries consolidated statements cash flows amounts thousands accompanying notes integral part consolidated financial statements watts industries inc subsidiaries notes consolidated financial statements 1 description business watts industries inc company designs manufactures sells extensive line valves products water quality water safety water flow control water conservation markets located predominately north america europe asia 2 accounting policies principles consolidation consolidated financial statements include accounts company majority wholly owned subsidiaries upon consolidation significant intercompany accounts transactions eliminated financial statements company reflect industrial oil gas businesses discontinued operations periods prior spinoff transaction completed october 18 1999 see note 3 change fiscal year effective july 1 1999 company changed fiscal year end june 30 december 31 accordingly audited financial statements include results twelve month period ended december 31 2001 fiscal 2001 december 31 2000 fiscal 2000 six month period ended december 31 1999 fiscal 19995 fiscal year ended june 30 1999 fiscal 1999 addition basic audited financial statements related notes certain unaudited financial information twelve month period ended december 31 1999 six month period ended december 31 1998 presented enhance comparability cash equivalents cash equivalents consist highly liquid investments maturities three months less date original issuance inventories stated lower cost firstin firstout method market value determined replacement cost net realizable value goodwill intangible assets goodwill represents excess cost fair value net assets businesses acquired goodwill related acquisitions prior july 1 2001 amortized 40 years using straightline method effective july 1 2001 company adopted provisions financial accounting standards board statements 141 business combinations certain provisions statement 142 goodwill intangible assets required goodwill intangible assets resulting business combinations consummated june 30 2001 goodwill relating acquisition powers process controls amortized acquisition falls certain provisions fas 142 impact adoption powers acquisition material company assesses recoverability intangible assets determining whether intangible asset balance recovered undiscounted future operating cash flows acquired businesses amount impairment measured based projected discounted future operating cash flows using discount rate reflecting companys average cost funds property plant equipment property plant equipment recorded cost depreciation provided straightline basis estimated useful lives assets range 10 40 years buildings improvements 3 15 years machinery equipment income taxes income taxes accounted asset liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases operating loss tax credit carry forwards deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized income period includes enactment date watts industries inc subsidiaries notes consolidated financial statements continued foreign currency translation balance sheet accounts foreign subsidiaries translated united states dollars fiscal year end exchange rates operating accounts translated weighted average exchange rates period net translation gains losses adjusted directly separate component stockholders equity company provide us income taxes foreign currency translation adjustments since provide taxes undistributed earnings foreign subsidiaries stock based compensation allowed statement financial accounting standards sfas 123 accounting stockbased compensation company accounts stockbased employee compensation plans accordance provisions apb opinion 25 accounting stock issued employees net income per common share basic net income per common share calculated dividing net income weighted average number common shares outstanding calculation diluted earnings per share assumes conversion dilutive securities see note 13 net income number shares used compute net earnings per share continuing operations basic assuming full dilution reconciled derivative financial instruments normal course business manage risks associated commodity prices foreign exchange rates interest rates variety strategies including use hedging transactions executed accordance policies hedging transactions include limited use various derivative financial commodity instruments matter policy use derivative instruments unless underlying exposure change value derivative instruments would substantially offset opposite change value underlying hedged items use derivative instruments trading speculative purposes using qualifying criteria defined fas 133 derivative instruments designated accounted either hedge recognized asset liability fair value hedge forecasted transaction cash flow hedge fair value hedge effective ineffective portions change fair value derivative instrument along adjustment carrying amount hedged item fair value changes attributable hedged risk recognized earnings cash flow hedge changes fair value derivative instrument highly effective deferred accumulated comprehensive income loss underlying hedged item recognized earnings ineffective portion fair value changes qualifying hedges recognized earnings immediately fair value cash flow hedge cease qualify hedge accounting terminated would continue carried watts industries inc subsidiaries notes consolidated financial statements continued balance sheet fair value settled hedge accounting would discontinued prospectively forecasted transaction longer probable occurring amounts previously deferred accumulated comprehensive income would recognized immediately earnings occasion may enter derivative instrument hedge accounting required entered offset changes fair value underlying transaction required recognized earnings natural hedge instruments reflected consolidated balance sheet fair value changes fair value recognized earnings certain forecasted transactions primarily intercompany sales united states canada assets exposed foreign currency risk company monitors foreign currency exposures ongoing basis maximize overall effectiveness foreign currency hedge positions fiscal year 2001 company used foreign currency forward contracts means hedging exposure foreign currency risks companys foreign currency forwards designated qualify cash flow hedges criteria fas 133 fas 133 requires changes fair value derivatives qualify cash flow hedges recognized comprehensive income ineffective portion derivatives change fair value reorganized immediately earnings net gain contracts recorded comprehensive income year ended december 31 2001 material shipping handling shipping handling costs included selling general administrative expense amounted 21002000 19492000 fiscal years ended december 31 2001 2000 respectively 9053000 six month period ended december 31 1999 17943000 fiscal year ended june 30 1999 revenue recognition company recognizes revenue following criteria met product shipped title passes sales price customer fixed determinable collectability price reasonably assured provisions estimated returns allowances made time sale basis presentation certain amounts fiscal years 2000 19995 1999 reclassified permit comparison 2001 presentation estimates preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates new accounting standards company adopted statement financial accounting standards 133 accounting derivative instruments hedging activities fas 133 amended fas 137 fas 138 january 1 2001 fas 133 establishes accounting reporting standards derivative instruments including certain derivative instruments embedded contracts hedging activities requires recognition derivative instruments assets liabilities companys balance sheet measurement instruments fair value adoption fas 133 january 1 2001 material effect consolidated financial statements 2000 financial accounting standards boards emerging issues task force eitf added agenda various revenue recognition issues could impact income statement classification certain promotional payments may 2000 eitf reached consensus issue 0014 accounting certain sales incentives eitf 0014 addresses recognition income statement classification various sales incentives among requirements consensus require costs related consumer coupons currently classified marketing costs classified reduction revenue impact adopting consensus expected material impact results operations company adopt consensus first quarter fiscal 2002 january 2001 eitf reached consensus issue 0022 accounting points certain timebased volumebased sales incentive offers free products services delivered future issue 0022 requires certain volumebased cash rebates customers currently recognized marketing costs watts industries inc subsidiaries notes consolidated financial statements continued classified reduction revenue consensus effective first quarter 2001 adoption material consolidated financial statements april 2001 eitf reached consensus issue 0025 vendor income statement characterization consideration purchaser vendors products services eitf 0025 addresses income statement classification consideration directly addressed issue 0014 vendor reseller another party purchases vendors products among requirements consensus require certain customer promotional incentives currently classified marketing costs classified reduction revenue company adopt consensus first quarter fiscal 2002 company currently assessing impact adopting issue 0025 anticipates material change consolidated financial statements july 2001 financial standards accounting board fasb issued financial accounting standards board statement 141 business combinations fas 141 financial accounting standards board statement 142 goodwill intangible assets fas 142 fas 141 requires purchase method accounting used business combinations initiated june 30 2001 fas 141 also specifies criteria intangible assets acquired purchase method business combination must meet recognized reported apart goodwill fas 142 requires goodwill intangible assets indefinite useful lives longer amortized instead tested impairment least annually accordance provisions fas 142 fas 142 also require intangible assets definite useful lives amortized respective estimated useful lives estimated residual values reviewed impairment accordance financial accounting standards board statement 121 accounting impairment longlived assets longlived assets disposed provisions fas 141 effective immediately except regard business combinations initiated prior july 1 2001 fas 142 effective january 1 2002 goodwill intangible assets determined indefinite useful life acquired purchase business combination completed june 30 2001 amortized continue evaluated impairment accordance appropriate prefas 142 accounting literature goodwill intangible assets acquired business combinations completed july 1 2001 continue amortized prior adoption fas 142 company currently evaluating effect adoption fas 141 fas 142 results operations financial position august 2001 fasb issued financial accounting standards board statement 143 accounting asset retirement obligations fas 143 requires companies record fair value asset retirement obligation liability period incurs legal obligation associated retirement tangible longlived assets result acquisition construction development normal use assets company must also record corresponding increase carrying value related longlived asset depreciate cost remaining useful life asset liability must increased period passage time offset recorded operating expense liability must also adjusted changes estimated future cash flows underlying initial fair value measurement companies must also recognize gain loss settlement liability provisions fas 143 effective fiscal years beginning june 15 2002 date adoption fas 143 companies required recognize liability existing asset retirement obligations associated asset retirement costs company currently evaluating effect adoption fas 143 results operations financial position august 2001 fasb issued financial accounting standards board statement 144 accounting impairment disposal longlived assets fas 144 addresses accounting reporting impairment disposal longlived assets fas 144 supercedes financial accounting standards board statement 121 accounting impairment longlived assets longlived assets disposed fas 121 retains many fundamental provisions fas 121 fas 144 also supercedes accounting reporting provisions accounting principles board opinion 30 reporting results operations reporting effects disposal segment business extraordinary unusual infrequently occurring events transactions apb 30 disposal segment business however fas 144 retains requirements apb 30 report discontinued operations separately extends reporting requirement components entity either disposed classified held sale fas 144 excludes goodwill intangibles amortized scope assets held used fas 144 addresses cash flows watts industries inc subsidiaries notes consolidated financial statements continued estimated test recoverability asset group assets clarifies impairment loss allocated creates requirement use expected present value technique estimate fair value market prices available uncertainties exist timing amount future cash flows longlived assets disposed sale fas 144 establishes criteria met qualify classification defines timing related sale must consummated eliminates net realizable value measurement approach segments business certain acquired assets business combination defines costs sell asset provisions fas 144 effective fiscal years beginning december 15 2001 generally applied prospectively company adopt fas 144 first quarter fiscal 2002 company currently evaluating effect adoption fas 144 results operations financial position 3 discontinued operations december 18 1998 company announced intention spinoff industrial oil gas businesses shareholders independent publicly traded company spinoff effected taxfree distribution october 18 1999 distribution date owners watts common stock october 6 1999 received one share common stock circor international inc circor new company every two shares watts class b common stock held coincident distribution date company received 960 million cash circor repayment intercompany loans advances historical operating results circor distribution date shown net tax discontinued operations consolidated statements operations included historical operating results discontinued operations allocation companys interest expense based allocation companys debt discontinued operations income taxes allocated discontinued operations based pretax income calculated separate company basis pursuant requirements statement financial accounting standards 109 september 1996 company divested municipal water group businesses included henry pratt james jones company edward barber company ltd costs expenses related municipal water group fiscal 2000 1999 relate legal settlement costs associated james jones litigation see note 15 condensed operating statement data discontinued operations summarized 4 restructuring charges company implementing plan consolidate several manufacturing plants north america europe time expanding manufacturing capacity china implementation manufacturing restructuring plan began fourth quarter fiscal 2001 expected completed fiscal watts industries inc subsidiaries notes consolidated financial statements continued 2002 insure quality products minimize interruption delivery products customers company recorded manufacturing restructuring plan costs 5831000 pretax fourth quarter fiscal 2001 anticipating recording additional 6000000 8000000 pretax 2002 continues implement program restructuring costs recorded 2001 consist primarily severance costs approximately 36 employees manufacturing administration groups 35 terminated december 31 2001 asset writedowns consist primarily writeoffs inventory related product lines company discontinued part restructuring plan recorded cost goods sold tax benefits costs asset writedowns slightly exceed cash outlays implement program would allow company complete restructuring without consuming cash company estimates annual pretax savings approximately 5000000 following completion program details restructuring follows initial utilized remaining provision 2001 balance thousands restructuringother 1454 692 762 asset writedowns 4300 exit costs 77 total 5831 5069 762 december 1999 company announced restructuring operations italy consolidate warehousing manufacturing operations connection restructuring company recorded pretax charge 1460000 restructuring program completed fiscal 2000 5 business acquisitions september 28 2001 wholly owned subsidiary company acquired assets powers process controls division mark controls corporation subsidiary crane co located skokie illinois mississauga ontario canada approximately 13 million cash december 31 2001 consolidated balance sheet company contains purchase price allocation powers acquisition consistent guidelines fas 141 certain provisions fas 142 powers designs manufactures thermostatic mixing valves personal safety process control applications commercial institutional facilities also manufactures control valves commercial plumbing brass products including shower valves lavatory faucets powers annualized sales prior acquisition approximately 20 million june 13 2001 wholly owned subsidiary company acquired premier manufactured systems inc located phoenix arizona approximately 5 million cash premier manufactures water filtration systems residential commercial applications filtration products including underthecounter ultraviolet filtration well variety sediment carbon filters premiers annualized sales prior acquisition approximately 10 million june 1 2001 wholly owned subsidiary company acquired fimet srl fabbrica italiana manometri e termometri located milan italy whollyowned subsidiary mtb ad located bulgaria approximately 6 million acquired business manufactures pressure temperature gauges use hvac market fimets annualized sales prior acquisition approximately 9 million january 5 2001 company acquired dumser metallbau gmbh co kg located landau germany approximately 20 million main products dumser include brass steel stainless steel manifolds used prime distribution device hydronic heating systems dumsers annualized sales prior acquisition approximately 24 million dumser 51 controlling share stern rubinetti annualized sales prior acquisition 4 million stern rubinetti italian manufacturing company producing brass components located brescia italy watts industries inc subsidiaries notes consolidated financial statements continued 6 allowance doubtful trade accounts receivable activity allowance doubtful trade accounts receivable follows 7 inventories consist following december 31 december 31 2001 2000 thousands raw materials 34276 35483 work process 13032 16390 finished goods 68556 57078 115864 108951 8 property plant equipment property plant equipment consists following december 31 december 31 2001 2000 thousands land 8890 8297 buildings improvements 61045 55779 machinery equipment 142615 131642 construction progress 5685 6774 218235 202492 accumulated depreciation 89629 76682 128606 125810 watts industries inc subsidiaries notes consolidated financial statements continued 9 income taxes significant components companys deferred income tax liabilities assets follows december 31 december 31 2001 2000 thousands deferred income tax liabilities excess tax book depreciation 12945 12216 2747 3247 deferred income tax liabilities 15692 15463 deferred income tax assets accrued expenses 12185 11433 net operating loss carryforward 3298 4102 inventory 3613 1688 restructuring 1553 5329 4017 deferred income tax assets 25978 21240 valuation allowance 649 754 deferred income tax assets net valuation allowance 25329 20486 net deferred income tax asset 9637 5023 provision income taxes continuing operations based following pretax income twelve months twelve months six months twelve months ended december 31 december 31 december 31 june 30 2001 2000 1999 thousands domestic 30152 35565 18424 33787 foreign 10016 13647 6987 11136 40168 49212 25411 44923 watts industries inc subsidiaries notes consolidated financial statements continued provision income taxes continuing operations consists following actual income taxes reported continuing operations different would computed applying federal statutory tax rate income continuing operations income taxes reasons difference follows december 31 2001 company foreign net operating loss carryforwards 88 million income tax purposes approximately 87 million foreign net operating losses carried forward indefinitely remainder expiring fiscal years 2002 2003 undistributed earnings companys foreign subsidiaries amounted approximately 55 million december 31 2001 57 million december 31 2000 43 million 45 million december 31 1999 june 30 1999 respectively earnings considered indefinitely reinvested accordingly provision us federal state income taxes recorded thereon upon distribution earnings form dividends otherwise company subject withholding taxes payable various foreign countries determination amount us income tax liability would incurred practicable complexities associated hypothetical calculation however unrecognized foreign tax credits would available reduce portion us income tax liability withholding taxes approximately 36 million would payable upon remittance previously unremitted earnings december 31 2001 watts industries inc subsidiaries notes consolidated financial statements continued management believes likely deferred tax assets net valuation allowance realized company made income tax payments 197 million fiscal year ended december 31 2001 184 million fiscal year ended december 31 2000 112 million 248 million fiscal years ended december 31 1999 june 30 1999 respectively 10 accrued expenses liabilities accrued expenses liabilities consist following december 31 december 31 2001 2000 thousands commissions sales incentives payable 12214 11261 accrued insurance 12415 11434 net pension liability 4162 3668 18919 18549 income taxes payable 1766 5217 accrued legalsettlement 6454 8959 55930 59088 watts industries inc subsidiaries notes consolidated financial statements continued 11 financing arrangements longterm debt consists following industrial revenue bond matures september 2002 29 million euro line credit matures march 2002 classified long term since management present ability intent refinance debt use existing credit facilities principal payments next five fiscal years due follows thousands 2002 37532 2003 83817 2004 3427 2005 426 2006 404 interest paid periods presented accompanying consolidated financial statements approximates interest expense watts industries inc subsidiaries notes consolidated financial statements continued letters credit purchased guarantees ensure companys performance payment third parties accordance specified terms conditions following table presents companys letters credit amounts committed drawndown amounts drawndown instruments may exist expire without drawn therefore amounts committed drawndown necessarily represent future cash flows certain companys loan agreements contain covenants require among items maintenance certain financial ratios limit companys ability enter secured borrowing arrangements 12 common stock since fiscal 1997 companys board directors authorized repurchase 4380200 shares companys common stock open market private purchases since inception repurchase program 3716000 shares companys common stock repurchased retired class common stock class b common stock equal dividend liquidation rights share companys class common stock entitled one vote matters submitted stockholders share class b common stock entitled ten votes matters shares class b common stock convertible shares class common stock onetoone basis option holder company reserved total 5799987 shares class common stock issuance stockbased compensation plans 8735224 shares conversion class b stock class common stock watts industries inc subsidiaries notes consolidated financial statements continued 13 stockbased compensation company several stock option plans key employees outside directors granted incentive isos nonqualified nsos options purchase companys class common stock generally options become exercisable five year period rate 20 per year expire ten years date grant isos nsos granted plans exercise prices less 100 50 fair market value common stock date grant respectively december 31 2001 3042723 shares class common stock authorized future grants options companys stock option plans following summary stock option activity related information effective date circor spinoff watts stock options held circor employees terminated replaced new circor stock options b immediately following spinoff number options increased exercise prices decreased modification preserve economic value options existed prior spinoff transaction holders watts stock options following table summarizes information options outstanding december 31 2001 company management stock purchase plan allows granting restricted stock units rsus key employees purchase 1000000 shares class common stock 67 fair market value watts industries inc subsidiaries notes consolidated financial statements continued date grant rsus vest annually three year period date grant difference rsu price fair market value date award amortized compensation expense ratably vesting period december 31 2001 229543 rsus outstanding dividends declared rsus remain unpaid december 31 2001 total 62900 pro forma information regarding net income net income per share required sfas 123 awards granted june 30 1995 company accounted stockbased awards employees fair value method sfas 123 weighted average grant date fair value options granted 278 202 december 31 2001 2000 respectively 304 247 december 31 1999 june 30 1999 respectively fair value companys stockbased awards employees estimated using blackscholes option pricing model following assumptions companys pro forma information follows 14 employee benefit plans company sponsors defined benefit pension plans covering substantially domestic employees benefits based primarily years service employees compensation funding policy company plans contribute annually maximum amount deducted federal income tax purposes additionally substantially companys domestic employees eligible participate 401k savings plan company matches specified percentage employee contributions subject certain limitations companys match expense years ended december 31 2001 2000 six months ended december 31 1999 twelve months ended june 30 1999 324000 225000 200000 310000 respectively watts industries inc subsidiaries notes consolidated financial statements continued components pension plans follows funded status defined benefit plan amounts recognized balance sheet follows weighted average assumptions used determining obligations pension benefit plans shown watts industries inc subsidiaries notes consolidated financial statements continued 15 contingencies environmental remediation contingencies april 1998 company became aware complaint filed seal state california alleging violations california false claims act complaint alleges former subsidiary company james jones company sold products utilized municipal water systems failed meet contractually specified standards falsely certified standards met complaint alleges municipal entities suffered tens millions dollars damages result defective products seeks treble damages reimbursement legal costs penalties quarter ended december 31 2000 company made offer settle claims los angeles department water power james jones case los angeles department water power ex rel nora amenta v james jones company et al offer approved california superior court october 31 2001 los angeles city council december 14 2001 company currently pursuing insurance coverage case carriers result developments managements current assessment case company recorded charge 7170000 tax quarter ended december 31 2000 represents companys current estimate cost bring entire case resolution charge reported loss discontinued operations charge represents tax impact companys current estimate based available information litigation inherently uncertain actual liability company fully resolve litigation could materially higher estimate lawsuits proceedings claims arising ordinary course operations also pending threatened company subsidiaries based facts currently known company believe ultimate outcome litigation matters material adverse effect financial condition results operation environmental remediation company named potentially responsible party respect limited number identified contaminated sites level contamination varies significantly site related levels remediation efforts environmental liabilities recorded based probable cost known estimated minimum cost remediation companys accrued estimated environmental liabilities based assumptions subject number factors uncertainties circumstances affect reliability precision estimates include identification additional sites environmental regulations level cleanup required technologies available number financial condition contributors remediation time period remediation may occur company recognizes changes estimates new remediation requirements defined new information becomes available company estimates accrued environmental remediation liabilities likely paid next five ten years new york attorney general nyag behalf new york state department environmental conservation nysdec threatened litigation company approximately fifteen 15 potentially responsible parties prps cost closing controlling contamination babylon landfill babylon new york company agreed enter tolling agreement nyag permit formation prp group first step toward establishing negotiation process nyag produced record interview landfill employee stated company acquired jameco company jameco delivered waste site trucks company knows information connecting predecessor site september 25 2001 united states environmental protection agency epa issued complaint compliance order watts regulator co wholly owned subsidiary company resource conservation recovery act rcra respect sand reclamation unit sand generated spindale north carolina facility requirements complaint compliance order resolved consent agreement final order filed january 30 2002 requires payment 100000 civil penalty submissions closure report reclamation unit site assessment report became reclaimed sand currently appears used manner acceptable epa watts industries inc subsidiaries notes consolidated financial statements continued 16 financial instruments fair value carrying amounts cash equivalents trade receivables trade payables approximate fair value short maturity financial instruments fair value companys 838 notes due december 2003 based quoted market prices fair value companys variable rate debt approximates carrying value carrying amount estimated fair market value companys longterm debt including current portion follows december 31 december 31 2001 2000 thousands carrying amount 126905 106618 estimated fair value 131990 109768 derivative instruments company uses foreign currency forward exchange contracts reduce impact currency fluctuations certain anticipated intercompany purchase transactions expected occur within fiscal year certain foreign currency transactions related gains losses recognized contracts expire generally period underlying foreign currency denominated transaction contracts subject company significant market risk exchange movement offset gains losses related foreign currency denominated transactions december 31 2001 2000 company outstanding forward contracts buy foreign currencies company uses commodity futures contracts fix price certain portion certain raw materials used manufacturing process contracts highly correlate actual purchases commodity contract values reflected cost commodity actually purchased june 30 1999 company outstanding contracts notional value 35 million fair value 02 million december 1999 contacts sold company realized gain approximately 05 million gain deferred december 31 1999 offset costs january february 2000 raw material purchases hedged original transaction commodity contracts outstanding december 31 2001 2000 december 31 2001 company outstanding interest rate swap converted 20 million euro borrowings variable rate euro line credit fixed rate borrowings 43 swap agreement expires march 2002 value impact companys results material december 31 2001 september 2001 company entered interest rate swap 75 million notes company swapped fixed interest rate 8 38 floating libor plus 374 swap qualifies hedge accounting fas 133 swap reduced interest expense 641000 year ended december 31 2001 swap expires december 2003 fair value 1091000 december 31 2001 watts industries inc subsidiaries notes consolidated financial statements continued 17 segment information following table presents certain operating segment information operating segment individually managed separate financial results reviewed companys chief operating decisionmaker intercompany transactions eliminated intersegment revenues significant watts industries inc subsidiaries notes consolidated financial statements continued 18 quarterly financial information unaudited watts industries inc subsidiaries notes consolidated financial statements continued 19 subsequent events february 5 2002 company signed agreement yuhuan county cheng guan metal hose factory yuhuan shida pipe product company ltd establish joint venture company invest 78 million receive 60 share joint venture joint venture manufacture flexible hose connectors company awaiting government approval anticipates receive march 1 2002item 14 controls procedures aevaluation disclosure controls procedures required new rule 13a15 securities exchange act 1934 within 90 days prior date report carried evaluation supervision participation management including chief executive officer chief financial officer effectiveness design operation disclosure controls procedures based upon evaluation chief executive officer chief financial officer concluded disclosure controls procedures effective ensure information required disclosed us reports file submit exchange act recorded processed summarized reported within time periods specified securities exchange commissions rules forms continue review document disclosure controls procedures including internal controls procedures financial reporting may time make changes aimed enhancing effectiveness ensure systems evolve business however management including chief executive officer chief financial officer recognizes set controls procedures matter well designed operated provide reasonable absolute assurance achieving desired control objectives bchanges internal controls course audit consolidated financial statements year ended december 31 2002 became aware deficiencies internal controls tianjin tanggu watts valve company limited twt joint venture located tianjin china learned maintaining adequate controls reporting respect disbursements cash account established fund certain employee benefit programs ii cash receipts disclosing deficiency audit committee board directors audit committee retained independent auditors attorneys investigate report matter took following corrective actions restore control account cash receipts •ceased paying employee benefit programs account maintained joint venture partner pay properly authorized obligations directly account maintained twt •implemented tighter reporting management oversight account cash collections believe established reasonably effective internal controls avoid impairment assets liabilities twt part iv item 15item 14 principal accounting fees services information appearing caption ratification independent auditors registrants proxy statement relating annual meeting stockholders held may 5 2004 incorporated herein reference part iv item 15item 14 principal accounting fees services information appearing caption “ratification independent auditors” registrant’s proxy statement relating annual meeting stockholders held may 4 2005 incorporated herein reference part iv item 15item 14 principal accountant fees services information provided caption “ratification independent registered public accounting firm” definitive proxy statement 2007 annual meeting stockholders held may 2 2007 incorporated herein reference part iv item 15item 14 principal accountant fees services information provided caption ratification independent registered public accounting firm definitive proxy statement 2010 annual meeting stockholders held may 12 2010 incorporated herein reference part iv item 15item 14 principal accountant fees services information provided caption ratification independent registered public accounting firm definitive proxy statement 2011 annual meeting stockholders held may 11 2011 incorporated herein reference part iv item 15item 14 principal accountant fees services information provided caption ratification independent registered public accounting firm definitive proxy statement 2012 annual meeting stockholders held may 16 2012 incorporated herein reference part iv item 15item 14 principal accountant fees services information provided caption ratification independent registered public accounting firm definitive proxy statement 2013 annual meeting stockholders held may 15 2013 incorporated herein reference part iv item 15item 14 principal accountant fees services information provided caption ratification independent registered public accounting firm definitive proxy statement 2015 annual meeting stockholders held may 13 2015 incorporated herein reference part iv item 15item 14 principal accountant fees services information provided caption “ratification independent registered public accounting firm” definitive proxy statement 2017 annual meeting stockholders held may 17 2017 incorporated herein reference part iv item 15item 14 principal accountant fees services information provided caption “ratification independent registered public accounting firm” definitive proxy statement 2018 annual meeting stockholders held may 17 2017 incorporated herein reference part iv item 15item 14 principal accounting fees services information provided caption “ratification independent registered public accounting firm” definitive proxy statement 2019 annual meeting stockholders held may 17 2019 incorporated herein reference part iv item 15item 14 principal accounting fees services information provided caption “ratification independent registered public accounting firm” definitive proxy statement 2020 annual meeting stockholders held may 13 2020 incorporated herein reference part iv item 15item 14 principal accountant fees services information provided caption “ratification independent registered public accounting firm” definitive proxy statement 2021 annual meeting stockholders held may 12 2021 incorporated herein reference part iv item 15item 14 principal accountant fees services information appearing caption “ratification independent auditors” registrant’s proxy statement relating annual meeting stockholders held may 4 2006 incorporated herein reference part iv item 15item 14 principal accountant fees services information provided caption ratification independent registered public accounting firm definitive proxy statement 2009 annual meeting stockholders held may 13 2009 incorporated herein reference part iv item 15item 14 principal accountant fees services information provided caption ratification independent registered public accounting firm definitive proxy statement 2014 annual meeting stockholders held may 14 2014 incorporated herein reference part iv item 15item 14 principal accountant fees services information provided caption ratification independent registered public accounting firm definitive proxy statement 2016 annual meeting stockholders held may 18 2016 incorporated herein reference part iv item 15item 14 exhibits financial statement schedules reports form 8k a1 financial statements following financial statements included separate section report commencing page numbers specified schedules provision made applicable accounting regulations securities exchange commission included notes consolidated financial statements required related instructions inapplicable therefore omitted a3 exhibits 101106 108 1016 1023 constitute management contracts compensation plans arrangements company required filed exhibits annual report upon written request stockholder chief financial officer companys principal executive office company provide exhibits listed exhibit description location 21 distribution agreement watts industries inc circor international inc 20 31 restated certificate incorporation amended 12 32 amended restated bylaws amended may 11 1999 1 91 horne family voting trust agreement1991 dated october 31 1991 2 amendments dated november 19 1996 18 february 24 1997 18 june 5 1997 18 august 26 1997 18 october 17 1997 21 92 amended restated george b horne voting trust agreement1997 dated september 14 1999 22 101 employment agreement effective september 1 1996 registrant timothy p horne 14 102 supplemental compensation agreement effective september 1 1996 registrant timothy p horne 14 amendment 1 dated july 25 2000 23 103 deferred compensation agreement registrant timothy p horne amended 4 104 1996 stock option plan dated october 15 1996 15 105 1989 nonqualified stock option plan 3 106 watts industries inc retirement plan salaried employees dated december 30 1994 amended restated effective january 1 1994 12 amendment 1 14 amendment 2 14 amendment 3 14 amendment 4 dated september 4 1996 18 amendment 5 dated january 1 1998 amendment 6 dated may 3 1999 22 amendment 7 dated june 7 1999 22 107 registration rights agreement dated july 25 1986 5 108 executive incentive bonus plan amended 12 109 indenture dated december 1 1991 registrant first national bank boston trustee including form 838 note due 2003 8 1010 loan agreement mortgage among industrial development authority state new hampshire watts regulator co arlington trust company dated august 1 1985 4 1011 amendment agreement relating watts regulator co canaan franklin new hampshire facilities financing dated december 31 1985 4 1012 loan agreement rutherford county industrial facilities pollution control financing authority watts regulator company dated september 1 1994 12 1013 letter credit reimbursement guaranty agreement dated september 1 1994 among registrant watts regulator company first union national bank north carolina 12 amendment 1 14 amendment 2 dated october 1 1996 18 amendment 3 dated october 18 1999 11 1014 trust indenture rutherford county industrial facilities pollution control financing authority first national bank boston trustee dated september 1 1994 12 1015 amended restated stock restriction agreement dated october 30 1991 2 amendment dated august 26 1997 18 1016 watts industries inc 1991 nonemployee directors nonqualified stock option plan 7 amendment 1 14 1017 letters credit relating retrospective paid loss insurance programs 10 1018 form stock restriction agreement management stockholders 5 1020 loan agreement dated september 1987 related mortgage nv sallandsche bank 6 1021 agreement sale shares intermes spa riaf holding ag participations multiscope due srl dated november 6 1992 9 1022 amended restated revolving credit agreement dated march 27 1998 among watts investment company certain financial institutions bankboston na administrative agent registrant guarantor 17 first amendment amended restated revolving credit agreement dated october 18 1999 11 1023 watts industries inc management stock purchase plan dated october 17 1995 13 amendment 1 dated august 5 1997 18 amendment 2 dated november 1 1999 1024 stock purchase agreement dated june 19 1996 among mueller co tyco valves limited watts investment company tyco international ltd watts industries inc 16 11 statement regarding computation earnings per common share 19 21 subsidiaries 23 consent kpmg llp incorporated reference 1 relevant exhibit registrants form 10q quarter ended march 31 1999 2 relevant exhibit registrants form 8k dated november 14 1991 3 relevant exhibit registrants form 10k year ended june 30 1989 4 relevant exhibit registrants form s1 336515 dated june 17 1986 5 relevant exhibit registrants form s1 336515 part second amendment form s1 dated august 21 1986 6 relevant exhibit registrants form s1 3327101 dated february 16 1989 7 relevant exhibit registrants amendment 1 form 10k year ended june 30 1992 8 relevant exhibit registrants form 10k year ended june 30 1992 9 relevant exhibit registrants amendment 2 dated february 22 1993 form 8k dated november 6 1992 10 relevant exhibit registrants form 10k year ended june 30 1993 11 relevant exhibit registrants form 10q quarter ended september 30 1999 12 relevant exhibit registrants form 10k year ended june 30 1995 13 relevant exhibit registrants form s8 3364627 dated november 29 1995 14 relevant exhibit registrants form 10k year ended june 30 1996 15 relevant exhibit registrants form s8 33332685 dated august 1 1997 16 relevant exhibit registrants form 8k dated september 4 1996 17 relevant exhibit registrants form 10q quarter ended march 31 1998 18 relevant exhibit registrants form 10k year ended june 30 1997 19 notes consolidated financial statements note 2 report 20 exhibit 21 circor international inc amendment 1 registration statement form 10 filed september 22 1999 file 00026961 21 relevant exhibit registrants form 10k year ended june 30 1998 22 relevant exhibit registrants form 10k year ended june 30 1999 23 relevant exhibit registrants form 10q quarter ended september 30 filed exhibit report securities exchange commission b reports form 8k reports filed form 8k quarter ending december 31 2000 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized watts industries inc timothy p horne timothy p horne chairman board chief executive officer president dated march 14 2001 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated signature title date timothy p horne chairman board march 14 2001 chief executive officer timothy p horne president principal executive officer director william c mccartney chief financial officer march 14 2001 treasurer principal william c mccartney financial accounting officer secretary kenneth j mcavoy director march14 2001 kenneth j mcavoy gordon w moran director march 14 2001 gordon w moran daniel j murphy iii director march 14 2001 daniel j murphy iii roger young director march 14 2001 roger young independent auditors report board directors stockholders watts industries inc audited accompanying consolidated balance sheets watts industries inc subsidiaries december 31 2000 1999 june 30 1999 related consolidated statements operations stockholders equity cash flows year ended december 31 2000 six month period ended december 31 1999 fiscal years ended june 30 1999 1998 consolidated financial statements responsibility companys management responsibility express opinion consolidated financial statements based audits conducted audits accordance auditing standards generally accepted united states america standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position watts industries inc subsidiaries december 31 2000 1999 june 30 1999 results operations cash flows year ended december 31 2000 six month period ended december 31 1999 fiscal years ended june 30 1999 1998 conformity accounting principles generally accepted united states america kpmg llp boston massachusetts february 9 2001 watts industries inc subsidiaries consolidated statements operations amounts thousands except per share information accompanying notes integral part consolidated financial statements watts industries inc subsidiaries consolidated balance sheets amounts thousands except share information accompanying notes integral part consolidated financial statements watts industries inc subsidiaries consolidated statements stockholders equity amounts thousands except share information watts industries inc subsidiaries consolidated statements cash flows amounts thousands accompanying notes integral part consolidated financial statements watts industries inc subsidiaries notes consolidated statements 1 description business watts industries inc company designs manufactures sells extensive line valves plumbing heating water quality markets located predominately north america europe asia 2 accounting policies principles consolidation consolidated financial statements include accounts company majority whollyowned subsidiaries upon consolidation significant intercompany accounts transactions eliminated financial statements company reflect industrial oil gas businesses discontinued operations periods prior spinoff transaction completed october 18 1999 see note 3 change fiscal year effective july 1 1999 company changed fiscal year end june 30 december 31 accordingly audited financial statements include results twelve month period ended december 31 2000 fiscal 2000 six month period ended december 31 1999 transition period prior fiscal years ended june 30 1999 fiscal 1999 june 30 1998 fiscal 1998 addition basic audited financial statements related notes unaudited financial information twelvemonth period ended december 31 1999 six month period ended december 31 1998 presented enhance comparability cash equivalents cash equivalents consist highly liquid investments maturities three months less date original issuance inventories stated lower cost firstin firstout method market goodwill represents excess cost fair value net assets businesses acquired balance amortized 40 years using straightline method company assesses recoverability intangible asset determining whether amortization goodwill balance remaining life recovered undiscounted future operating cash flows acquired businesses amount goodwill impairment measured based projected discounted future operating cash flows using discount rate reflecting companys average cost funds property plant equipment property plant equipment recorded cost depreciation provided straightline basis estimated useful lives assets range 10 40 years buildings improvements 3 15 years machinery equipment income taxes income taxes accounted asset liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases operating loss tax credit carry forwards deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized income period includes enactment date watts industries inc subsidiaries notes consolidated statements continued foreign currency translation balance sheet accounts foreign subsidiaries translated united states dollars fiscal year end exchange rates operating accounts translated weighted average exchange rates period net translation gains losses adjusted directly separate component stockholders equity company provide us income taxes foreign currency translation adjustments since provide taxes undistributed earnings foreign subsidiaries stock based compensation allowed statement financial accounting standards sfas 123 accounting stockbased compensation company accounts stockbased employee compensation plans accordance provisions apb opinion 25 accounting stock issued employees net income per common share basic net income per common share calculated dividing net income weighted average number common shares outstanding calculation diluted earnings per share assumes conversion dilutive securities see note 13 income number shares used compute net earnings per share continuing operations basic assuming full dilution reconciled derivative financial instruments company uses derivative instruments principally swaps forward contracts options achieve financing strategy hedge foreign currency commodity exposures contracts hedge transactions balances periods consistent committed exposures constitute investments independent exposures company hold issue financial instruments trading purposes party leveraged contracts realized unrealized foreign exchange gains losses financial instruments recognized offset foreign exchange gains losses underlying exposures gain loss financial instrument ceases effective hedge recognized statement operations interest rate differential paid received swap agreements recognized adjustment interest expense shipping handling shipping handling costs included selling general administrative expense amounted 19492000 year ended december 31 2000 9053000 six month period ended december 31 1999 17943000 14961000 fiscal years ended june 30 1999 1998 respectively revenue recognition revenue sale products recognized goods shipped title passes customer watts industries inc subsidiaries notes consolidated statements continued basis presentation certain amounts fiscal years 19995 1999 1998 reclassified permit comparison 2000 presentation estimates preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates new accounting standards june 1998 statement financial accounting standards sfas 133 accounting derivative instruments hedging activities issued company adopted sfas 133 amended sfas 137 sfas 138 january 1 2001 adoption sfas 133 material impact companys financial position overall trends results operations resulted significant changes financial risk management practices however adoption sfas 133 could result pronounced quarterly fluctuations income expense december 1999 securities exchange commission issued staff accounting bulletin sab 101 revenue recognition amendment june 2000 delayed effective date fourth quarter 2000 adoption sab 101 material impact consolidated financial statements may 2000 financial accounting standards boards emerging issues task force eitf reached consensus issue 0014 accounting certain sales incentives issue addresses recognition measurement income statement classification various types sales incentives including discounts coupons rebates free products november 2000 eitf revised transition date company must adopt eitf 0014 later second quarter 2001 company adopt consensus second quarter 2001 expected material impact companys financial statements july september 2000 eitf reached consensus issue 0010 accounting shipping handling fees costs issue addresses income statement classification shipping handling fees costs company adopted consensus fourth quarter 2000 adoption eitf issue 0010 material impact consolidated financial statements 3 discontinued operations december 18 1998 company announced intention spinoff industrial oil gas businesses shareholders independent publicly traded company spinoff effected taxfree distribution october 18 1999 distribution date owners watts common stock october 6 1999 received one share common stock circor international inc circor new company every two shares watts class b common stock held coincident distribution date company received 960 million cash circor repayment intercompany loans advances historical operating results circor shown net tax discontinued operations consolidated statements operations net assets discontinued operations consolidated balance sheet include assets liabilities attributable circor businesses june 30 1999 included historical operating results discontinued operations allocation companys interest expense based allocation companys debt discontinued operations income taxes allocated discontinued operations based pretax income calculated separate company basis pursuant requirements statement financial accounting standards 109 september 1996 company divested municiple water group businesses included henry pratt james jones company edward barber company ltd costs expenses related municipal water watts industries inc subsidiaries notes consolidated statements continued group fiscal 2000 1999 relate legal settlement costs associated james jones litigation see note 15 condensed operating statement data discontinued operations summarized 4 restructuring activities december 2 1999 company announced restructuring operations italy consolidate warehousing manufacturing operations existing italian operation facilities newly acquired italian subsidiary cazzaniga spa restructuring program included termination 29 employees primarily manufacturing completed 2000 however actual cash payments severance related terminated employees lease costs related vacated facilities continue several quarters program spending employee severance related benefits lease termination costs exit costs differ materially original estimates details restructuring follows 5 business acquisitions august 30 2000 wholly owned subsidiary company acquired certain assets chiles power supply bask llc located springfield missouri approximately 3 million acquired business operating name watts heatway manufactures distributes complete line hydronic electric radiant heating snow melting systems heatways annualized sales prior acquisition approximately 11 million may 12 2000 wholly owned subsidiary company acquired mccraney inc located santa ana california approximately 7 million mccraney business spacemaker manufactures complete line watts industries inc subsidiaries notes consolidated statements continued seismic restraint straps water heaters well water heater stands enclosures spacemakers last twelve months sales approximately 5 million 1999 company acquired cazzaniga spa located biassono italy approximately 28 million cazzaniga integrated manufacturer plumbing heating products annual sales approximately 35 million fiscal 1999 1998 company also acquired several valve companies included part industrial oil gas businesses spunoff separate publicly traded company circor aggregate purchase price acquisitions approximately 118 million acquisitions accounted purchase method accounting results operations since acquisition included companys consolidated financial statements materially affected consolidated financial position results operations liquidity company 6 allowance doubtful trade accounts receivable activity allowance doubtful trade accounts receivable follows 7 inventories consist following watts industries inc subsidiaries notes consolidated statements continued 8 property plant equipment property plant equipment consists following december 31 december 31 june 30 2000 1999 thousands land 8297 7937 7964 buildings improvements 55779 56478 53867 machinery equipment 131642 154490 148952 construction progress 6774 7787 7932 202492 226692 218715 accumulated depreciation 76682 96461 89552 125810 130231 129163 9 income taxes significant components companys deferred income tax liabilities assets follows decrease valuation allowance fiscal 2000 due realization net operating loss carryforward benefits resulting tax planning strategies undertaken company watts industries inc subsidiaries notes consolidated statements continued provision income taxes continuing operations based following pretax income provision income taxes continuing operations consists following actual income taxes reported continuing operations different would computed applying federal statutory tax rate income continuing operations income taxes reasons difference follows watts industries inc subsidiaries notes consolidated statements continued december 31 2000 company foreign net operating loss carryforwards 108 million income tax purposes 106 million foreign net operating losses carried forward indefinitely remainder expiring fiscal years 2001 2003 undistributed earnings companys foreign subsidiaries amounted approximately 57 million december 31 2000 43 million december 31 1999 45 million june 30 1999 33 million june 30 1998 respectively earnings considered indefinitely reinvested accordingly provision us federal state income taxes recorded thereon upon distribution earnings form dividends otherwise company subject us income taxes subject adjustment foreign tax credits withholding taxes payable various foreign countries determination amount us income tax liability would incurred practicable complexities associated hypothetical calculation however unrecognized foreign tax credits would available reduce portion us income tax liability withholding taxes approximately 29 million would payable upon remittance previously unremitted earnings december 31 2000 company made income tax payments 184 million fiscal year ended december 31 2000 112 million six month period ended december 31 1999 248 million fiscal year ended june 30 1999 172 million fiscal year ended june 30 1998 10 accrued expenses liabilities accrued expenses liabilities consist following watts industries inc subsidiaries notes consolidated statements continued 11 financing arrangements longterm debt consists following coincident distribution date spinoff transaction company received 960 million cash circor repayment intercompany loans advances company amount based formula allocated borrowings company circor based relative levels business acquisition activity based methodology borrowings amounting approximately 970 million allocated discontinued operations june 30 1999 principal payments next five fiscal years due follows thousands 2001 1241 2002 9341 2003 80017 2004 14662 2205 17 interest paid periods presented accompanying consolidated financial statements approximates interest expense certain companys loan agreements contain covenants require among items maintenance certain financial ratios limit companys ability enter secured borrowing arrangements 12 common stock since fiscal 1997 companys board directors authorized repurchase 4380200 shares companys common stock open market private purchases since inception repurchase program 3605700 shares companys common stock repurchased retired class common stock class b common stock equal dividend liquidation rights share companys class common stock entitled one vote matters submitted stockholders share class b common stock entitled ten votes matters shares class b common stock convertible shares class common stock onetoone basis option holder company reserved total 5925664 shares class common stock issuance stockbased compensation plans 9235224 shares conversion class b stock class common stock watts industries inc subsidiaries notes consolidated statements continued 13 stockbased compensation company several stock option plans key employees outside directors granted incentive isos nonqualified nsos options purchase companys class common stock generally options become exercisable fiveyear period rate 20 per year expire ten years date grant isos nsos granted plans exercise prices less 100 50 fair market value common stock date grant respectively december 31 2000 3212019 shares class common stock authorized future grants options companys stock option plans following summary stock option activity related information effective date circor spinoff watts stock options held circor employees terminated replaced new circor stock options b immediately following spinoff number options increased exercise prices decreased modification preserve economic value options existed prior spinoff transaction holders watts stock options c includes 13100 options 1998 exercised exchange 10633 shares class common shares contributed treasury subsequently retired following table summarizes information options outstanding december 31 2000 watts industries inc subsidiaries notes consolidated statements continued company management stock purchase plan allows granting restricted stock units rsus key employees purchase 1000000 shares class common stock 67 fair market value date grant rsus vest annually threeyear period date grant difference rsu price fair market value date award amortized compensation expense ratably vesting period december 31 2000 244000 rsus outstanding dividends declared rsus remain unpaid december 31 2000 total 78000 pro forma information regarding net income net income per share required sfas 123 awards granted june 30 1995 company accounted stockbased awards employees fair value method sfas 123 weighted average grant date fair value options granted 202 december 31 2000 304 247 350 december 31 1999 june 30 1999 1998 respectively fair value companys stockbased awards employees estimated using blackscholes option pricing model following assumptions companys pro forma information follows 14 employee benefit plans company sponsors defined benefit pension plans covering substantially domestic employees benefits based primarily years service employees compensation funding policy company plans contribute annually maximum amount deducted federal income tax purposes additionally substantially companys domestic employees eligible participate 401k savings plan company matches specified percentage employee contributions subject certain limitations watts industries inc subsidiaries notes consolidated statements continued components benefit expense follows funded status defined benefit plan amounts recognized balance sheet follow weighted average assumptions used determining obligations pension benefit plans shown watts industries inc subsidiaries notes consolidated statements continued subsequent spinoff circor took place october 18 1999 circor became liable payment pension plan benefits earned circor employees prior following spinoff retire spinoff companys pension plan transferred assets circor pension plan amount assets calculated based relative percentage projected benefit obligation amount adjusted comply asset allocation methodology set forth section 4044 employee retirement income security act 1974 amended 15 contingencies environmental remediation contingencies april 1998 company became aware complaint filed seal state california alleging violations california false claims act complaint alleges former subsidiary company james jones company sold products utilized municipal water systems failed meet contractually specified standards falsely certified standards met complaint alleges municipal entities suffered tens millions dollars damages result defective products seeks treble damages reimbursement legal costs penalties quarter ended december 31 2000 company made offer settle claims los angeles department water power james jones case los angeles department water power ex rel nora amenta v james jones company et al los angeles department water power indicated views offer favorably intends seek approval january 19 2001 california false claims act claims filed city pomona dismissed company expects city pomona file appellate review order company currently unable predict outcome appeal present record vast majority cities named lawsuit subject legal challenge similar resulted dismissal pomonas false claims act case result developments managements current assessment case company recorded charge 7170000 tax quarter ended december 31 2000 represents companys current estimate cost bring entire case resolution charge reported loss discontinued operations charge represents tax impact companys current estimate based available information litigation inherently uncertain actual liability company fully resolve litigation could materially higher estimate environmental remediation company named potentially responsible party respect limited number identified contaminated sites level contamination varies significantly site related levels remediation efforts environmental liabilities recorded based probable cost known estimated minimum cost remediation companys accrued estimated environmental liabilities based assumptions subject number factors uncertainties circumstances affect reliability precision estimates include identification additional sites environmental regulations level cleanup required technologies available number financial condition contributors remediation time period remediation may occur company recognizes changes estimates new remediation requirements defined new information becomes available company estimates accrued environmental remediation liabilities likely paid next five ten years watts industries inc subsidiaries notes consolidated statements continued 16 financial instruments fair value carrying amounts cash equivalents trade receivables trade payables approximate fair value short maturity financial instruments fair value companys 838 notes due december 2003 based quoted market prices fair value companys variable rate debt approximates carrying value carrying amount estimated fair market value companys longterm debt including current portion follows december 31 december 31 june 30 2000 1999 thousands carrying amount 106618 129674 217963 estimated fair value 109768 131452 222441 derivative instruments company uses foreign currency forward exchange contracts reduce impact currency fluctuations certain anticipated intercompany purchase transactions expected occur within fiscal year certain foreign currency transactions related gains losses recognized contracts expire generally period underlying foreign currency denominated transaction contracts subject company significant market risk exchange movement offset gains losses related foreign currency denominated transactions june 30 1999 company forward contracts buy foreign currencies notional value 90 million fair market value loss 06 million contracts transferred circor part spinoff transaction december 31 2000 1999 company outstanding forward contracts buy foreign currencies company uses commodity futures contracts fix price certain portion certain raw materials used manufacturing process contracts highly correlate actual purchases commodity contract values reflected cost commodity actually purchased june 30 1999 company outstanding contracts notional value 35 million fair value 02 million december 1999 contacts sold company realized gain approximately 05 million gain deferred december 31 1999 offset costs january february 2000 raw material purchases hedged original transaction commodity contracts outstanding december 31 2000 1999 company also enters derivative contracts convert specific variable rate borrowings fixed rate debt instruments december 31 2000 company outstanding interest rate swap converted 20 million euro borrowings variable rate euro line credit fixed rate borrowings 43 swap agreement expires september 2002 fair value 02 million december 31 2000 watts industries inc subsidiaries notes consolidated statements continued 17 segment information following table presents certain operating segment information operating segment individually managed separate financial results reviewed companys chief operating decisionmaker intercompany transactions eliminated intersegment revenues significant watts industries inc subsidiaries notes consolidated statements continued 18 quarterly financial information unaudited watts industries inc subsidiaries notes consolidated statements continued 19 subsequent events january 5 2001 company acquired dumser metallbau gmbh co kg located landau germany approximately 22 million main products dumser brass steel stainless steel manifolds used prime distribution device hydronic heating systems dumser approximately 24 million us total sales twelve months ended december 31 2000 dumser 51 controlling share stern rubunetti 4 million italian manufacturing company producing brass components located brescia italy acquisition accounted purchase method accounting exhibit index exhibit description 1023 amendment 2 watts industries inc management stock purchase plan 21 direct indirect subsidiaries watts industries inc 23 consent kpmg llpitem 14 principal accountant fees services information provided caption ratification independent registered public accounting firm definitive proxy statement 2008 annual meeting stockholders held may 14 2008 incorporated herein reference part iv item 15 item 7 managements discussion analysis financial condition results operations information set forth managements discussion analysis financial condition results operations pages 22 25 annual report stockholders fiscal year ended june 30 1994 incorporated herein reference item 8item 7managements discussion analysis financial condition results operations information set forth managements discussion analysis financial condition results operations pages 26 29 annual report stockholders fiscal year ended june 30 1995 incorporated herein reference item 8item 7 managements discussion analysis financial condition results operations management initiatives quarter ended march 31 1996 company decided restructure business effort improve efficiency companys worldwide operations divestiture previously announced company decided divest municipal water group companies consist henry pratt company james jones company edward barber co ltd divestiture enable company focus acquisition growth strategies core markets namely plumbing heating water quality industrial oil gas results operations municipal water group fiscal 1996 reported income discontinued operations net income taxes statements operations prior periods reclassified conform fiscal 1996 presentation company signed definitive agreement sale municipal water group june 19 1996 tyco international ltd transaction expected completed quarter ended september 30 1996 subject regulatory approvals company anticipates small gain upon divestiture municipal water group restructuring activities company also decided undertake restructuring initiatives aimed improving efficiency certain continuing operations two significant initiatives relocation jameco industries inc jameco downsizing pibiviesse spa pbvs company decided relocate manufacturing operations jameco wyandanch new york watts regulator plant spindale north carolina company expects relocation project completed fiscal 1997 company also decided implement plan streamline downsize operations pbvs subsidiary addition company identified efficiencies expects improve operations number divisions connection implementing reorganization plans company recorded plant closure costs 7700000 severance costs 290 employees 9300000 asset writedowns assets abandoned sold 8400000 inventory writedowns 9500000 accrued expenses 13800000 substantially charges restructuring recorded provisions severance plant closure costs asset writedowns included restructuring line statement operations inventory writedown included cost sales accrued expenses included operating expenses june 30 1996 97 employees released 1660000 paid severance impairment company identified impairment events affecting certain longlived assets primarily italian subsidiaries pbvs intermes concluded assets impaired due significant losses pbvs future undiscounted cash flows insufficient recover fair market value longlived assets primarily goodwill due change interpretation italian tax law regarding deductibility goodwill amortization coupled decreasing margins operating profits resulted goodwill intermes impaired accordingly management prepared cash flow estimates indicating impairment fact occurred wrote goodwill fair value determined using discounted cash flow approach company taken charge 63065000 write affected assets fair value accordance implementation statement financial accounting standards 121 accounting impairment longlived assets longlived assets disposed depreciation goodwill amortization decrease approximately 1400000 annually conclusion aftertax charge initiatives recorded fiscal 1996 92986000 aftertax cash impact charge expected approximately 10000000 expected restructuring plan require two years complete positive effects realized fiscal 1997 results operations fiscal year ended june 30 1996 compared fiscal year ended june 30 1995 net sales continuing operations increased 64025000 111 640876000 increase attributable inclusion net sales acquired companies acquisitions primarily included andersonbarrows trubert pbvs exclusive acquisitions net sales continuing operations would increased 19601000 34 increase primarily attributable increased unit shipments plumbing heating water quality valves united states europe quarter ended june 30 1996 net sales exclusive acquisitions increased 106 comparable quarter last year increase due increased unit shipments plumbing heating valves oil gas valves company intends maintain strategy seeking acquisition opportunities well expanding existing market position achieve sales growth gross profit continuing operations increased 1486000 07 212198000 decreased percentage sales 365 331 decreased percentage primarily attributable inclusion 9500000 costs related primarily inventory writedowns part restructuring plan discussed gross profit continuing operations exclusive charges would 221698000 346 net sales decreased percentage primarily attributable lower gross margins experienced within industrial oil gas group result competitive pricing unfavorable manufacturing variances addition unfavorable manufacturing variances associated reduced production levels caused lower sales volume experienced within steam group adversely impacted companys gross margin inclusion certain acquired companies operate lower gross margin rest company also adversely impacted gross margin gross profit also adversely affected increased raw material costs bronze ingot carbon stainless steel due competitive pricing pressures could completely recovered price increases selling general administrative expenses continuing operations increased 29350000 22 162951000 increase primarily attributable inclusion 13800000 costs related restructuring plan discussed expenses acquired companies interest income continuing operations decreased 1228000 636 702000 due decreased levels cash shortterm investments interest expense continuing operations increased 592000 63 9960000 increase primarily attributable increased levels debt incurred association acquisitions effective tax rate continuing operations exclusive restructuring charges decreased 371 fiscal 1996 377 fiscal 1995 net income loss continuing operations decreased 96228000 2266 53765000 net income continuing operations exclusive restructuring impairment charge would decreased 3242000 76 39221000 change foreign exchange rates material impact net results operations financial condition company results operations fiscal year ended june 30 1995 compared fiscal year ended june 30 1994 net sales continuing operations increased 132367000 298 576851000 increase attributable inclusion net sales acquired companies establishment companys chinese joint venture increased unit shipments certain product lines net sales jameco industries inc jameco acquired july 1994 located new york pibiviesse spa pbvs acquired november 1994 located italy andersonbarrows metals corporation andersonbarrows acquired march 1995 located california establishment tianjin tanggu watts valve co ltd twt joint venture august 1994 located tianjin peoples republic china represented approximately 98054000 increase net sales company increased unit shipments plumbing heating valves industrial valves steam valves company increased net sales europe 10400000 77 increase due strength foreign currencies versus us dollar international sales 175000000 represented 30 total net sales company intends maintain strategy seeking acquisition opportunities well expanding existing market position achieve sales growth gross profit continuing operations increased 31532000 176 210712000 decreased percentage net sales 403 365 decreased percentage primarily attributable inclusion acquired companies currently operate lower gross margins rest company gross profit percentage also adversely affected increased raw materials costs primarily bronze ingot brass rod selling general administrative expenses continuing operations increased 25220000 233 133601000 decreased percentage net sales 244 232 increase expense primarily attributable inclusion expenses acquired companies discussed increased international selling expenses commissions associated increased sales volumes interest income continuing operations decreased 1017000 345 1930000 due decreased levels cash shortterm investments interest expense continuing operations increased 1904000 255 9368000 increase attributable increased levels debt incurred association acquisitions discussed effective tax rate company continuing operations 377 year ended june 30 1995 compared 392 year ended june 30 1994 decreased percentage primarily attributable lower effective tax rates experienced germany holland due tax planning strategies executed year result prior european acquisitions guarantee lower effective tax rate continue future also companys earnings china currently exempt taxation china period two years net income continuing operations increased 3063000 78 42463000 net income discontinued operations increased 1665000 1034 3275000 increase primarily attributable increased sales volume improved manufacturing efficiencies change foreign exchange rates since june 30 1994 material impact results operations financial condition company liquidity capital resources recording companys restructuring charge noted adverse impact companys retained earnings working capital restructuring charge however impact companys ability borrow funds future existing credit facilities net cash impact company implement restructuring charge expected approximately 10000000 year ended june 30 1996 company invested four acquisitions one joint venture august 1995 whollyowned subsidiary company purchased societe des etablissements rene trubert sa trubert chartres france trubert manufacturer thermostatic mixing valves sold primarily commercial industrial applications accurately control temperature water human safety process control trubert net sales approximately 8000000 twelve months ended june 30 1995 august 1995 whollyowned subsidiary company acquired keane product line keane controls corporation product line consists solenoid valves regulators used high pressure applications annual sales products approximately 1500000 september 1995 whollyowned subsidiary company acquired kieley mueller control valve product line international valve corporation product line consists linear rotary control valves sold primarily industrial process applications accurately control pressure flow temperature steam process fluids annual sales products approximately 2800000 march 1996 whollyowned subsidiary company purchased artec gmbh artec oberhausen germany artec assembles distributes underfloor heating systems radiator connection systems plumbing pipe systems german plumbing heating market artec net sales approximately 4500000 twelve months ended december 31 1995 net purchase price acquisitions fiscal 1996 13415000 whollyowned subsidiary company invested total 6000000 suzhou watts valve co ltd joint venture located suzhou peoples republic china joint venture established manufacture ball valves industrial oil gas markets companys investment represents 60 interest joint venture year ended june 30 1996 company spent 31080000 capital expenditures continuing operations primarily manufacturing machinery equipment part commitment continuously improve manufacturing capabilities april 16 1996 board directors authorized company repurchase 2000000 shares class common stock open market private purchases june 30 1996 company purchased 1458900 shares aggregate price 28567000 july 1996 remaining authorized shares purchased total purchase price 2000000 shares 38559674 funds finance stock repurchases generated operations borrowings unsecured line credit july 17 1996 board directors authorized repurchase additional 1000000 shares next twelve months order support companys acquisition program working capital requirements general corporate purposes company fiveyear commitment unsecured line credit 125000000 expiring august 31 1999 june 30 1996 61300000 outstanding credit facility total borrowings line credit august 13 1996 71300000 increase since june 30 1996 primarily attributable completion share repurchase program company plans repay outstanding balance sale municipal water group completed working capital continuing operations june 30 1996 196468000 compared 210610000 june 30 1995 cash shortterm investments 0 june 30 1996 compared 7826000 june 30 1995 ratio current assets current liabilities continuing operations 25 1 june 30 1996 compared 30 1 june 30 1995 debt percentage total capital employed 338 june 30 1996 compared 262 june 30 1995 decrease working capital changes current debt ratios primarily result recording restructuring charge share repurchase program increased level borrowings companys line credit company time involved environmental proceedings incurs costs ongoing basis related environmental matters company expects named potentially responsible party respect currently identified contaminated sites various stages remediation process company evaluated potential exposure based currently available information recorded estimate liability environmental matters company currently anticipates incur significant expenditures fiscal 1997 connection environmentally contaminated sites company anticipates available funds provided current operations sufficient meet current operating requirements anticipated capital expenditures least next 24 months item 8item 7 managements discussion analysis financial condition results operations management initiatives fiscal 1996 company reevaluated strategy decided restructure business effort improve efficiency companys worldwide operations described divestiture part strategy company decided divest municipal water group companies consisted henry pratt company james jones company edward barber company ltd divestiture completed september 4 1996 resulting aftertax gain 3208000 proceeds used primarily reduce longterm debt fund companys share repurchase program fund acquisitions divestiture enable company focus acquisition growth strategies core markets namely plumbing heating water quality industrial oil gas results operations municipal water group reported income discontinued operations impairment longlived assets fiscal 1996 company recorded 63065000 impairment longlived asset loss impairment charge mainly pertains companys italian subsidiaries result potential nondeductibility goodwill amortization coupled decreasing margins operating profits connection reevaluation business strategy italy management concluded impairment occurred recorded loss reducing value affected longlived assets primarily goodwill fair value determined using discounted cash flow approach restructuring activities company also decided undertake certain restructuring initiatives aimed improving efficiency certain continuing operations two significant initiatives consolidation downsizing pibiviesse spa pbvs relocation jameco industries inc jameco company initiated plan consolidate downsize operations pbvs subsidiary italy downsizing occurred consolidation completed fiscal 1998 pbvs experienced improvement sales volume gross margin fiscal 1997 even though restructuring efforts still ongoing company also decided relocate manufacturing operations jameco wyandanch new york watts regulator plant spindale north carolina expansion spindale facility house jameco activity complete manufacturing machinery equipment relocated expect transfer fully completed early fiscal 1998 25415000 restructuring expense recorded fiscal 1996 includes 9300000 severance 8400000 asset writedowns assets abandoned sold 7715000 exit costs 7715000 exit costs comprised primarily lease contract termination costs plant closure costs expected restructuring plan substantially complete end fiscal year 1998 although unanticipated events could affect cost timing restructuring plan matters fiscal 1996 company recorded 13753000 selling general administrative expense charge principally product liability costs environmental remediation requirements additional bad debt reserves also 9508000 inventory writedown recorded fiscal 1996 reduce inventories estimated market value conclusion effect aforementioned fiscal year 1996 charges summarized thousands inventory writedown charged cost goods sold 9508 selling general administrative expense charge 13753 impairment longlived assets 63065 restructuring expense 25415 111741 income tax benefit 18755 aftertax charge 92986 results operations fiscal year ended june 30 1997 compared fiscal year ended june 30 1996 net sales continuing operations increased 79464000 124 720340000 analysis increase net sales follows 1997 1996 thousands domestic internal growth 43256 68 international internal growth 25297 39 exchange rate effect 8037 13 total international 17260 26 acquisitions 18948 30 total increase 79464 124 increase net sales internal growth primarily attributable increased unit shipments oil gas valves plumbing heating valves increased unit shipments oil gas valves supported strong worldwide oil gas market increased unit shipments plumbing heating valves primarily associated increased demand plumbing heating wholesalers increased penetration home repair retail market diy increased sales due acquisitions primarily attributable acquisition ames company inc ames woodland ca january 1997 company intends maintain strategy seeking acquisition opportunities well expanding existing market position achieve sales growth gross profit continuing operations increased 33194000 156 excluding 9508000 inventory writedowns recorded cost sales last fiscal year gross profit would increased 23686000 107 245392000 decreased percentage net sales 346 341 gross profit percentage primarily among things adversely affected decreased absorption fixed expenses occurred company reduced production levels achieve inventory reductions decreased absorption partially offset improved gross margins oil gas valves due increased sales volumes factory efficiencies selling general administrative expenses year ended june 30 1996 include 13753000 charge product liability costs environmental remediation additional bad debt reserves selling general administrative expenses excluding charge increased 9786000 66 158984000 decreased percentage net sales 233 221 increase spending primarily attributable increased commissions variable selling expenses associated increased sales inclusion expenses acquired companies companys effective tax rate favorably effected fiscal 1997 tax planning strategies utilization foreign net operating loss carry forwards fiscal 1996 companys effective tax rate unfavorably effected substantially nondeductible nature longlived asset impairment loss earnings continuing operations increased 102225000 compared fiscal 1996 9239000 236 92986000 aftertax effect items described management initiatives excluded comparison companys return average stockholders investment excluding gain sale municipal water group 149 fiscal 1997 compared 96 fiscal 1996 adjusted exclude 1996 items described company experienced unfavorable impact due change foreign exchange rates since june 30 1996 change material adverse impact results operations financial condition company results operations fiscal year ended june 30 1996 compared fiscal year ended june 30 1995 net sales continuing operations increased 64025000 111 640876000 analysis increase net sales follows 1996 1995 thousands domestic internal growth 11759 20 international internal growth 4697 08 exchange rate effect 3145 06 total international 7842 14 acquisitions 44424 77 total increase 64025 111 increase internal growth primarily attributable increased unit shipments plumbing heating water quality valves united states europe increase sales acquisitions primarily attributable acquisition andersonbarrows metals corporation palmdale ca pbvs nerviano italy etablissements trubert sa chartres france gross profit continuing operations increased 1486000 07 212198000 decreased percentage sales 365 331 decreased percentage primarily attributable inclusion 9508000 costs related primarily inventory writedowns market value gross profit continuing operations exclusive charges would 221706000 346 net sales decreased percentage primarily attributable lower gross margins experienced within industrial oil gas group result competitive pricing unfavorable manufactur ing variances addition unfavorable manufacturing variances associated reduced production levels caused lower sales volume experienced within steam group adversely impacted companys gross margin inclusion certain acquired companies operate lower gross margin rest company also adversely impacted gross margin gross profit also adversely affected increased raw material costs bronze ingot carbon stainless steel due competitive pricing pressures could completely recovered price increases selling general administrative expenses continuing operations increased 29350000 22 162951000 increase primarily attributable inclusion 13753000 additional charge product liability costs environmental remediation bad debt reserves discussed expenses acquired companies interest income continuing operations decreased 1228000 636 702000 due decreased levels cash shortterm investments interest expense continuing operations increased 592000 63 9960000 increase primarily attributable increased levels debt incurred association acquisitions effective tax rate continuing operations exclusive restructuring impairment longlived assets matters decreased 371 fiscal 1996 377 fiscal 1995 net income loss continuing operations decreased 96228000 2266 53765000 net income continuing operations exclusive impairment loss restructuring charge matters referred management initiatives would decreased 3242000 76 39221000 change foreign exchange rates material impact net results operations financial condition company liquidity capital resources fiscal 1997 company generated 58870000 cash flow operations principally used reduce borrowings line credit fund capital expenditures fiscal 1997 company received 88164000 proceeds result sale municipal water group proceeds used fund acquisitions described reduce borrowings line credit fund additional share purchases existing stock repurchase program capital expenditures fiscal 1997 29742000 primarily manufacturing machinery equipment part commitment continuously improve manufacturing capabilities companys capital expenditure budget fiscal 1998 29500000 company purchased 1321300 shares class common stock aggregate purchase price 25564000 twelve months ended june 30 1997 company invested 37705000 two acquisitions september 1996 whollyowned subsidiary company purchased certain assets assumed certain liabilities cpc manufacturer high quality control valves manual actuated shutoff valves cryogenic filters valve manifolds bayonet fittings cryogenic ultrahigh purity industrial gas market cpc sales approximately 2500000 twelve months ended may 31 1996 january 1997 whollyowned subsidiary company purchased ames designs manufactures markets ulfm certified backflow prevention valves use fire protection market ames sales approximately 27000000 twelve months ended december 31 1996 company available unsecured 125000000 line credit expires august 31 1999 companys intent utilize credit facility support companys acquisition program working capital requirements acquired companies general corporate purposes june 30 1997 29000000 borrowed line credit working capital june 30 1997 224702000 compared 286205000 june 30 1996 ratio current assets current liabilities 29 1 june 30 1997 compared 32 1 june 30 1996 decrease principally attributable repayment longterm debt companys stock repurchase program cash shortterm investments 14422000 june 30 1997 compared 0 june 30 1996 debt percentage total capital employed 278 june 30 1997 compared 338 june 30 1996 june 30 1997 company compliance covenants related existing debt company time involved environmental proceedings incurs costs ongoing basis related environmental matters company currently anticipates incur significant expenditures fiscal connection environmentally contaminated sites please see part item 1 product liability environmental matters company anticipates available funds provided current operations sufficient meet current operating requirements anticipated capital expenditures least next 24 months item 8item 7 managements discussion analysis financial condition results operations results operations fiscal year ended june 30 1998 compared fiscal year ended june 30 1997 net sales continuing operations increased 9626000 13 729966000 analysis change net sales follows 1998 1997 thousands internal growth 14673 20 acquisitionsnew joint ventures 30097 42 divestitures 20244 28 foreign exchange rate effect 14900 21 total increase 9626 13 increase net sales internal growth primarily attributable increased unit shipments domestic plumbing heating valves european oil gas valves increased sales due acquisitions primarily attributable inclusion full year net sales ames company inc ames woodland ca acquired january 1997 net sales telford valve specialties inc telford edmonton alberta canada acquired march 1998 fiscal 1997 sales included 13415000 certain product lines jameco business imported vitreous china faucets company owns 49 minority interest thereby eliminating sales current year results company also divested three international product lines impacted fiscal 1998 sales 6829000 unfavorable effect changes foreign exchange rates sales primarily attributable companys european operations company intends maintain strategy seeking acquisition opportunities well expanding existing market position achieve sales growth gross profit continuing operations increased 8944000 36 increased percentage net sales 341 348 percentage increase primarily attributable improved gross margins european oil gas valves domestic plumbing heating valves fullyear inclusion ames operates higher gross margin company average improvements partially offset manufacturing inefficiencies associated relocation jameco product line watts regulator factory spindale north carolina selling general administrative expenses increased 4776000 30 163760000 increase primarily attributable inclusion expenses acquired companies increased variable selling expenses increase partially offset effect change foreign exchange rates nonoperating expense decreased 353000 320 738000 decrease primarily attributable inclusion gains recognized sale canadian manufacturing facility small italian valve manufacturing division companys effective tax rate continuing operations decreased 359 fiscal 1997 342 fiscal 1998 primarily due implementation tax planning strategies utilization net operating loss carry forwards income continuing operations increased 4909000 101 53369000 companys return average stockholders investment 151 fiscal 1998 compared 148 fiscal 1997 companys consolidated results operations impacted effect changes foreign currency exchange rates international subsidiaries operating results changes foreign exchange rates adverse effect income continuing operations fiscal 1998 approximately 1500000 quarter ended september 30 1996 company sold municipal water group companies divestiture resulted aftertax gain 3208000 12 per share basic diluted basis year ended june 30 1997 results operations fiscal year ended june 30 1997 compared fiscal year ended june 30 1996 net sales continuing operations increased 79464000 124 720340000 analysis increase net sales follows 1997 1996 thousands internal growth 68553 107 acquisitions 18948 30 foreign exchange rate effect 8037 13 total increase 79464 124 increase net sales internal growth primarily attributable increased unit shipments oil gas valves plumbing heating valves increased unit shipments oil gas valves supported strong worldwide oil gas market increased unit shipments plumbing heating valves primarily associated increased demand plumbing heating wholesalers increased penetration home repair retail market diy increased sales due acquisitions primarily attributable acquisition ames company inc january 1997 gross profit continuing operations increased 33194000 156 excluding 9508000 inventory writedowns recorded cost sales prior fiscal year gross profit would increased 23686000 107 245392000 decreased percentage net sales 346 341 gross profit percentage primarily among things adversely affected decreased absorption fixed expenses occurred company reduced production levels achieve inventory reductions decreased absorption partially offset improved gross margins oil gas valves due increased sales volumes factory efficiencies selling general administrative expenses year ended june 30 1996 include 13753000 charge product liability costs environmental remediation additional bad debt reserves selling general administrative expenses excluding charge increased 9786000 66 158984000 decreased percentage net sales 233 221 increase spending primarily attributable increased commissions variable selling expenses associated increased sales inclusion expenses acquired companies companys effective tax rate favorably effected fiscal 1997 tax planning strategies utilization foreign net operating loss carry forwards fiscal 1996 companys effective tax rate unfavorably effected substantially nondeductible nature longlived asset impairment loss earnings continuing operations increased 102225000 compared fiscal 1996 9239000 236 92986000 aftertax effect charges recorded longlived asset impairment restructuring inventory writedowns product liability costs environmental remediation additional bad debt reserves excluded companys return average stockholders investment excluding gain sale municipal water group 148 fiscal 1997 compared 96 fiscal 1996 adjusted exclude 1996 items described company experienced unfavorable impact due change foreign exchange rates since june 30 1996 change material adverse impact results operations financial condition company liquidity capital resources fiscal 1998 company generated 62784000 cash flow operations principally used fund capital expenditures 29170000 finance acquisitions capital expenditures primarily manufacturing machinery equipment part companys commitment continuously improve manufacturing capabilities companys capital expenditure budget fiscal 1999 29000000 december 18 1997 company acquired aerodyne controls corporation aerodyne located ronkonkoma new york aerodyne manufacturer pneumatic valve motion switches aerodynes sales twelve months ended october 1997 approximately 7000000 customers primarily medical analytical military aerospace markets march 26 1998 company acquired telford located edmonton alberta canada telford manufactures check valves pipe line closures specialty gate valves used industrial oil gas applications telford also distributor authorized repair facility number independent manufacturers oilfield products based telfords previous sales telford provide approximately 15000000 incremental sales aggregate purchase price acquisitions aerodyne telford product line acquisitions fiscal 1998 23632000 fiscal 1998 company sold one facilities canada consolidating operations another existing canadian plant additionally company sold small italian valve manufacturing division part companys core business proceeds transactions totalled 7135000 july 22 1998 company acquired hoke inc hoke headquartered cresskill new jersey hoke manufactures distributes industrial valves fittings consisting miniaturized pressure regulators needle valves metering valves ball valves plug valves also wellknown line gyrolokr tube fittings instrumentation applications hokes annual sales fiscal year ended december 31 1997 approximately 70000000 sells products primarily chemical petrochemical oil gas industrial oem analytical instrumentation markets purchase price including assumption certain debt approximately 85000000 funded using companys line credit facility company available unsecured 125000000 line credit expires march 27 2003 company intends utilize credit facility support companys acquisition program working capital requirements acquired companies general corporate purposes june 30 1998 august 20 1998 19000000 81000000 respectively borrowed line credit net increase outstanding line credit primarily due acquisition hoke working capital june 30 1998 237373000 compared 224702000 june 30 1997 ratio current assets current liabilities 28 1 june 30 1998 compared 29 1 june 30 1997 cash shortterm investments 10714000 june 30 1998 compared 14422000 june 30 1997 debt percentage total capital employed 238 june 30 1998 compared 278 june 30 1997 approximately 327 august 21 1998 june 30 1998 company compliance covenants related existing debt company time involved product liability environmental litigation proceedings incurs costs ongoing basis related matters company incur significant expenditures fiscal 1998 connection matters see part 1 item 1 product liability environmental litigation matters company anticipates available funds provided current operations sufficient meet current operating requirements anticipated capital expenditures least next 24 months company developed comprehensive global plan assess address timely manner information systems including customer service production distribution financial systems conjunction year 2000 significant portion companys year 2000 issues addressed part program upgrade information systems company committed regardless year 2000 issue program commenced fiscal 1997 substantially complete end fiscal 1999 company spent approximately 8100000 computer hardware software information systems upgrade program expects spend approximately 1600000 additional similar costs complete upgrade becomes necessary dedicate additional financial resources complete companys information systems upgrade program end fiscal year 1999 shortly thereafter company also communicating suppliers distributors others conducts business coordinate year 2000 compliance identify alternative sources supply materials implementation plans expected material adverse effect results operations financial condition company presently believes alternative sources supply available event unforeseen year 2000 compliance issues affect suppliers abilities fulfill requirements production plans need modified unforeseen year 2000 issues distributors others company conducts business company need modification becomes apparent company suppliers distributors others conducts business unable identify address system issues related year 2000 risk timely basis could material adverse effect results operations financial condition company uses foreign currency forward exchange contracts reduce impact currency fluctuations certain intercompany purchase transactions occur within fiscal year known foreign currency exposures notional amount contracts related realized unrealized gains losses june 30 1998 material certain statements contained herein forward looking many factors could cause actual results differ statements including loss market share competition introduction competing products companies pressure prices competitors suppliers andor customers regulatory obstacles lack acceptance new products changes plumbing heating oil gas markets changes global demand companys products changes distribution companys products interest rates foreign exchange fluctuations cyclicality industries company markets certain products general economic factors markets companys products sold manufactured marketed factors discussed companys reports filed securities exchange commission statement financial accounting standard sfas 130 reporting comprehensive income sfas 131 disclosures segments enterprise related information sfas 132 employers disclosures pensions postretirement benefits become effective fiscal year 1999 adopted time since new standards require additional disclosure adoption effect companys results operations financial condition sfas 133 accounting derivative instruments hedging activities becomes effective fiscal year 2000 new standard require company recognize derivative instruments either assets liabilities fair value consolidated balance sheet company currently evaluating effect new standard item 7aitem 7 managements discussion analysis financial condition results operations december 15 1998 company announced plan spinoff industrial oil gas business separately traded public company circor international inc terms spinoff completed october 18 1999 holders watts common stock received one share circor common stock every two shares watts stock held companys results operations restated reflect circor discontinued operations periods presented may 11 1999 companys board directors voted amend companys bylaws change companys fiscal year end june 30 calendar year result company reporting six month transition period ending december 31 1999 results operations six months ended december 31 1999 compared six months ended december 31 1998 net sales continuing operations increased 31531000 139 259110000 increase net sales attributable following internal growth 19896000 87 acquisitions 17061000 75 foreign exchange 5426000 23 total change 31531000 139 increase net sales internal growth primarily attributable increased unit shipments north american segment growth net sales acquired companies due inclusion net sales cazzaniga spa biassono italy acquired march 9 1999 foreign exchange impact reflects adverse affects euros devaluation period excluding cazzaniga shipments european plumbing heating market 92 higher last year watts monitors net sales three geographical segments north america europe asia outlined north america europe asia accounted 739 226 35 net sales respectively six months ended december 31 1999 compared 771 191 38 respectively six months ended december 31 1998 companys net sales groups six months ended december 31 1999 1998 follows thousands 123199 123198 change north america 191349 175448 15901 europe 58651 43497 15154 asia 9110 8634 476 total 259110 227579 31531 increase north america due increased unit sales increase europe due cazzaniga acquisition increased unit sales partially offset devaluation euro gross profit increased 11338000 138 93257000 remained constant percentage net sales 360 increase attributable increased net sales period ended december 31 1999 company recorded restructuring charge 1460000 taxes charge comprised severance costs 1299000 contract termination costs 134000 exit costs 27000 company consolidating certain existing italian manufacturing warehouse facilities cazzaniga facility biassono italy company expects projects include termination 29 employees completed fiscal 2000 anticipated annual savings actions 750000 december 31 1999 10 employees released 192000 paid severance selling general administrative expenses increased 5441000 96 62239000 increase primarily attributable inclusion selling general administrative expenses cazzaniga increased variable selling expenses primarily commissions freight costs operating income six months ended december 31 1999 increased 4437000 177 29558000 due increased gross profit without restructuring charge operating income would increased 235 increased percentage sales 114 120 companys operating income segment six months ended december 31 1999 1998 follows thousands 123199 123198 change north america 21645 18151 3494 europe 7252 5682 1570 asia 731 822 91 corporate 70 466 536 total 29558 25121 4437 increase north america due increased net sales increase europe primarily due increased net sales cazzaniga acquisition partially offset restructuring charge interest expense increased 1783000 six months ended december 31 1999 primarily due increased levels debt associated acquisition cazzaniga companys effective tax rate continuing operations increased 321 352 increase attributable acquired companies operating higher tax rate jurisdictions rest company tax planning strategies favorably impacting fiscal 1998 revised tax structure required effect distribution net income continuing operations six months ended december 31 1999 increased 1243000 82 16468000 061 per common share compared 056 per common share six months ended december 31 1998 diluted basis net income continuing operations exclusive restructuring charge would increased 2103000 17329000 064 per common share diluted basis impact foreign exchange primarily due devaluation euro decreased net income 002 per common share diluted basis period ended december 31 1999 six months ended december 31 1999 discontinued operations generated net loss 1226000 005 per share compared net income 8419000 031 per share six months ended december 31 1998 results six months ended december 31 1999 negatively impacted tax charge 2433000 spinoff related costs including professional fees facility relocation costs income tax costs associated reorganizing companys legal entity structure anticipation spinoff excluding charge discontinued operations would net income 1207000 005 per share six months ended december 31 1999 net sales discontinued operations six months ended december 31 1999 76957000 decrease 3699000 48 comparable period 1998 decrease net sales primarily attributable lower demand oil gas valve products declining prices resulting increased competition reduced manufacturing levels resulting lower absorption fixed manufacturing costs associated integration acquired companies negatively impacted operating profits six months ended december 31 1999 additional details spinoff transaction provided notes consolidated financial statements note 3 results operations twelve months ended june 1999 compared twelve months ended june 1998 net sales continuing operations twelve months ended june 30 1999 increased 32381000 73 474458000 442077000 fiscal year ended june 30 1998 increase net sales attributable following internal growth 25455000 57 acquisitions 10095000 23 divestitures 3386000 08 foreign exchange 217000 01 total change 32381000 73 increase net sales internal growth primarily attributable increased unit shipments north american segment growth net sales due acquired companies primarily attributable inclusion cazzaniga spa biassono italy acquired march 1999 excluding cazzaniga shipments european segment consistent prior year company monitors net sales three geographical segments north america europe asia outlined north america europe asia accounted 778 194 28 net sales respectively twelve months ended june 30 1999 compared 781 187 32 respectively twelve months ended june 30 1998 companys net sales groups fiscal 1999 1998 follows thousands 63099 63098 change north america 369193 345346 23847 europe 92247 82837 9410 asia 13018 13894 876 total 474458 442077 32381 increase net sales north america primarily due increased unit shipments increase europe due primarily acquisition cazzaniga companys gross profit increased 11788000 74 171713000 increased gross profit primarily attributable increased net sales gross margin remained consistent 362 fiscal 1999 1998 selling general administrative expenses increased 7021000 62 119875000 increase attributable inclusion expenses cazzaniga increased variable selling expenses including commissions freight costs operating income continuing operations increased 4767000 101 47071000 51838000 primarily due increased gross profit companys operating income segment twelve months ended june 30 1999 1998 follows thousands 63099 63098 change north america 38536 36754 1782 europe 11228 8258 2970 asia 1608 1984 376 corporate 466 75 391 total 51838 47071 4767 increase north america due increased net sales increase europe primarily due inclusion cazzaniga expense continuing operations increased 1256000 1688000 increase attributable companys share losses related equity investment jameco international llc increased minority interest expense resulting improved performance companys joint venture china also contributed increase expense income continuing operations increased 1331000 47 29454000 increase primarily attributable income generated acquired companies increased gross profit existing companies companys consolidated results operations impacted effect changes foreign exchange rates international subsidiaries operating results changes foreign exchange rates immaterial impact net income fiscal 1999 net income discontinued operations 6502000 024 per share fiscal 1999 compared 25246000 093 per share fiscal 1998 fiscal 1999 results negatively impacted tax charge 6166000 spinoff related costs including professional fees facility relocation costs income tax costs associated reorganizing companys legal entity structure anticipation spinoff excluding charge discontinued operations would net income 12668000 059 per share fiscal 1999 net sales discontinued operations fiscal 1999 321711000 increase 33822000 117 fiscal 1998 increase net sales primarily attributable inclusion net sales acquired companies excluding impact acquisitions net sales domestic oil gas valves declined 298 net sales international oil gas valves declined 209 fiscal 1999 declining prices resulting increased competition reduced manufacturing levels resulting lower absorption fixed manufacturing costs negatively impacted operating profits fiscal 1999 additional details spinoff transaction provided notes consolidated financial statements note 3 company also recorded charge discontinued operations 5000000 3000000 net tax legal expenses associated litigation involving james jones company james jones company subsidiary company municipal water works division september 1996 sold tyco international ltd see part item 1 product liability environmental litigation matters liquidity capital resources six month period ended december 31 1999 company generated 29009000 operating cash flow continuing operations principally used fund purchase 10293000 capital equipment pay cash dividends common shareholders support working capital needs discontinued operations capital expenditures primarily manufacturing machinery equipment part companys commitment continuously improve manufacturing capabilities companys capital expenditure budget year ending december 31 2000 17500000 fiscal 19995 company maintained 125000000 line credit amended coincident spinoff circor companys amended facility effect december 31 1999 unsecured 100000000 line credit support companys acquisition program working capital requirements acquired companies general corporate purposes december 31 1999 company 22000000 outstanding line credit compliance banking covenants related facility december 31 1999 company maintained syndicated credit facility group european banks amount 40000000 euros credit facility several tranches provide credit company period five 5 years purpose credit facility fund acquisitions europe support working capital requirements acquired companies general corporate purposes december 31 1999 21980000 euros 22134000 borrowed line credit working capital continuing operations december 31 1999 141740000 compared 144941000 june 30 1999 ratio current assets current liabilities 23 1 december 31 1999 25 1 june 30 1999 cash equivalents 13016000 december 31 1999 compared 12774000 june 30 1999 debt percentage total capital employed 374 december 31 1999 compared 389 june 30 1999 company anticipates available funds provided current operations sufficient meet current operating requirements anticipated capital expenditures least next 24 months company time involved product liability environmental proceedings litigation proceedings incurs costs ongoing basis related matters company incurred material expenditures fiscal 19995 connection matters see part item 1 product liability environmental litigation matters year 2000 companys comprehensive program address potential exposures year 2000 issues complete since january 1 2000 company business interruptions due year 2000 issues company aware incidents events caused year 2000 issue could material adverse effect results operations financial condition spending year 2000 program expensed incurred material conversion euro january 1 1999 11 15 member countries european union adopted euro common legal currency established fixed conversion rates existing sovereign currencies euro trades currency exchanges available noncash transactions introduction euro affect company manufacturing distribution facilities several member countries trades extensively across europe longterm competitive implications conversion currently assessed company however company experience immediate reduction risks associated foreign exchange time company anticipating significant costs incurred due introduction conversion euro company process implementing systems receive make payments euros company anticipates systems place january 1 2002 certain statements contained herein forward looking many factors could cause actual results differ statements including loss market share competition introduction competing products companies pressure prices competitors suppliers andor customers regulatory obstacles lack acceptance new products changes plumbing heating markets changes global demand companys products changes distribution companys products interest rates foreign exchange fluctuations cyclicality industries company markets certain products general economic factors markets companys products sold manufactured marketed factors discussed companys reports filed securities exchange commission june 1998 financial accounting standards board issued sfas 133 accounting derivative instruments hedging activities company adopt sfas 133 january 1 2001 impact sfas 133 combined financial statements still evaluated expected material item 7aitem 7 managements discussion analysis financial condition results operations recent developments company implementing plan consolidate several manufacturing plants north america europe time expanding manufacturing capacity china implementation manufacturing restructuring plan began fourth quarter fiscal 2001 expected completed fiscal 2002 insure quality products minimize interruption delivery products customers company recorded manufacturing restructuring plan costs 5831000 pretax fourth quarter fiscal 2001 anticipating recording additional 6000000 8000000 pretax 2002 continues implement program tax benefits costs asset writedowns slightly exceed cash outlay implement program allowing company complete restructuring without consuming cash company estimates annual pretax savings approximately 5000000 following completion program september 28 2001 wholly owned subsidiary company acquired assets powers process controls division mark controls corporation subsidiary crane co located skokie illinois mississauga ontario canada approximately 13 million cash december 31 2001 consolidated balance sheet company contains purchase price allocation powers acquisition consistent guidelines sfas 141 certain provisions sfas 142 powers designs manufactures thermostatic mixing valves personal safety process control applications commercial institutional facilities also manufactures control valves commercial plumbing brass products including shower valves lavatory faucets powers annualized sales prior acquisition approximately 20 million june 13 2001 wholly owned subsidiary company acquired premier manufactured systems inc located phoenix arizona approximately 5 million cash premier manufactures water filtration systems residential commercial applications filtration products including underthecounter ultraviolet filtration well variety sediment carbon filters premiers annualized sales prior acquisition approximately 10 million june 1 2001 wholly owned subsidiary company acquired fimet srl fabbrica italiana manometri e termometri located milan italy wholly owned subsidiary mtb ad located bulgaria approximately 6 million acquired business manufactures pressure temperature gauges use hvac market fimets annualized sales prior acquisition approximately 9 million january 5 2001 company acquired dumser metallbau gmbh co kg located landau germany approximately 20 million main products dumser include brass steel stainless steel manifolds used prime distribution device hydronic heating systems dumsers annualized sales prior acquisition approximately 24 million dumser 51 controlling share stern rubinetti annualized sales prior acquisition 4 million stern rubinetti italian manufacturing company producing brass components located brescia italy results operations twelve months ended december 31 2001 compared twelve months ended december 31 2000 net sales twelve months ended december 31 2001 increased 32840000 64 548940000 compared period 2000 increase net sales attributable following internal growth 12764 24 acquisitions 50203 97 foreign exchange 4599 09 total change 32840 64 decrease net sales internal growth attributable decreased unit sales north american european plumbing heating wholesalers resulting continued weakness north american plumbing market weakened european economy decreases partially offset increased unit sales diy market growth net sales acquired businesses due inclusion net sales powers process controls skokie illinois acquired september 28 2001 premier manufactured systems phoenix arizona acquired june 13 2001 fimet milan italy acquired june 1 2001 dumser metallbau gmbh co kg landau germany acquired january 5 2001 business acquired chiles power supply bask llc springfield missouri business watts radiant acquired august 30 2000 mccraney inc santa ana california business spacemaker acquired may 12 2000 decrease foreign exchange due primarily euro devaluation us dollar compared period 2000 watts monitors net sales three geographical segments north america europe asia outlined north america europe asia accounted 757 221 22 net sales respectively twelve months ended december 31 2001 compared 776 200 24 respectively twelve months ended december 31 2000 companys net sales groups twelve months ended december 31 2001 2000 follows 123101 123100 change north america 415689 400384 15305 europe 121228 103085 18143 asia 12023 12631 608 total 548940 516100 32840 increase north americas net sales due powers process controls premier manufactured systems watts radiant spacemaker acquisitions well increased unit sales diy market partially offset decreased unit sales plumbing heating wholesalers increase europes net sales due fimet dumser acquisitions partially offset decreased unit sales european plumbing heating wholesalers euros devaluation us dollar gross profit twelve months ended december 31 2001 decreased 1772000 10 comparable prior year period decreased percentage net sales 359 334 company charged 4253000 costs associated manufacturing restructuring plan cost sales excluding manufacturing restructuring costs gross profit would increased 2481000 declined percent sales 359 342 decreased percentage primarily attributable unfavorable sales mix caused decreased sales plumbing heating wholesalers well inclusion gross margin acquired companies operate lower gross margin remainder company selling general administrative expenses increased 6478000 52 comparable prior year period 131795000 increase attributable inclusion selling general administrative expenses acquired companies partially offset lower exchange rate euro relative us dollar reduced spending levels restructuring charges primarily severance related costs 36 employees operating income twelve months ended december 31 2001 decreased 9704000 162 50283000 compared period 2000 due reduced gross profit manufacturing restructuring costs companys operating income segment twelve months ended december 31 2001 2000 follows 123101 123000 change north america 47346 55661 8315 europe 11256 13225 1969 asia 465 882 417 corporate 8784 9781 997 total 50283 59987 9704 decrease north american european operating income due decreased unit sales plumbing heating wholesalers manufacturing restructuring plan costs decreases partially offset operating earnings acquired companies interest expense twelve months ended december 31 2001 decreased 475000 48 compared period 2000 primarily due lower interest rates variable rate indebtedness despite increased levels debt incurred acquisitions september 1 2001 company entered interest rate swap 75000000 8 38 notes swap took interest fixed floating reduced companys interest expense 641000 2001 companys effective tax rate continuing operations decreased 367 339 decrease primarily due statutory rate reductions affecting income tax canada tax planning opportunities costs manufacturing restructuring plan recorded tax jurisdictions tax rates higher companys effective rate lowered overall effective rate fiscal 2001 net income continuing operations twelve months ended december 31 2001 decreased 4615000 148 26556000 099 per common share compared 117 per common share twelve months ended december 31 2000 diluted basis net tax basis manufacturing restructuring plan costs accounted 013 per share reduction twelve months ended december 31 2000 discontinued operations reported net loss 7170000 027 per share diluted basis company record costs associated discontinued operations fiscal 2001 results operations twelve months ended december 31 2000 compared twelve months ended december 31 1999 net sales twelve months ended december 31 2000 increased 6444000 13 516100000 compared period 1999 increase net sales attributable following internal growth 7456 15 acquisitions 15030 29 foreign exchange 16042 31 total change 6444 13 increase net sales internal growth attributable increased unit shipments north american european plumbing heating valves north american increases offset recent softness housing market resulting increased interest rates 2000 growth net sales acquired companies due inclusion watts radiant spacemaker cazzaniga spa biassono italy acquired march 9 1999 excluding acquired revenue cazzaniga impact foreign exchange shipments european plumbing heating valves 31 higher last year decrease sales due foreign exchange principally due devaluation euro depreciated almost 13 us dollar twelve month period ended december 31 2000 watts monitors net sales three geographical segments north america europe asia outlined north america europe asia accounted 776 200 24 net sales respectively twelve months ended december 31 2000 compared 761 213 26 respectively twelve months ended december 31 1999 companys net sales groups twelve months ended december 31 2000 1999 follows 123100 123199 change north america 400384 388049 12335 europe 103085 108579 5494 asia 12631 13028 397 total 516100 509656 6444 increase north america primarily due watts radiant spacemaker acquisitions lesser extent increased unit sales decrease europe due impact euros devaluation us dollar substantially offset increased unit sales inclusion cazzaniga decrease asia primarily due reduced demand north american export market gross profit twelve months ended december 31 2000 decreased 1414000 08 185304000 compared period 1999 decreased percentage net sales 366 359 percentage reduction attributable price competition certain markets company serves additional production costs associated new product introductions europe partially offset inclusion acquired companies currently operating higher gross margins rest company selling general administrative expenses twelve months decreased 3666000 28 125317000 compared period 1999 decrease attributable decreased corporate headquarters expenses resulting circor spinoff euros devaluation us dollar reduced variable selling expenses partially offset inclusion selling general administrative expenses acquired companies selling general administrative expenses twelve months decreased percentage sales 253 twelve months ended december 31 1999 243 twelve months ended december 31 2000 decreased percentage primarily due decreased corporate headquarters expenses resulting circor spinoff operating income twelve months ended december 31 2000 increased 3712000 66 59987000 increased percentage sales 116 110 compared period 1999 due increased net sales decreased selling general administrative expenses companys operating income segment twelve months ended december 31 2000 1999 follows 123100 123199 change north america 55661 56439 778 europe 13225 12560 665 asia 882 1519 637 corporate 9781 14243 4462 total 59987 56275 3712 decrease north america due decreased unit prices certain markets increase europe primarily due increased net sales cazzaniga acquisition substantially offset euros devaluation us dollar decrease asia due decreased net sales decrease corporate due reduced headquarter expenses attributable circor spinoff interest expense increased 1964000 9897000 twelve months ended december 31 2000 compared period 1999 primarily due increased effective interest rates companys effective tax rate continuing operations increased 359 367 twelve months ended december 31 2000 compared period 1999 increase primarily attributable revised tax structure required execute circor spinoff net income continuing operations twelve months ended december 31 2000 increased 474000 15 31171000 117 per common share compared 115 per common share twelve months ended december 31 1999 diluted basis impact foreign exchange primarily due devaluation euro us dollar decreased income approximately 1331000 05 per common share diluted basis period ended december 31 2000 twelve months ended december 31 2000 discontinued operations reported net loss 7170000 027 per share diluted basis loss results charge recorded fiscal year representing companys current estimate tax impact cost bring james jones litigation resolution additional details james jones litigation provided part item 1 product liability environmental litigation matters note 15 notes consolidated financial statements twelve months ended december 31 1999 discontinued operations reported net loss 3143000 012 per share diluted basis results twelve months ended december 31 1999 negatively impacted tax charges 11599000 spinoff related costs including professional fees facility relocation costs income tax costs associated reorganizing companys legal entity structure anticipation spinoff well legal fees associated james jones litigation excluding charges discontinued operations would net income 8456000 032 per share twelve months ended december 31 1999 additional details spinoff transaction provided note 3 notes consolidated financial statements results operations six months ended december 31 1999 compared six months ended december 31 1998 net sales increased 31869000 139 261019000 increase net sales attributable following internal growth 20234 88 acquisitions 17061 74 foreign exchange 5426 23 total change 31869 139 increase net sales internal growth primarily attributable increased unit shipments north american segment growth net sales acquired companies due inclusion net sales cazzaniga spa biassono italy acquired march 9 1999 foreign exchange impact reflects adverse affects euros devaluation us dollar period excluding cazzaniga shipments european plumbing heating market 92 higher last year watts monitors net sales three geographical segments north america europe asia outlined north america europe asia accounted 739 226 35 net sales respectively six months ended december 31 1999 compared 772 190 38 respectively six months ended december 31 1998 companys net sales groups six months ended december 31 1999 1998 follows 123199 123198 change north america 192975 176918 16057 europe 58934 43598 15336 asia 9110 8634 476 total 261019 229150 31869 increase north america due increased unit sales increase europe due cazzaniga acquisition increased unit sales partially offset devaluation euro us dollar gross profit increased 11676000 140 95166000 remained constant percentage net sales 364 increase attributable increased net sales period ended december 31 1999 company recorded restructuring charge 1460000 taxes charge comprised severance costs 1299000 contract termination costs 134000 exit costs 27000 company consolidated certain italian manufacturing warehouse facilities cazzaniga facility biassono italy project included termination 29 employees completed fiscal 2000 total program costs differ materially original estimate selling general administrative expenses increased 5779000 99 64148000 increase primarily attributable inclusion selling general administrative expenses cazzaniga increased variable selling expenses primarily commissions freight costs operating income six months ended december 31 1999 increased 4437000 177 29558000 due increased gross profit without restructuring charge operating income would increased 235 increased percentage sales 110 119 companys operating income segment six months ended december 31 1999 1998 follows 123199 123198 change north america 27793 25684 2109 europe 7252 5682 1570 asia 731 822 91 corporate 6218 7067 849 total 29558 25121 4437 increase north america due increased net sales increase europe primarily due increased net sales cazzaniga acquisition partially offset restructuring charge interest expense increased 1783000 six months ended december 31 1999 primarily due increased levels debt associated acquisition cazzaniga companys effective tax rate continuing operations increased 321 352 increase attributable acquired companies operating higher tax rate jurisdictions rest company tax planning strategies favorably impacting fiscal 1998 revised tax structure required effect distribution net income continuing operations six months ended december 31 1999 increased 1243000 82 16468000 61 per common share compared 56 per common share six months ended december 31 1998 diluted basis net income continuing operations exclusive restructuring charge would increased 2104000 17329000 64 per common share diluted basis impact foreign exchange primarily due devaluation euro us dollar decreased net income 02 per common share diluted basis period ended december 31 1999 six months ended december 31 1999 discontinued operations generated net loss 1226000 005 per share compared net income 8419000 031 per share six months ended december 31 1998 results six months ended december 31 1999 negatively impacted tax charge 2433000 spinoff related costs including professional fees facility relocation costs income tax costs associated reorganizing companys legal entity structure anticipation spinoff excluding charge discontinued operations would net income 1207000 005 per share six months ended december 31 1999 net sales discontinued operations three months ended september 30 1999 76957000 decrease 3699000 46 comparable period 1998 decrease net sales primarily attributable lower demand oil gas valve products declining prices resulting increased competition reduced manufacturing levels resulting lower absorption fixed manufacturing costs associated integration acquired companies negatively impacted operating profits six months ended december 31 1999 additional details spinoff transaction provided note 3 notes consolidated financial statements results operations twelve months ended june 30 1999 net sales twelve months ended june 30 1999 477869000 sales grew internally rate 59 prior fiscal year primarily attributable increased unit shipments north american market march 1999 company acquired cazzaniga spa biassono italy inclusion sales cazzaniga contributed 10095000 overall net sales net income continuing operations 29454000 net income discontinued operations 6502000 year ended june 30 1999 results discontinued operations year ended june 30 1999 include net income industrial oil gas operations negatively impacted aftertax charge 6166000 spinoff related costs including professional fees facility relocation costs income tax costs associated reorganization companys legal entity structure anticipation spinoff income discontinued operations contains aftertax charge 3000000 legal expenses associated litigation involving james jones company james jones company subsidiary company municipal water works division september 1996 sold tyco international ltd liquidity capital resources twelve month period ended december 31 2001 company generated 51237000 cash flow continuing operations principally used fund purchase 16047000 capital equipment contribute funding acquisitions pay cash dividends common shareholders capital expenditures primarily manufacturing machinery equipment part companys commitment continuously improve manufacturing capabilities companys capital expenditure budget fiscal 2002 18700000 largest component budget establishment 100 controlled brass bronze valve manufacturing plant tianjin china estimated cost 9000000 board ratified february 12 2002 establishment 60 owned joint venture shanghai provinces support companys retailoriented products flexible hose connectors plumbing fittings underthesink products companys investment 60 joint venture estimated 7800000 company invested 42977000 net cash acquired acquire four businesses twelve months ended december 31 2001 acquisitions dumser metallbau gmbh co kg landau germany fimet srl milan italy premier manufactured systems inc phoenix arizona powers process controls skokie illinois mississauga ontario canada purchase price acquisitions primarily funded companys use domestic foreign revolving lines credit companys consolidated longterm debt increased 20287000 126905000 december 31 2001 compared 106618000 december 31 2000 companys operating cash flow enabled pay significant portion 42977000 invested acquired companies 2001 reducing use companys debt facility february 27 2002 company entered new revolving credit facility syndicate banks revolving credit facility replaces companys 100 million facility 39350000 euro facility revolving credit facility provides borrowings 150 million includes 100 million tranche us dollar borrowings 50 million tranche euro base borrowings matures february 2005 approximately 50 million borrowings revolving credit facility used repay amounts outstanding prior facilities revolving credit facility used support companys acquisition program working capital requirements acquired companies general corporate purposes outstanding indebtedness revolving credit facility bears interest one three customary rates plus margin 100 basis points depending applicable base rate companys bond rating average interest rate february 2002 approximately 3 revolving credit facility includes operational financial covenants customary facilities type including among others restrictions additional indebtedness liens investments maintenance certain leverage ratios february 27 2002 company compliance covenants related revolving credit facility companys 5000000 industrial revenue bond payable september 2002 company intends repay debt utilizing revolving line credit september 1 2001 company entered interest rate swap 75000000 8 38 notes due december 2003 company swapped fixed rate variable rate variable rate floating libor plus 374 term swap coincides term notes working capital december 31 2001 142595000 compared 137142000 december 31 2000 increase primarily attributable inclusion working capital acquired companies ratio current assets current liabilities 23 1 december 31 2001 compared 22 1 december 31 2000 cash equivalents 11997000 december 31 2001 compared 15235000 december 31 2000 debt percentage total capital employed shortterm longterm debt percentage sum shortterm longterm debt plus equity 337 december 31 2001 compared 314 december 31 2000 company anticipates currently available funds provided ongoing operations sufficient meet current operating requirements anticipated capital expenditures least next 24 months company time involved environmental proceedings legal proceedings incurs costs ongoing basis related matters company incurred material expenditures fiscal 2001 connection matters see part ii item 1 legal proceedings conversion euro january 1 1999 11 15 member countries european union adopted euro common legal currency established fixed conversion rates existing sovereign currencies euro affects company manufacturing distribution facilities several member countries trades extensively across europe longterm competitive implications conversion currently assessed company however company experienced reduction risks associated foreign exchange time company incurred significant costs introduction conversion euro company currently able make receive payments euro converted financial information technology systems use euro required base currency responsibility financial statements company responsible objectivity integrity accompanying consolidated financial statements prepared conformity accounting principles generally accepted united states america financial statements necessity include companys estimates judgments relating matters concluded year end financial information contained elsewhere annual report form 10k consistent included financial statements company maintains system internal accounting controls although inherent limitations effectiveness system accounting controls company believes system provides reasonable absolute assurance assets safeguarded unauthorized use disposition accounting records sufficiently reliable permit preparation financial statements conform material respects accounting principles generally accepted united states kpmg llp independent auditors engaged render independent opinion regarding fair presentation financial statements companys financial condition operating results report appears page 31 examination made accordance auditing standards generally accepted united states america included review system internal accounting controls extent considered necessary determine audit procedures required support opinion audit committee board directors composed four nonemployee directors board made determination members audit committee satisfy requirements new york stock exchange independence financial literacy experience except mr mcavoy independent defined section 30301b3 listing requirements new york stock exchange employed company december 31 1999 committee meets periodically privately independent auditors financial officers company deems necessary review quality financial reporting company internal accounting controls committee also reviews compliance companys policy regarding relationship independent auditors addition committee responsible recommending appointment companys independent auditors critical accounting policies key estimates management considers following accounting policies key estimates critical reporting financial position company results operations proper application revenue recognition criteria requires certain judgments estimates including assessment credit risk sales return rates management used best estimates based historic trends establish reserves valuation inventory includes forecasted demand anticipated market pricing products contingencies environmental remediation costs include estimates cleanup costs could paid several years estimates based management legal counsels best estimates ultimate liability product liability costs estimated utilizing historic trends considering known insurance recoveries accounting costs relating manufacturing restructuring plan certain estimates made measuring cost plan impact operations including estimated timing facility closures management believes estimates assessments inherent application accounting policies applied reasonable basis actual results could differ estimates assumptions could impact financial position company results operations certain factors affecting future results report form 10k includes forwardlooking statements historical facts considered forwardlooking within meaning private securities litigation reform act 1995 forwardlooking statements reflect companys current views future events financial performance forwardlooking statements relate strictly historical current facts may identified use words like plan believe expect anticipate estimate words similar meaning investors rely forwardlooking statements subject variety risks uncertainties factors could cause actual results differ materially expectations undertake duty update forwardlooking statements important factors could cause actual results differ materially projected forwardlooking statements follows economic cycles particularly reduced levels housing starts remodeling adverse affect business revenues businesses customers particularly plumbing heating wholesalers home improvement retailers cyclical therefore level companys business activity cyclical fluctuating economic cycles particular housing starts remodeling levels housing starts remodeling turn heavily influenced mortgage interest rates consumer debt levels changes disposable income employment growth consumer confidence short term basis weather conditions assurance downturn factors affecting housing starts remodeling occur housing remodeling starts materially reduced likely reduction would material adverse effect company due reduced revenue economic political risks associated international sales operations could adversely affect business since sell products worldwide business subject risks associated business internationally sales outside north america percentage total sales 243 2001 accordingly future results could harmed variety factors including changes foreign currency exchange rates changes specific countrys regions political economic conditions particularly emerging markets trade protection measures import export licensing requirements potentially negative consequences changes tax laws difficulty staffing managing widespread operations differing labor regulations differing protection intellectual property unexpected changes regulatory requirements reductions supply raw materials increases prices raw materials could adversely affect operating results require substantial amounts raw materials bronze brass cast iron substantially raw materials require purchased outside sources availability prices raw materials may subject curtailment change due among things new laws regulations suppliers allocations purchasers interruptions production suppliers changes exchange rates worldwide price levels change supply price raw materials could adversely affect operating results fluctuations foreign exchange rates could materially affect reported results exchange rates united states dollar results reported local currency countries provide many services may fluctuate quarter since report interim annual results united states dollars subject risk currency fluctuations dollar appreciates applicable local currency reporting period actual earnings generated services country diminished conversion exposed fluctuations foreign currencies significant portion revenue certain costs assets liabilities denominated currencies us dollars approximately 243 revenue 2001 sales outside north america twelve months ended december 31 2001 depreciation euro us dollar adverse impact revenue 3385000 yet impact earnings minimal share revenue nondollar denominated currencies may continue increase future periods offer assurance exchange rate fluctuations material adverse effect results operations financial condition face intense competition encounter intense competition areas business additionally customers products attempting reduce number vendors purchase order reduce size diversity inventory remain competitive need invest continuously manufacturing marketing customer service support distribution networks anticipate may adjust prices products stay competitive potentially resulting inventory valuation impairment issues cannot assure sufficient resources continue make investments maintain competitive position environmental compliance costs liabilities could adversely affect financial condition operations properties subject increasingly stringent laws regulations relating environmental protection including laws regulations governing air emissions water discharges waste management workplace safety laws regulations impose substantial fines sanctions violations require installation costly pollution control equipment operational changes limit pollution emissions andor decrease likelihood accidental hazardous substance releases must conform operations properties laws adapt regulatory requirements countries requirements change experienced expect continue experience operating costs comply environmental laws regulations addition new laws regulations stricter enforcement existing laws regulations discovery previously unknown contamination imposition new clean requirements could require us incur costs become basis new increased liabilities could material adverse effect business financial condition results operations third parties may infringe intellectual property may expend significant resources enforcing rights suffer competitive injury success depends part proprietary technology rely combination patents copyrights trademarks trade secrets confidentiality provisions licensing arrangements establish protect proprietary rights fail successfully enforce intellectual property rights competitive position could suffer could harm operating results may required spend significant resources monitor police intellectual property rights cannot continue operating manufacturing facilities current higher levels results operations could adversely affected operate number manufacturing facilities production products equipment management systems necessary operations may break perform poorly fail resulting fluctuations manufacturing efficiencies fluctuations may affect ability deliver products customers timely basis could material adverse effect business financial condition results operations extent successful implementing manufacturing restructuring plan could adverse effect results operations financial condition reducing number manufacturing plants united states europe also expanding production capability china believe reduce product cost plant consolidations china expansion plants successful could material adverse effect results operations financial condition experience delays introducing new products existing new products achieve maintain market acceptance revenues may decrease industry characterized intense competition changes enduser requirements technically complex products evolving product offerings introductions believe future success depend part ability anticipate adapt factors offer timely basis products meet customer demands failure develop new innovative products custom design existing products could result loss existing customers competitors inability attract new business either may adversely affect revenues implementation acquisition strategy may successful could affect ability increase revenues reduce profitability one strategies increase revenues expand markets acquisitions provide us complementary water related products expect spend significant time effort expanding existing businesses identifying completing integrating acquisitions expect face competition acquisition candidates may limit number acquisition opportunities available us may result higher acquisition prices cannot certain able identify acquire profitably manage additional companies successfully integrate additional companies without substantial costs delays problems also assurance companies acquired future achieve revenues profitability cash flows justify investment addition acquisitions may involve number special risks including adverse shortterm effects reported operating results diversion managements attention loss key personnel acquired companies unanticipated management operational problems legal liabilities special risks could material adverse effect business financial condition results operations fail manufacture deliver high quality products may lose customers product quality performance priority customers products used control temperature pressure water well water quality safety applications require products meet stringent performance safety standards fail maintain enforce quality control testing procedures products meet stringent performance safety standards substandard products would seriously harm reputation resulting loss current customers competitors damage ability attract new customers could material adverse effect business financial condition results operations face risks product liability lawsuits may adversely affect business like manufacturers distributors products designed control regulate water face inherent risk exposure product liability claims event use products results personal injury property damage business interruption customers may subjected various product liability claims including among others products include inadequate improper instructions use installation inadequate warnings concerning effects failure products although maintain strict quality controls procedures including testing raw materials safety testing selected finished products cannot certain products completely free defect addition certain cases rely thirdparty manufacturers products components products although liability insurance coverage cannot certain insurance coverage continue available us reasonable cost available adequate cover liabilities one shareholders exercise substantial influence company february 15 2002 timothy p horne chairman chief executive beneficially owned 337 outstanding shares class common stock class b common stock represents 798 total outstanding voting power long mr horne controls shares representing least majority total voting power companys outstanding stock mr horne able unilaterally determine outcome stockholder votes stockholders able affect outcome stockholder vote mr horne sell significant amount common stock public market trading price common stock could decline see part iii item 12 security ownership certain beneficial owners management foregoing list sets forth many factors could impact upon ability achieve results described forwardlooking statements investors cautioned place undue reliance statements speak date made investors also understand possible predict identify factors list considered complete statement potential risks uncertainties investors also realize underlying assumptions prove inaccurate unknown risks uncertainties materialize actual results could vary materially projections undertake obligation update forwardlooking statements result future events developments new accounting standards 2000 financial accounting standards boards emerging issues task force eitf added agenda various revenue recognition issues could impact income statement classification certain promotional payments may 2000 eitf reached consensus issue 0014 accounting certain sales incentives eitf 0014 addresses recognition income statement classification various sales incentives among requirements consensus require costs related consumer coupons currently classified marketing costs classified reduction revenue impact adopting consensus expected material impact results operations company expects implement consensus first quarter 2002 april 2001 eitf reached consensus issue 0025 vendor income statement characterization consideration purchaser vendors products services eitf 0025 addresses income statement classification consideration directly addressed issue 0014 vendor reseller another party purchases vendors products among requirements consensus require certain customer promotional incentives currently classified marketing costs classified reduction revenue consensus effective fiscal 2002 company expects implement consensus first quarter 2002 july 2001 financial accounting standards board fasb issued financial accounting standards board statement 141 business combinations fas 141 financial accounting standards board statement 142 goodwill intangible assets fas 142 fas 141 requires purchase method accounting used business combinations initiated june 30 2001 fas 141 also specifies criteria intangible assets acquired purchase method business combination must meet recognized reported apart goodwill fas 142 requires goodwill intangible assets indefinite useful lives longer amortized instead tested impairment least annually accordance provisions fas 142 fas 142 also require intangible assets definite useful lives amortized respective estimated useful lives estimated residual values reviewed impairment accordance financial accounting standards board statement 121 accounting impairment longlived assets longlived assets disposed provisions fas 141 effective immediately except regard business combinations initiated prior july 1 2001 fas 142 effective january 1 2002 goodwill intangible assets determined indefinite useful life acquired purchase business combination completed june 30 2001 amortized continue evaluated impairment accordance appropriate prefas 142 accounting literature goodwill intangible assets acquired business combinations completed july 1 2001 continue amortized prior adoption fas 142 company currently evaluating effect adoption fas 141 fas 142 results operations financial position august 2001 fasb issued financial accounting standards board statement 143 accounting asset retirement obligations fas 143 requires companies record fair value asset retirement obligation liability period incurs legal obligation associated retirement tangible longlived assets result acquisition construction development normal use assets company must also record corresponding increase carrying value related longlived asset depreciate cost remaining useful life asset liability must increased period passage time offset recorded operating expense liability must also adjusted changes estimated future cash flows underlying initial fair value measurement companies must also recognize gain loss settlement liability provisions fas 143 effective fiscal years beginning june 15 2002 date adoption fas 143 companies required recognize liability existing asset retirement obligations associated asset retirement costs company currently evaluating effect adoption fas 143 results operations financial position august 2001 fasb issued financial accounting standards board statement 144 accounting impairment disposal longlived assets fas 144 addresses accounting reporting impairment disposal longlived assets fas 144 supercedes financial accounting standards board statement 121 accounting impairment longlived assets longlived assets disposed fas 121 retains many fundamental provisions fas 121 fas 144 also supercedes accounting reporting provisions accounting principles board opinion 30 reporting results operations reporting effects disposal segment business extraordinary unusual infrequently occurring events transactions apb 30 disposal segment business however fas 144 retains requirements apb 30 report discontinued operations separately extends reporting requirement components entity either disposed classified held sale fas 144 excludes goodwill intangibles amortized scope assets held used fas 144 addresses cash flows estimated test recoverability asset group assets clarifies impairment loss allocated creates requirement use expected present value technique estimate fair value market prices available uncertainties exist timing amount future cash flows longlived assets disposed sale fas 144 establishes criteria met qualify classification defines timing related sale must consummated eliminates net realizable value measurement approach segments business certain acquired assets business combination defines costs sell asset provisions fas 144 effective fiscal years beginning december 15 2001 generally applied prospectively company currently evaluating effect adoption fas 144 results operations financial position item 7aitem 7 managements discussion analysis financial condition results operations recent developments august 7 2002 announced appointment new chief executive officer patrick okeefe replace timothy p horne retired chairman board chief executive officer president mr horne retired employee company december 31 2002 mr horne consultant company remains director board nominated elected mr gordon w moran nonexecutive chairman mr moran served board since 1990 mr okeefe also elected board july 29 2002 acquired fr foerster rothmann gmbh fr located neuenburg rhein germany approximately 23 million cash less assumed net debt 08 million fr manufactures distributes line gauges predominantly french german oem markets frs annual revenue prior acquisition approximately 4 million euro december 31 2002 consolidated balance sheet contains purchase price allocation consistent guidelines financial accounting standards board statement 141 business combinations fas 141 july 15 2002 acquired adev electronic sa adev located rosieres france closely affiliated distributor ek eminent ab eminent located gothenburg sweden approximately 129 million cash less assumed net debt 35 million adev also low cost manufacturing facility located tunisia adev manufactures distributes electronic systems predominantly oem market product lines include thermostats controls heating ventilation air conditioning control systems hydronic electric floor warming systems controls residential applications eminent distributes electronic controls mechanical thermostats electric control related products throughout european nordic countries two companies combined annual revenue preceding acquisition approximately 30 million euro december 31 2002 consolidated balance sheet contains purchase price allocation consistent guidelines fas 141 may 9 2002 acquired hunter innovations sacramento california 25 million approximately 10 million paid cash closing balance interest bearing notes payable equal installments next four years hunter innovations founded 1995 developed line large backflow prevention devices represent significant advance technology improved product features important backflow prevention markets include lighter weight compact design better flow characteristics improved serviceability multiple endconnection shutoff valve options hunter innovations sales twelve months preceding acquisition approximately 15 million unlike acquisitions hunter significant historical revenues earnings nonetheless purchase price based projected revenues earnings utilized acquisitions quarter ending september 30 2002 obtained thirdparty valuation allocate purchase price consistent guidelines fas 141 allocation goodwill approximately 168 million approximately 117 million intangibles classified assets consolidated balance sheet december 31 2002 117 million acquired intangible assets 92 million assigned unpatented technology currently subject amortization 25 million patents twentyyear useful life 168 million goodwill assigned north american segment none deductible tax purposes march 5 2002 entered joint venture yuhuan county cheng guan metal hose factory cheng guan located taizhou zhejiang province peoples republic china cheng guan annual sales prior transaction approximately 15 million manufacturer variety plumbing products sold chinese domestic market export markets product lines contributed joint venture include hose connectors multilayer tubing stainless steel braided hose joint venture owned 60 us 40 chinese partner invest 78 million obtain 60 interest 50 million paid december 31 2002 december 31 2002 consolidated balance sheet contains purchase price allocation joint venture allocation goodwill approximately 3 million approximately 2 million amortizable intangibles classified assets consolidated balance sheet december 31 2002 part 187 million capital expenditure budget fiscal 2002 expected invest approximately 90 million establish 100 controlled bronze brass manufacturing plant tianjin china anticipate construction plant completed early 2003 remaining costs expected disbursed next two quarters fiscal 2003 december 31 2002 spent approximately 77 million process implementing plan consolidate several manufacturing plants north america europe time expanding manufacturing capacity china low cost areas world implementation manufacturing restructuring plan began fourth quarter fiscal 2001 projects charges recorded fourth quarter fiscal 2001 essentially complete 2002 decided expand scope manufacturing restructuring plan transfer certain production low cost manufacturing plants tunisia bulgaria expanded plan expected completed end fiscal 2003 anticipate pretax cost manufacturing restructuring plan 128 million recorded pretax manufacturing restructuring costs 58 million fourth quarter fiscal 2001 41 million fiscal 2002 anticipate recording additional pretax costs approximately 29 million fiscal 2003 continue implement program manufacturing restructuring costs recorded 2001 2002 consist primarily severance costs asset writedowns accelerated depreciation severance costs recorded restructuring 38 employees manufacturing administration groups 26 terminated december 31 2002 asset writedowns consist primarily writeoffs inventory related product lines discontinued part restructuring plan recorded cost goods sold accelerated depreciation based shorter remaining estimated useful lives certain fixed assets recorded cost goods sold costs consist primarily removal shipping costs associated relocation manufacturing equipment recorded cost goods sold tax benefits costs incurred asset writedowns approximate amount cash outlays implement program would allow us complete restructuring plan minimum consumption cash following completion plan estimate annual pretax savings approximately 50 million current production volume 2002 annual report shareholders discusses earnings adjusted exclude manufacturing restructuring costs goodwill amortization fiscal 2002 2001 management believes information appropriate supplemental measure operating performance company helps investors understand impact changes accounting principles impact restructuring plan considered alternative net income indication performance reconciliation adjusted earnings reported twelve months ended december 31 2002 2001 2000 provided adjusted earnings exclude restructuring impairment related costs twelve months ended december 31 2002 2001 also excludes goodwill amortization based adoption fas 142 twelve months ended december 31 2001 2000 results operations twelve months ended december 31 2002 compared twelve months ended december 31 2001 net sales net sales twelve months ended december 31 2002 increased 66586000 121 615526000 compared 548940000 period 2001 increase net sales attributable following increase net sales internal growth primarily attributable increased unit sales doityourself diy market north america growth net sales acquired businesses due inclusion net sales powers process controls skokie illinois acquired september 28 2001 premier manufactured systems phoenix arizona acquired june 13 2001 fimet milan italy acquired june 1 2001 cheng guan joint venture established march 5 2002 adev eminent acquired july 15 2002 fr acquired july 29 2002 increase foreign exchange due primarily euro appreciating us dollar compared period 2001 monitor net sales three geographical segments north america europe asia outlined north america europe asia accounted 731 237 32 net sales respectively twelve months ended december 31 2002 compared 757 221 22 respectively twelve months ended december 31 2001 net sales geographic segments twelve months ended december 31 2002 2001 follows increase net sales north america due inclusion powers process controls premier manufactured systems well increased unit sales diy market increase net sales europe due inclusion fimet adev eminent fr appreciation euro us dollar increase net sales asia primarily due inclusion chen guan joint venture gross profit gross profit twelve months ended december 31 2002 increased 25188000 137 comparable prior year period increased percentage net sales 339 334 charged 2907000 425300 costs associated manufacturing restructuring plan cost sales 2002 2001 respectively excluding cost associated manufacturing restructuring plan 2002 2001 gross profit would increased 23842000 127 would increased percentage net sales 344 342 selling general administrative expenses selling general administrative expenses increased 18758000 142 150553000 131795000 comparable prior year period increase attributable inclusion selling general administrative expenses acquired companies increase cost product general liability insurance administrative startup costs associated new manufacturing plant china adopted financial accounting standards board statement 142 goodwill intangibles fas142 january 1 2002 accordingly record goodwill amortization fiscal 2002 recorded goodwill amortization 3220000 part selling general administrative expenses fiscal 2001 restructuring charges restructuring charges twelve months ended december 31 2002 decreased 816000 561 638000 compared 1454000 period 2001 costs primarily severance costs related twelve months ended december 31 2002 24 employees 12 terminated december 31 2002 compared costs related december 31 2001 14 employees terminated december 31 2002 operating income operating income twelve months ended december 31 2002 increased 7246000 144 57529000 compared 50283000 period 2001 due increased gross profit cessation goodwill amortization partially offset increased selling general administrative expenses operating income segment twelve months ended december 31 2002 2001 follows increase north america due increased gross profit primarily due inclusion operating results acquired companies partially offset increased premiums product general liability insurance increase europe due inclusion operating results acquired companies euro appreciating us dollar compared prior year decrease china primarily due increased bad debt warranty expense corporate expenses primarily compensation expense professional fees including legal audit expenses product liability general liability insurances increase corporate expenses primarily due increased legal audit expenses administrative startup costs associated new manufacturing plant china interest expense interest expense twelve months ended december 31 2002 decreased 730000 77 8692000 compared 9422000 period 2001 primarily due lower interest rates variable rate indebtedness capitalized construction period interest startup manufacturing plant china partially offset increased levels debt incurred fund acquisitions september 1 2001 entered interest rate swap respect 75000000 838 notes due december 2003 swap converted interest fixed floating august 5 2002 sold swap received 2315000 cash interest expense twelve months ended december 31 2002 reduced 1711000 benefit swap active amortization adjustment fair value subsequent sale swap income taxes effective tax rate continuing operations twelve months ended december 31 2002 increased 350 339 comparable prior year period increase primarily due change earnings mix jurisdictions higher tax rates also 2001 costs manufacturing restructuring plan recorded tax jurisdictions tax rates higher effective rate caused overall effective rate 2001 lower would normally expected excluding impact aftertax manufacturing costs goodwill amortization 2002 2001 effective tax rate would increased 352 322 net income continuing operations net income continuing operations twelve months ended december 31 2002 increased 6066000 228 32622000 121 per common share compared 26556000 099 per common share twelve months ended december 31 2001 diluted basis twelve months ended december 31 2001 compared twelve months ended december 31 2000 net sales net sales twelve months ended december 31 2001 increased 32840000 64 548940000 compared 516100000 period 2000 increase net sales attributable following decrease net sales internal growth attributable decreased unit sales north american european plumbing heating wholesalers resulting continued weakness north american plumbing market weakened european economy decreases partially offset increased unit sales diy market growth net sales acquired businesses due inclusion net sales powers process controls skokie illinois acquired september 28 2001 premier manufactured systems phoenix arizona acquired june 13 2001 fimet milan italy acquired june 1 2001 dumser metallbau gmbh co kg landau germany acquired january 5 2001 business acquired chiles power supply bask llc springfield missouri business watts radiant acquired august 30 2000 mccraney inc santa ana california business spacemaker acquired may 12 2000 decrease foreign exchange due primarily devaluation euro us dollar compared period 2000 monitor net sales three geographical segments north america europe asia outlined north america europe asia accounted 757 221 22 net sales respectively twelve months ended december 31 2001 compared 776 200 24 respectively twelve months ended december 31 2000 net sales geographic segments twelve months ended december 31 2001 2000 follows increase net sales north america due inclusion powers process controls premier manufactured systems watts radiant spacemaker acquisitions well increased unit sales diy market partially offset decreased unit sales plumbing heating wholesalers increase net sales europe due inclusion fimet dumser partially offset decreased unit sales european plumbing heating wholesalers euros devaluation us dollar gross profit gross profit twelve months ended december 31 2001 decreased 1772000 10 comparable prior year period decreased percentage net sales 334 359 charged 4253000 costs associated manufacturing restructuring plan cost sales excluding manufacturing restructuring costs gross profit would increased 2481000 declined percentage sales 342 359 decreased percentage primarily attributable unfavorable sales mix caused decreased sales plumbing heating wholesalers well inclusion gross margin acquired companies operated lower gross margin remainder business selling general administrative expense selling general administrative expenses increased 6478000 52 131795000 125317000 comparable prior year period increase attributable inclusion selling general administrative expenses acquired companies partially offset lower exchange rate euro relative us dollar reduced spending levels restructuring charges restructuring charges primarily severance related costs current year 14 employees 13 terminated december 31 2001 operating income operating income twelve months ended december 31 2001 decreased 9704000 162 50283000 compared period 2000 due reduced gross profit manufacturing restructuring costs operating income segment twelve months ended december 31 2001 2000 follows decrease north american european operating income due decreased unit sales plumbing heating wholesalers manufacturing restructuring plan costs decreases partially offset operating earnings acquired companies increase china primarily due decreased bad debt expense due stabilization accounts receivable aging domestic chinese market corporate expenses primarily compensation expense professional fees including legal audit expenses product liability general liability insurances interest expense interest expense twelve months ended december 31 2001 decreased 475000 48 9422000 compared 9897000 period 2000 primarily due lower interest rates variable rate indebtedness partially offset increased levels debt incurred acquisitions september 1 2001 entered interest rate swap respect 75000000 838 notes due december 2003 swap converted interest fixed floating reduced interest expense 641000 2001 income taxes effective tax rate continuing operations decreased 339 367 comparable prior year period decrease primarily due statutory rate reductions affecting income tax canada tax planning opportunities costs manufacturing restructuring plan recorded tax jurisdictions tax rates higher effective rate lowered overall effective rate fiscal 2001 net income continuing operations net income continuing operations twelve months ended december 31 2001 decreased 4615000 148 26556000 099 per common share compared 31171000 117 per common share twelve months ended december 31 2000 diluted basis net tax basis manufacturing restructuring plan costs accounted 013 per share reduction discontinued operations twelve months ended december 31 2000 discontinued operations reported net loss 7170000 027 per share diluted basis record costs associated discontinued operations twelve months ended december 31 2001 2002 see note 3 notes consolidated financial statements liquidity capital resources twelve month period ended december 31 2002 generated 51425000 cash continuing operations spent 16399000 capital equipment twelve months ended december 31 2002 net proceeds 3194000 primarily sale two facilities closed part manufacturing restructuring plan largest component capital expenditures establishment 100 controlled bronze brass manufacturing plant tianjin china estimated total cost 9000000 approximately 7700000 invested twelve months ended december 31 2002 remaining capital expenditures primarily manufacturing machinery equipment part commitment continuously improve manufacturing capabilities addition twelve months ended december 31 2002 invested approximately 5000000 establish joint venture china 10000000 acquire hunter innovations approximately 10900000 three acquisitions europe adev eminent fr positive free cash flow 28536000 defined net cash provided continuing operations minus capital expenditures dividends plus proceeds sale assets twelve months ended december 31 2002 versus positive free cash flow 29035000 comparable prior year period experienced increase accounts receivable due increased sales volume change industrywide payment terms home depot inc largest customer remaining within normal industry standards addition accounts receivable cheng guan joint venture established march 2002 offset increased income continuing operations increased depreciation expense compared comparable period believe free cash flow appropriate supplemental measure operating performance company provides investors measure ability repay debt fund acquisitions computation may comparable companies may define free cash flow differently free cash flow represent cash generated operating activities accordance generally accepted accounting principles gaap therefore considered alternative net cash flows operating activities indication performance free cash flow also considered alternative net cash flows operating activities defined gaap reconciliation free cash flow net cash provided continuing operations provided september 6 2002 received 9524000 cash zurich american insurance company reimbursement defense costs incurred us james jones case since april 23 1998 cash net tax classified discontinued operations consolidated statements cash flows addition january 16 2003 received 2726000 cash zurich american insurance company indemnification costs incurred james jones case see part item 1 product liability environmental litigation mattersjames jones case february 28 2002 entered revolving credit facility syndicate banks revolving credit facility replaced 1000 million us facility 394 million euro facility revolving credit facility provides borrowings 1500 million us includes 1000 million tranche us dollar borrowings 500 million tranche eurobased borrowings matures february 2005 approximately 460 million borrowings revolving credit facility used repay amounts outstanding prior facilities revolving credit facility used support acquisition program working capital requirements general corporate purposes december 31 2002 longterm debt included 416 million outstanding revolving credit facility us dollar eurobased borrowings outstanding indebtedness revolving credit facility bears interest one three customary rates plus margin 100 basis points depending applicable base rate bond rating average interest rate borrowings revolving credit facility approximately 39 december 31 2002 revolving credit facility includes operational financial covenants customary facilities type including among others restrictions additional indebtedness liens investments maintenance certain leverage ratios december 31 2002 compliance covenants related revolving credit facility working capital defined current assets less current liabilities december 31 2002 772 million compared 1426 million december 31 2001 decrease primarily due classification 750 million 838 notes due december 2003 current portion longterm debt partially offset increase accounts receivable excluding 750 million 838 notes working capital would 1522 million ratio current assets current liabilities 13 1 december 31 2002 compared 23 1 december 31 2001 cash equivalents 110 million december 31 2002 compared 120 million december 31 2001 proceeds exercise stock options 80 million december 31 2002 primarily due exercising expiring options increase total debt 1385 million december 31 2002 1269 million december 31 2001 due funding acquisitions increase working capital exclusive current portion longterm debt impact debt incurred fund capital expenditures net debt capitalization defined short long term interestbearing liabilities less cash equivalents percentage sum short long term interestbearing liabilities less cash equivalents plus total stockholders equity including minority interest 294 december 31 2002 compared 309 december 31 2001 net debt capitalization computed accordance gaap management believes appropriate supplemental measure helps investors understand ability meet financing needs computation may comparable companies may define debt capitalization differently reconciliation net debt provided reconciliation capitalization provided net capital expenditure budget fiscal 2003 15536000 includes expected proceeds sale facility closed part manufacturing restructuring plan january 2003 contributed 3000000 pension plan expect contribute approximately 800000 within first six months fiscal 2003 fund minimum contribution required also intend refinance 750 million 838 notes prior stated maturity december 1 2003 anticipate available funds current operations sources liquidity sufficient meet current operating requirements anticipated capital expenditures least next 24 months however may consider external sources financing large future acquisitions longterm financial obligations presented following table aas recognized consolidated balance sheet letters credit purchased guarantees ensure performance payment third parties accordance specified terms conditions amounts outstanding approximately 19522000 december 31 2002 14997000 december 31 2001 instruments may exist expire without drawn therefore necessarily represent future cash flow obligations certain loan agreements contain covenants require among items maintenance certain financial ratios limit ability enter secured borrowing arrangements time involved environmental proceedings legal proceedings incur costs ongoing basis related matters incurred material costs fiscal 2002 connection matters twelve months ended december 31 2002 disbursed approximately 35 million aftertax defense settlement costs related james jones case september 2002 received 57 million tax reimbursement defense costs related james jones case amounts recorded discontinued operations consolidated statement cash flows addition january 16 2003 received 17 million tax indemnification incurred james jones case see part item 1 businessproduct liability environmental litigation mattersjames jones litigation critical accounting policies key estimates preparation financial statements accordance generally accepted accounting principles gaap requires us make judgments assumptions estimates affect amounts reported critical accounting estimate assumption highly uncertain matters could material effect financial statements another also reasonable amount used change estimate reasonably likely period base assumption historical experience estimates believe reasonable circumstances actual results could differ significantly estimates note 2 notes consolidated financial statements describes significant accounting policies utilized preparation consolidated financial statements discussed development selection disclosure estimates audit committee management believes following critical accounting policies reflect significant estimates assumptions allowance doubtful accounts encounter risks associated collectibility customer accounts management specifically analyzes individual accounts receivable historical bad debts allowances concentration receivables customer credit worthiness current economic trends changes customer payment terms evaluating allowance doubtful accounts factors along aging accounts receivable used determining adequacy allowance circumstances relating specific customers change estimates recoverability receivables could adjusted inventory valuation inventories generally stated lower cost market costs determined firstin firstout basis utilize historical experience basis determining value excess obsolete inventories changes market conditions lower expected customer demand changes technology features could result additional obsolete inventory saleable could require additional inventory reserve provisions legal contingencies defendant numerous legal matters including involving environmental law product liability discussed note 15 notes consolidated financial statements required financial accounting standards board statement 5 accounting contingencies determine whether estimated loss contingency accrued assessing whether loss deemed probable loss amount reasonably estimated net applicable insurance proceeds develop estimates consultation outside counsel handling defense matters involves analysis potential results final settlement matters could result significant effects results operations cash flows financial position goodwill intangibles adopted financial accounting standards board statement 142 goodwill intangible assets fas 142 january 1 2002 result longer amortize goodwill valuation goodwill intangible assets reviewed impairment annually accordance fas 142 intangible assets purchased technology generally recorded connection business acquisition larger complex acquisitions value assigned intangible assets determined independent valuation firm based estimates judgments regarding expectations success life cycle products technology acquired actual product acceptance differs significantly estimates may required record impairment charge write assets realizable value annual goodwill impairment test involves use estimates related fair market value business unit goodwill associated value estimated using future cash flow valuation methodology severe decline market value could result unexpected impairment charge goodwill could material impact results operations cash flows financial position business combinations addition requirements set forth fas 141 regarding intangible assets necessary make estimates relating assets acquired liabilities assumed assumptions future growth acquired companies assurances estimates assumptions accurate pension benefits calculation employee pension benefit costs obligations actuaries dependent assumptions include salary growth longterm return plan assets discount rates factors key factors utilized actuaries discussed detail note 14 notes consolidated financial statements income taxes recognize deferred tax liabilities assets expected future consequences events reflected consolidated financial statements present financials accordance rules financial accounting standards board statement 109 accounting income taxes fas 109 deferred tax liabilities assets determined based differences book values tax bases particular assets liabilities using tax rates effect years differences expected reverse valuation allowance provided offset net deferred tax assets based upon available evidence likely deferred tax assets realized certain factors affecting future results annual report form 10k contains statements historical facts considered forwardlooking within meaning private securities litigation reform act 1995 forwardlooking statements contain projections future results operations financial position state forwardlooking information cases identify statements forwardlooking words anticipate believe could estimate expect intend may would similar words rely forwardlooking statements involve known unknown risks uncertainties factors beyond control risks uncertainties factors may cause actual results performance achievements differ materially anticipated future results performance achievements expressed implied forwardlooking statements factors might cause differences follows face intense competition able respond competition markets revenues may decrease competitive pressures markets could adversely affect competitive position leading possible loss market share decrease prices either could result decreased revenues profits encounter intense competition areas business additionally customers products attempting reduce number vendors purchase order reduce size diversity inventories transaction costs remain competitive need invest continuously manufacturing marketing customer service support distribution networks may sufficient resources continue make investments may unable maintain competitive position addition anticipate may reduce prices products stay competitive potentially resulting reduction profit margin inventory valuation products competitors based foreign countries cost structures prices foreign currencies accordingly currency fluctuations could cause us dollarpriced products less competitive competitors products priced currencies implementation acquisition strategy may successful could affect ability increase revenues profitability growth last two years largely driven acquisitions one strategies increase revenues profitability expand markets acquisitions provide us complementary waterrelated products cannot certain able identify acquire profitably manage additional companies successfully integrate additional companies without substantial costs delays problems also companies acquired recently future may achieve revenues profitability cash flows justify investment expect spend significant time effort expanding existing businesses identifying completing integrating acquisitions expect face competition acquisition candidates may limit number acquisition opportunities available us may result higher acquisition prices possibly leading decrease revenues profitability addition acquisitions may involve number special risks including limited •adverse shortterm effects reported operating results •diversion managements attention •loss key personnel acquired companies •unanticipated management operational problems legal liabilities economic cycles particularly reduced levels housing starts remodeling adverse effect revenues operating results experienced expect continue experience fluctuations revenues operating results due economic business cycles businesses customers particularly plumbing heating wholesalers home improvement retailers cyclical therefore level business activity cyclical fluctuating economic cycles also believe level business activity influenced housing starts renovation remodeling turn heavily influenced mortgage interest rates consumer debt levels changes disposable income employment growth consumer confidence factors cause material reduction housing remodeling starts revenues profits would decrease result material adverse effect financial condition results operations economic political risks associated international sales operations could adversely affect business future operating results since sell manufacture products worldwide business subject risks associated business internationally business future operating results could harmed variety factors including •trade protection measures import export licensing requirements could increase costs business internationally •potentially negative consequences changes tax laws could adverse impact profits •hiring retaining senior management overseas operations •difficulty staffing managing widespread operations could reduce productivity •costs compliance differing labor regulations especially connection restructuring overseas operations •laws foreign countries may protect intellectual property rights extent laws united states •unexpected changes regulatory requirements may costly require significant time implement •political risks specific foreign jurisdictions fluctuations foreign exchange rates could materially affect reported results exposed fluctuations foreign currencies significant portion sales certain portions costs assets liabilities denominated currencies us dollars approximately 314 sales 2002 sales outside us twelve months ended december 31 2002 appreciation euro us dollar positive impact sales 7949000 twelve months ended december 31 2001 depreciation euro us dollar adverse impact sales 3385000 share revenue nondollar denominated currencies continues increase future periods exchange rate fluctuations likely greater impact results operations financial condition significant risks expanding manufacturing operations china part strategy shifting significant portion manufacturing operations china reduce production costs subject greater portion operations risks business china chinese legal system relatively new lacks transparency gives chinese central local government authorities higher degree control business china customary developed economies makes process obtaining necessary regulatory approval china inherently unpredictable addition protection accorded proprietary technology knowhow chinese legal system strong united states result may lose valuable trade secrets competitive advantage although chinese government pursuing economic reform policy welcoming foreign investments past two decades assurance chinese government change current policies future making continued business operations china difficult unprofitable reductions interruptions supply raw materials increases prices raw materials could reduce profit margins adversely impact ability meet customer delivery commitments require substantial amounts raw materials including bronze brass cast iron substantially raw materials require purchased outside sources availability prices raw materials may subject curtailment change due among things new laws regulations suppliers allocations purchasers interruptions production suppliers changes exchange rates worldwide price levels currently party longterm supply agreements inability obtain adequate supplies raw materials products favorable prices could material adverse effect business financial condition results operations decreasing profit margins hindering ability deliver products customers timely basis example november 1994 one limited number brass rod suppliers went strike simultaneously copperbased metals prices increased dramatically combination events caused increase operating costs adversely affected financial results extent successful implementing manufacturing restructuring plan results operations financial condition could adversely affected manufacturing restructuring plan began 2001 expanded 2002 implemented reduce manufacturing cost planned manufacturing plant consolidations united states europe production capability expansion china successful results operations financial condition could materially adversely affected cannot continue operating manufacturing facilities current higher utilization levels results operations could adversely affected equipment management systems necessary operation manufacturing facilities may breakdown perform poorly fail resulting fluctuations ability manufacture products achieve manufacturing efficiencies operate number manufacturing facilities subject risk fluctuations facilities could cause increase production costs corresponding decrease profitability example 2001 one manufacturing facilities shut period time result fire required source products external vendors substantially higher costs also verticallyintegrated manufacturing process segment dependent upon prior process breakdown one segment adversely affect later components fluctuations production process may affect ability deliver products customers timely basis inability meet delivery obligations could result loss customers negatively impact business financial condition results operations experience delays introducing new products existing new products achieve maintain market acceptance revenues profitability may decrease failure develop new innovative products custom design existing products could result loss existing customers competitors inability attract new business either may adversely affect revenues industry characterized •intense competition •changes specifications required customers andor plumbing codes •technically complex products •constant improvement existing products introductions new products believe future success depend part ability anticipate adapt factors offer timely basis products meet customer demands development new enhanced products complex uncertain process requiring anticipation technological market trends may experience design manufacturing marketing difficulties inability attract sufficient number experienced engineers could delay prevent development introduction marketing new products enhancements result unexpected expenses difficulties could cause us lose business customers could adversely affect competitive position addition added expenses could decrease profitability associated products gain market acceptance environmental compliance costs liabilities could increase expenses reduce profitability operations properties subject extensive increasingly stringent laws regulations relating environmental protection including laws regulations governing air emissions water discharges waste management disposal workplace safety laws regulations impose substantial fines sanctions violations require installation costly pollution control equipment operational changes limit pollution emissions andor decrease likelihood accidental hazardous substance releases also could required halt one portions operations violation cured could also liable costs property damage personal injury others although attempt operate compliance environmental laws may succeed effort times costs curing violations resolving enforcement actions might initiated government authorities could substantial certain environmental laws current past owners operators real property may liable costs cleaning contamination even know responsible contamination laws also impose liability person arranges disposal treatment hazardous waste site therefore ownership operation real property disposal waste could lead liabilities laws incurred expect continue incur costs relating environmental matters addition new laws regulations stricter enforcement existing laws regulations discovery previously unknown contamination imposition new clean requirements could require us incur additional costs become basis new increased liabilities could significant environmental litigation enforcement compliance inherently uncertain may experience significant costs connection environmental matters third parties may infringe intellectual property may expend significant resources enforcing rights suffer competitive injury rely combination patents copyrights trademarks trade secrets confidentiality provisions licensing arrangements establish protect proprietary rights may required spend significant resources monitor police intellectual property rights fail successfully enforce intellectual property rights competitive position could suffer could harm operating results limited timetotime selling products existing patents face risks product liability lawsuits may adversely affect business may subjected various product liability claims lawsuits including among others products include inadequate improper instructions use installation inadequate warnings concerning effects failure products event adequate insurance contractual indemnification damages claims would paid assets could material adverse effect results operations liquidity financial condition particular settle conclude litigation quarterly annual reporting period could material impact operating results quarter year like manufacturers distributors products designed control regulate fluids face inherent risk exposure product liability claims lawsuits event use products results personal injury property damage business interruption customers although maintain strict quality controls procedures including testing raw materials safety testing selected finished products cannot certain products completely free defect addition certain cases rely thirdparty manufacturers products components products although product liability general insurance coverage cannot certain insurance coverage continue available us reasonable cost available adequate cover liabilities see part item 1 product liability environmental litigation matters requirements fas 142 may result writeoff portion goodwill would negatively impact operating results financial condition required take impairment charge goodwill connection requirements fas 142 operating results may decrease financial condition may harmed december 31 2002 goodwill net accumulated amortization 1632 million 257 total assets 552 total stockholders equity fas 142 goodwill identifiable intangible assets indefinite useful lives longer amortized lieu amortization required perform initial impairment review goodwill required perform annual impairment reviews thereafter concluded impairment existed january 1 2002 time adoption fas 142 october 27 2002 time annual review required fas 142 perform annual tests october year indications goodwill impairment loss major customer could adverse effect results operations twelve months ended december 31 2002 largest customer home depot inc accounted approximately 630 million 102 total net sales second largest customer represented approximately 35 total net sales 2002 top ten customers accounted approximately 254 total net sales 2002 customers generally obligated purchase minimum volume products us able terminate relationships us time significant reduction orders change terms home depot inc could material adverse effect future results operations one stockholders exercise substantial influence company march 18 2003 timothy p horne member board directors beneficially owned 306 outstanding shares class common stock 944 outstanding shares class b common stock represents 772 total outstanding voting power long mr horne controls shares representing least majority total voting power outstanding stock mr horne able unilaterally determine outcome stockholder votes stockholders able affect outcome stockholder vote august 15 2002 securities exchange commission commenced civil action mr timothy p horne alleging violations securities exchange act 1934 sec alleges mr horne member board directors controlling stockholder former chief executive officer chairman received confidential information officer watts industries inc company used profit trading shares central sprinkler corp may 1999 complaint alleged violations section 10b securities exchange act 1934 rule 10b5 promulgated thereunder based insider trading mr horne entered agreement sec settle civil action pursuant agreement mr horne without admitting denying allegations complaint filed sec consented entry final judgment requires disgorge profits gained result conduct alleged complaint pay prejudgment interest plus civil money penalty permanently restrains enjoins violations section 10b securities exchange act 1934 rule 10b5 thereunder shares class common stock eligible public sale could adversely affect market price class common stock march 18 2003 18873740 shares class common stock 8185224 shares class b common stock outstanding shares class common stock freely transferable without restriction registration federal securities laws except shares held affiliates sales limited rule 144 securities act 1933 addition terms registration rights agreement respect outstanding shares class b common stock 8185224 shares holders class b common stock rights respect registration underlying class common shares securities act 1933 registration rights class b common stockholders may require two occasions register shares public resale eligible use form s3 similar shortform registration statement class b common stockholders may require register shares public resale two times per year elect register shares common stock public offering class b common stockholders entitled include shares common stock registration however may reduce number shares proposed registered view market conditions pay expenses connection registration underwriting discounts commissions pursuant exercise registration rights registered resale 1200000 shares class common stock underlying class b common stock form s3 shelf registration statement mr horne sell registered shares public market sell shares owned trading price class common stock could decline class common stock insignificant voting power class b common stock entitles holders ten votes share class b common stock constitutes 303 total outstanding common stock 813 total outstanding voting power thus able exercise controlling influence business class common stock entitles holders one vote per share provisions charter documents delaware law may prevent delay acquisition us could decrease value class common stock certificate incorporation bylaws delaware law contain provisions could make harder third party acquire us without consent board directors provisions include •authorize issuance 5000000 shares preferred stock one series without stockholder vote •limit stockholders ability call special meetings •establish advance notice requirements nominations election board directors proposing matters acted stockholders stockholder meetings delaware law also imposes restrictions mergers business combinations us holder 15 outstanding common stock restrictions revolving credit facility may limit ability pay dividends incur additional debt make acquisitions investments revolving credit facility contains operational financial covenants restrict ability make distributions stockholders incur additional debt make acquisitions investments unless satisfy certain financial tests comply various financial ratios maintain compliance covenants creditors could declare default revolving credit facility indebtedness could declared immediately due payable ability comply provisions revolving credit facility may affected changes economic business conditions beyond control new accounting standards august 2001 financial accounting standards board fasb issued financial accounting standards board statement 143 accounting asset retirement obligations fas 143 requires companies record fair value asset retirement obligation liability period incurs legal obligation associated retirement tangible longlived assets result acquisition construction development andor normal use assets company must also record corresponding increase carrying value related longlived asset depreciate cost remaining useful life asset liability must increased period passage time offset recorded operating expense liability must also adjusted changes estimated future cash flows underlying initial fair value measurement companies must also recognize gain loss settlement liability provisions fas 143 effective fiscal years beginning june 15 2002 date adoption fas 143 companies required recognize liability existing asset retirement obligations associated asset retirement costs adopted fas 143 adoption material consolidated financial statements effective january 1 2002 also adopted financial accounting standards board statement 144 accounting impairment disposal longlived assets addresses accounting reporting impairment disposal longlived assets fas 144 supercedes fas 121 retains many fundamental provisions fas 121 fas 144 also supercedes accounting reporting provisions accounting principles board opinion 30 reporting results operationsreporting effects disposal segment business extraordinary unusual infrequently occurring events transactions apb 30 disposal segment business however fas 144 retains requirements apb 30 report discontinued operations separately extends reporting requirement components entity either disposed classified held sale fas 144 excludes goodwill intangibles amortized scope former distribution center german market closed fiscal 2002 due manufacturing restructuring plan building actively marketed expect building sold fiscal 2003 accordance fas 144 classified asset held sale consolidated balance sheet december 31 2002 carrying asset fair value less costs sell april 2002 fasb issued financial accounting standards board statement 145 rescission fasb statements 4 44 64 amendment fasb statement 13 technical corrections fas 145 fas 145 rescinds fas 4 fas 64 related classification gains losses debt extinguishment debt extinguishment gains losses longer classified extraordinary fas 145 also amends fas 13 respect salesleaseback transactions adopted provisions fas 145 effective april 1 2002 adoption material consolidated financial statements july 2002 fasb issued financial accounting standards board statement 146 accounting costs associated exit disposal activities fas 146 principal difference statement issue 943 relates requirements recognition liability cost associated exit disposal activity statement requires liability cost associated exit disposal activity recognized liability incurred issue 943 liability exit cost defined issue 943 recognized date entitys commitment exit plan provisions statement effective exit disposal activities initiated december 31 2002 currently evaluating effect adoption fas 146 results operations financial position december 2002 fasb issued financial accounting standards board statement 148 accounting stockbased compensationtransition disclosure fas 148 statement effective fiscal years ending december 15 2002 amends fas 123 provides alternative methods transition voluntary change fair value based method accounting stockbased compensation addition fas 148 amends disclosure requirements fas 123 regardless accounting method used account stockbased compensation chosen continue account stockbased compensation employees using fair value method prescribed apb 25 however adopted enhanced disclosure provisions defined fas 148 effective december 31 2002 november 2002 fasb issued financial accounting standards board interpretation 45 guarantors accounting disclosure requirements guarantees including indirect guarantees indebtedness others fin 45 fin 45 requires liability recorded guarantors balance sheet upon issuance guarantee addition fin 45 requires disclosures guarantees entity issued including rollforward entitys product warranty liabilities apply recognition provisions fin 45 prospectively guarantees issued december 31 2002 adopted disclosure provisions fin 45 effective december 31 2002 offer warranties returns warranty immaterial warranty reserve part reserve sales returns allowances component allowance doubtful accounts currently process evaluating potential impact adoption fin 45 consolidated financial position results operations january 2003 fasb issued financial accounting standards board interpretation 46 consolidation variable interest entities fin 46 requires consolidation variable interest entities primary beneficiary entity equity investors entity characteristics controlling financial interest sufficient equity risk entity finance activities without additional subordinated financial support parties fin 46 effective new variable interest entities created acquired january 31 2003 variable interest entities created acquired prior february 1 2003 provisions fin 46 must applied first interim annual period beginning june 15 2003 q3 fiscal 2003 currently evaluating effect adoption fin 46 results operations financial condition currently evaluating whether would required consolidate jameco international llc fiscal 2003 financial statements jameco international llc imports sells vitreous china imported faucets faucet parts imported bathroom accessories north american retail market jameco international llc formed november 14 1996 49 interest jameco international llc involved operations daily basis loan amounts totaling 2231000 included carrying amount upon jameco international llc accrues pays interest us agreement provides 70 net income 500000 allocated us amounts thereafter allocated accordance membership interest annual sales twelve months ended december 31 2002 16685000 assets 3821000 less liabilities 1971000 excludes loan jameco international llc sufficient substantially cover carrying amount 2009000 classified assets consolidated balance sheet assets comprised primarily accounts receivable inventory believe collectable saleable respectively within normal course business item 7aitem 7 managements discussion analysis financial condition results operations overview leading supplier products use water quality water safety water flow control water conservation markets north america europe 125 years designed manufactured products promote comfort safety people quality conservation water used commercial residential light industrial applications earn revenue income almost exclusively sale products principal product lines include •backflow preventers preventing contamination potable water caused reverse flow within water supply lines fire protection systems •a wide range water pressure regulators commercial residential applications •water supply drainage products commercial residential applications •temperature pressure relief valves water heaters boilers associated systems •pointofuse water filtration reverse osmosis systems commercial residential applications •thermostatic mixing valves tempering water commercial residential applications •pumping systems underfloor radiant applications business reported three geographic segments north america europe china distribute products three primary distribution channels wholesale diy oems increases gross national product gnp indicate healthy economic environment believe positively impacts results operations economic factors believe significant direct effect demand products number new housing construction starts nonresidential commercial construction starts interest rates significant indirect effect demand products due effect rates number new residential commercial construction starts remodeling projects additional factor significant effect sales fluctuations foreign currencies significant portion sales certain portions costs assets liabilities denominated currencies us dollar approximately 372 sales year ended december 31 2003 sales outside us compared 314 year ended december 31 2002 believe significant factors relating future growth include ability continue make selected acquisitions core markets well new complementary markets regulatory requirements relating quality conservation water increased demand clean water continued enforcement plumbing building codes completed fourteen acquisitions since divesting industrial oil gas business 1999 acquisition strategy focuses businesses manufacture preferred brand name products address themes water quality water safety water conservation water flow control target businesses provide us one following entry new markets increase shelf space existing customers new improved technology expansion breadth water quality water conservation water safety water flow control products residential commercial markets products representing majority sales subject regulatory standards code enforcement typically require products meet stringent performance criteria together commissioned manufacturers representatives consistently advocated development enforcement plumbing codes focused maintaining stringent quality control testing procedures manufacturing facilities order manufacture products compliance code requirements take advantage resulting demand compliant products believe significant product development product testing capability investment plant equipment needed manufacture products compliance code requirements represents significant barrier entry competitors believe increasing demand among consumers products ensure water quality creates growth opportunities products significant risk face ability deal effectively increases raw material costs require substantial amounts raw materials including bronze brass cast iron steel plastic produce products substantially raw materials require purchased outside sources recently experienced increases costs bronze brass cast iron steel able reduce eliminate effect cost increases reducing production costs successfully implementing price increases raw material costs could reduce profit margins another significant risk face areas business competition consider brand preference engineering specifications plumbing code requirements price technological expertise delivery times breadth product offerings primary competitive factors mentioned previously believe significant product development product testing capability investment plant equipment needed manufacture products compliance code requirements represents significant barrier entry competitors committed maintaining capital equipment level consistent current technologies invested 200 million capital equipment 2003 expect invest approximately 185 million 2004 also committed expanding manufacturing capacity lower cost countries china tunisia bulgaria manufacturing plant relocations consolidations important part ongoing commitment reduce production costs 2003 highlights year ended december 31 2003 include following •net sales increased 901 million 146 2003 compared 2002 due following •operating margins increased 99 2003 93 2002 •income continuing operations increased 118 365 million 2003 326 million 2002 •diluted earnings per share continuing operations increased 132 2003 121 2002 •on may 15 2003 company refinanced 750 million 838 notes due december 1 2003 private placement 500 million 487 notes 750 million 547 notes company experienced additional interest expense approximately 35 million may 15 2003 december 1 2003 •on december 15 2003 company completed public offering 46 million shares class common stock resulting net proceeds approximately 825 million cash •the company consummated two acquisitions europe entered agreement acquire substantially assets flowmatic systems inc located dunnellon florida •working capital less cash sales ratio reduced seventh consecutive year •net cash provided continuing operations 500 million despite 68 million pension contribution various working capital pressures •the euro appreciated approximately 21 2002 canadian dollar appreciated approximately 13 2002 us dollar •the companys whollyowned facility china started operations •effective october 1 2003 company adopted financial accounting standards board interpretation 46 consolidation variable interest entitiesrevised fin 46r consolidated variable interest entity jameco international llc located lakewood new jersey •the company recorded tax charge discontinued operations 31 million primarily legal settlement costs expenses related james jones litigation •the company recorded adjustment 22 million revenue previously recorded twt joint venture tianjin china reduced earnings 002 per share •the company recorded tax charge 11 million 004 per share costs associated manufacturing restructuring plan company expects incur approximately 36 million tax similar costs 2004 •on july 30 2003 acquired giuliani anello srl located cento bologna italy approximately 106 million cash net acquired cash 14 million giuliani anello manufactures distributes valves filters utilized heating applications including strainer filters solenoid valves flow stop valves stainless steel water filter elements steam cleaning filters •on april 18 2003 acquired martin orgee uk ltd located kidderminster west midlands united kingdom approximately 16 million cash martin orgee distributes line plumbing heating products wholesale commercial oem markets united kingdom southern ireland martin orgee also assembles pumping systems underfloor radiant heat applications recent developments february 20 2004 entered agreement yuhuan county cheng guan metal hose factory acquire 40 equity interest shida joint venture expected purchase price 30 million assumption approximately 60 million debt payment 35 million connection threeyear noncompete agreement transaction 100 shida closing transaction subject satisfaction certain closing conditions expected occur second quarter 2004 january 5 2004 acquired substantially assets flowmatic systems inc located dunnellon florida approximately 165 million cash flowmatic designs distributes complete line high quality reverse osmosis components filtration equipment product line includes stainless steel plastic housings filter cartridges storage tanks control valves well complete reverse osmosis systems residential commercial applications continue implement plan consolidate several manufacturing plants north america europe time expanding manufacturing capacity china low cost areas world implementation manufacturing restructuring plan began fourth quarter 2001 continue 2004 projects charges recorded fourth quarter 2001 essentially complete 2002 decided expand scope manufacturing restructuring plan transfer certain production low cost manufacturing plants tunisia bulgaria expect record additional 60 million 2004 attributable accelerated depreciation associated anticipated closure one us manufacturing plants reduction estimated useful lives manufacturing equipment due transfer production lower cost countries company recorded pretax manufacturing restructuring costs 17 million net recoveries 2003 manufacturing restructuring costs recorded consist primarily severance costs asset writedowns accelerated depreciation severance costs recorded restructuring 48 employees manufacturing administration groups expect make severance payments first quarter 2004 asset writedowns consist primarily writeoffs inventory related product lines discontinued part restructuring plan recorded cost goods sold accelerated depreciation based shorter remaining estimated useful lives certain fixed assets recorded cost goods sold costs consist primarily removal shipping costs associated relocation manufacturing equipment recorded cost goods sold expensed incurred results operations year ended december 31 2003 compared year ended december 31 2002 net sales business reported three geographic segments north america europe china net sales segments years ended december 31 2003 2002 follows increase net sales north america 2003 compared 2002 due internal growth 18381000 30 appreciation canadian dollar us dollar accounted 3904000 06 increase impact adoption fin 46r accounted 3792000 06 increase cannot predict whether canadian dollar continue appreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact net sales increase internal growth rate north america primarily due increased unit sales diy wholesale markets sales north american diy market grew 128 2003 2002 due increasing store count large customers successful introduction new products consistent reliable delivery products wholesale market grew 21 2003 2002 due increased sales backflow preventors significant increase decrease interest rates increase drop new housing construction market could positive negative impact sales included either diy wholesale market comparisons fourth quarter sales 3792000 jameco international llc october 2003 determined 49 minority interest jameco international llc qualified variable interest variable interest entity fin 46r primary beneficiary consolidated north american results jameco international llcs annual sales year ended 2003 approximately 16079000 since adoption effective october 1 2003 continue impact next three quarters continue consolidate jameco international llc accordance fin 46r increase net sales europe 2003 compared 2002 primarily due appreciation euro us dollar accounted 31107000 51 increase inclusion net sales acquired companies 21313000 35 internal growth 12565000 20 foreign exchange growth due average year date euro rate increasing 206 average year date rate 2002 cannot predict whether euro continue appreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact net sales acquired growth due inclusion net sales adev electronic sa ek eminent ab acquired july 15 2002 fr foerster rothman gmbh acquired july 29 2002 martin orgee acquired april 18 2003 giuliani anello acquired july 30 2003 expect recent acquisitions positive impact sales next two quarters internal growth sales primarily due increased sales european oem market inclusive acquisitions exclusive impact foreign exchange sales european oem market increased approximately 28900000 372 decrease net sales china 2003 compared 2002 primarily due adjustment 2200000 made second quarter 2003 previously recorded sales increased sales rebates returns recorded twt joint venture tianjin partially offset inclusion net sales shida joint venture established march 5 2002 approximately 2636000 gross profit gross profit 2003 increased 31941000 153 compared 2002 increase primarily due internal growth 12007000 change foreign exchange rates accounted 11075000 increase inclusion gross profit acquired companies 5961000 reduction restructuring charges 2103000 2003 compared 2002 inclusion gross profit jameco international llc 795000 excluding costs restructuring periods gross profits would increased 29838000 141 internal growth primarily due north american segment increased internal gross profits 11408000 increase primarily due improved manufacturing efficiencies increased sales volume internal growth gross profit offset loss china segment 3873000 loss due startup costs absorbed manufacturing costs due delay production new whollyowned manufacturing plant china believe capacity utilization increasing 2004 plant also offset inventory writedowns increased sales rebates returns net adjustments twt joint venture located tianjin china selling general administrative expenses selling general administrative sga expenses 2003 increased 19642000 130 compared 2002 increase primarily due internal increase 8386000 change foreign exchange rates accounted 6935000 increase inclusion operating expenses acquired companies jameco international llc together accounted 4321000 increase internal increase sga expenses primarily due increased product liability expense workers compensation expenses professional fees include legal audit expenses pension costs variable selling expenses due increased sales volumes although absolute increase sga expense 2002 sga expense percent sales 2003 decreased 241 compared 245 2002 operating income operating income geographic segment years ended december 31 2003 2002 follows increase operating income north america 2003 compared 2002 primarily due internal growth 6754000 reduction restructuring charges 1691000 appreciation canadian dollar us dollar accounted 618000 increase inclusion income jameco international llc 38000 internal growth due increased gross profit partially offset increased sga expense extent unable recover raw material cost increases customer cost increases would adversely affect operating income 2003 recorded 162000 compared 1853000 2002 costs associated manufacturing restructuring plan excluding costs operating income north america would 64576000 2003 compared 57166000 2002 expect record approximately 6000000 2004 additional manufacturing restructuring expenses primarily attributable accelerated depreciation associated anticipated closure one us manufacturing plants reduction estimated useful lives manufacturing equipment due transfer production lower cost countries increase operating income europe 2003 compared 2002 due euro appreciating us dollar accounted 3522000 increase internal growth 2744000 inclusion income acquired companies 1932000 reduction restructuring charges 786000 cannot predict whether euro continue appreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact operating income internal operating profit primarily due increased sales volume partially offset increased sga expenses recorded 906000 2003 compared 1692000 2002 costs associated manufacturing restructuring plan excluding costs associated periods operating income europe would increased 23498000 2003 15300000 2002 anticipate recording additional manufacturing restructuring costs 2004 european operations increase operating losses china 2003 compared 2002 due increase internal operating losses 3512000 partially offset inclusion income acquired companies 465000 december 2003 incurred restructuring charge twt facility 162000 severance internal operating loss due inventory writedowns increased sales rebates returns net adjustments twt joint venture absorbed manufacturing costs due delay production start costs associated new whollyowned manufacturing plant china corporate expenses primarily compensation expense professional fees including legal audit expenses benefit administration costs increase corporate expenses primarily due increased legal audit expenses 2003 interest expense interest expense increased 3422000 394 2003 compared 2002 primarily due inclusion interest expense 125000000 senior notes issued may 15 2003 december 1 2003 repaid 75000000 838 notes expect interest expense decrease result repayment september 1 2001 entered interest rate swap respect 75000000 838 notes due december 2003 swap converted interest fixed floating august 5 2002 sold swap received 2315000 cash year ended december 31 2003 reduced interest expense 1420000 amortizing adjustment fair value swap year ended december 31 2002 reduced interest expense 1711000 effectiveness swap amortization swap completed upon repayment 75000000 838 notes july 1 2003 entered interest rate swap notional amount 25000000 euros outstanding revolving credit facility swapped variable rate revolving credit facility three month euribor plus 07 fixed rate 233 impact swap immaterial overall interest expense income taxes effective tax rate continuing operations 2003 increased 380 350 2002 increase primarily due losses china received tax benefit accordance fas 109 certain chinese entities tax holiday income continuing operations income continuing operations 2003 increased 3851000 118 36473000 132 per common share 32622000 121 per common share 2002 case diluted basis appreciation euro us dollar resulted positive impact income continuing operations 007 per share year ended december 31 2003 compared prior year cannot predict whether euro continue appreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact net income excluding manufacturing restructuring costs incurred periods income continuing operations would increased 2383000 68 supplement consolidated financial statements presented accordance accounting principles generally accepted united states america gaap sometimes use nongaap measures net income net income per share income continuing operations income continuing operations per share net cash provided continuing operations believe appropriate enhance overall understanding historical financial performance future prospects nongaap results adjusted exclude certain costs expenses gains losses comparable gaap measures indication baseline performance gains losses charges considered management outside core operating results nongaap results among primary indicators management uses basis evaluating financial performance well forecasting future periods reasons management believes nongaap measures useful investors potential investors others presentation additional information meant considered isolation substitute net income per share prepared accordance gaap loss discontinued operations recorded charge net tax discontinued operations 2003 3111000 011 per common share diluted basis charge primarily attributable legal expenses associated litigation involving james jones company also recorded charge second quarter 2003 attributed payments made selling shareholders james jones company pursuant original purchase agreement see part item 1 businessproduct liability environmental litigation matters year ended december 31 2002 compared year ended december 31 2001 net sales net sales year ended december 31 2002 increased 66586000 121 615526000 compared 548940000 period 2001 increase net sales attributable following increase net sales internal growth primarily attributable increased unit sales diy market north america growth net sales acquired businesses due inclusion net sales powers process controls skokie illinois acquired september 28 2001 premier manufactured systems phoenix arizona acquired june 13 2001 fimet milan italy acquired june 1 2001 shida joint venture established march 5 2002 adev eminent acquired july 15 2002 fr acquired july 29 2002 increase foreign exchange due primarily euro appreciating us dollar compared period 2001 monitor net sales three geographic segments north america europe china outlined north america europe china accounted 731 237 32 net sales respectively year ended december 31 2002 compared 757 221 22 respectively year ended december 31 2001 net sales geographic segments years ended december 31 2002 2001 follows increase net sales north america due inclusion powers process controls premier manufactured systems well increased unit sales diy market increase net sales europe due inclusion fimet adev eminent fr appreciation euro us dollar increase net sales china primarily due inclusion chen guan joint venture gross profit gross profit year ended december 31 2002 increased 25188000 137 prior year increased percentage net sales 339 334 charged 2907000 4253000 costs associated manufacturing restructuring plan cost sales 2002 2001 respectively excluding cost associated manufacturing restructuring plan 2002 2001 gross profit would increased 23842000 127 would increased percentage net sales 344 342 selling general administrative expenses sga expenses increased 18758000 142 150553000 131795000 comparable prior year period increase attributable inclusion sga expenses acquired companies increase cost product general liability insurance administrative startup costs associated new manufacturing plant china adopted financial accounting standards board statement 142 goodwill intangibles fas142 january 1 2002 accordingly record goodwill amortization 2002 recorded goodwill amortization 3220000 part sga expenses 2001 restructuring charges restructuring charges year ended december 31 2002 decreased 816000 561 638000 compared 1454000 period 2001 costs primarily severance costs related year ended december 31 2002 24 employees 12 terminated december 31 2002 compared costs related december 31 2001 14 employees terminated december 31 2002 operating income operating income year ended december 31 2002 increased 7246000 144 57529000 compared 50283000 period 2001 due increased gross profit cessation goodwill amortization partially offset increased selling general administrative expenses operating income segment years ended december 31 2002 2001 follows increase north america due increased gross profit primarily due inclusion operating results acquired companies partially offset increased premiums product general liability insurance increase europe due inclusion operating results acquired companies euro appreciating us dollar compared prior year decrease china primarily due increased bad debt warranty expense corporate expenses primarily compensation expense professional fees including legal audit expenses benefit administration costs increase corporate expenses primarily due increased legal audit expenses administrative startup costs associated new manufacturing plant china interest expense interest expense year ended december 31 2002 decreased 730000 77 8692000 compared 9422000 period 2001 primarily due lower interest rates variable rate indebtedness capitalized construction period interest startup manufacturing plant china partially offset increased levels debt incurred fund acquisitions september 1 2001 entered interest rate swap respect 75000000 838 notes due december 2003 swap converted interest fixed floating august 5 2002 sold swap received 2315000 cash interest expense year ended december 31 2002 reduced 1711000 benefit swap active amortization adjustment fair value subsequent sale swap income taxes effective tax rate continuing operations year ended december 31 2002 increased 350 339 comparable prior year period increase primarily due change earnings mix jurisdictions higher tax rates also 2001 costs manufacturing restructuring plan recorded tax jurisdictions tax rates higher effective rate caused overall effective rate 2001 lower would normally expected excluding impact aftertax manufacturing costs goodwill amortization 2002 2001 effective tax rate would increased 352 322 income continuing operations net income continuing operations year ended december 31 2002 increased 6066000 228 32622000 121 per common share compared 26556000 099 per common share year ended december 31 2001 diluted basis liquidity capital resources generated 49990000 net cash continuing operations 2003 experienced increase inventories north america europe china increase inventory north america primarily due planned increases imported raw materials finished goods support delivery capability extend supply chain lower cost regions well increase inventory support increased retail business increase inventory europe primarily due increased safety stock growth cover planned distribution relocations support delivery requirements oem customers europe increase inventory china result whollyowned manufacturing plant startup operations reductions accounts receivable europe china partially offset increased accounts receivable north america increase north america due increased sales volume funded 6800000 pension plans year ended december 31 2003 used 37045000 net cash investing activities invested 20035000 capital equipment year ended december 31 2003 capital expenditures primarily manufacturing machinery equipment part ongoing commitment improve manufacturing capabilities two largest components expenditure building added shida joint venture facility taizhou china additional machinery equipment whollyowned manufacturing plant tianjin china expect invest approximately 18500000 capital equipment 2004 january 29 2003 invested additional 3040000 shida joint venture bringing total amount approximately 8040000 joint venture owned 60 us 40 chinese partner may 6 2003 paid 3750000 debt owed former shareholders hunter innovations leaving balance 11250000 remaining paid addition april 18 2003 paid approximately 1600000 acquire martin orgee uk limited july 30 2003 paid approximately 10600000 net cash acquired 1400000 acquire giuliani anello srl generated 128050000 net cash financing activities december 10 2003 completed public offering 4600000 shares newly issued class common stock 1900 per share net proceeds approximately 82500000 taking account underwriter discounts expenses associated transaction intend use net proceeds offering fund potential acquisitions general corporate purposes may 15 2003 completed private placement 125000000 senior unsecured notes consisting 50000000 principal amount 487 senior notes due 2010 75000000 principal amount 547 senior notes due 2013 used net proceeds private placement purchase restricted treasury securities repayment principal interest 75000000 principal amount 838 notes due december 1 2003 december 1 2003 principal interest 75000000 838 notes paid restricted treasury securities additional net proceeds used repay approximately 32000000 outstanding revolving credit facility balance net proceeds used general corporate purposes payment interest senior unsecured notes due semiannually may 15th november 15th year senior unsecured notes issued company subordinated revolving credit facility subsidiary level senior unsecured notes allow us debt senior new notes amount 150000000 plus 5 stockholders equity ii debt pari passu junior senior unsecured notes extent maintain compliance 200 100 fixed charge coverage ratio notes include prepayment provision might require makewhole payment note holders payment dependent upon level respective treasuries notes include customary terms conditions including events default revolving credit facility syndicate banks amended revolving credit facility provides borrowings 150000000 includes 75000000 tranche eurobased borrowings matures february 2005 revolving credit facility used support acquisition program working capital requirements general corporate purposes december 31 2003 longterm debt included 44089000 outstanding revolving credit facility eurobased borrowings amounts outstanding us dollar borrowings facility amended fourth quarter 2003 permit us enter guarantee 2000000 credit line utilized european subsidiaries allow us use proceeds december 2003 public offering purposes repayment credit facility outstanding indebtedness revolving credit facility bears interest rate determined type currency loan plus applicable margin determined companys debt rating depending applicable base rate bond rating average interest rate borrowings revolving credit facility approximately 28 december 31 2003 105911000 unused available revolving credit december 31 2003 revolving credit facility includes operational financial covenants customary facilities type including among others restrictions additional indebtedness liens investments maintenance certain leverage ratios december 31 2003 compliance covenants related revolving credit facility effective july 1 2003 entered interest rate swap notional amount 25000000 euros outstanding revolving credit facility swapped variable rate revolving credit facility three month euribor plus 07 fixed rate 233 term swap two years designated swap hedging instrument using cash flow method swap hedges cash flows associated interest payments first 25000000 euros revolving credit facility mark market changes value swap comprehensive income ineffectiveness recorded income fair value recorded comprehensive income december 31 2003 46000 november 4 2003 declared quarterly dividend 007 per share common stock increase 001 per share dividends paid ten previous quarters dividends increased 6859000 2003 6490000 2002 used 6643000 net cash discontinued operations year ended december 31 2003 received 3139000 cash indemnification payment settlement costs incurred james jones case cash recorded liability december 31 2003 possibility might reimburse insurance company ultimately successful future appeal also received 2932000 cash reimbursement defense costs related james jones case paid 2283000 defense costs 2859000 indemnity costs incurred james jones case additionally september 2 2003 paid 11000000 relating settlement agreement james jones case see part item 1 businessproduct liability environmental litigation matters working capital defined current assets less current liabilities december 31 2003 308135000 compared 71384000 december 31 2002 increase primarily due net proceeds received 125000000 private placement stock offering raised net cash approximately 82500000 ratio current assets current liabilities 28 1 december 31 2003 compared 13 1 december 31 2002 cash equivalents 149361000 december 31 2003 compared 10973000 december 31 2002 total debt increased 192312000 december 31 2003 138487000 december 31 2002 primarily due issuance 125000000 senior notes reduced repayment 75000000 principal amount 838 notes due december 1 2003 positive free cash flow 24861000 defined net cash provided continuing operations minus capital expenditures dividends plus proceeds sale assets year ended december 31 2003 versus positive free cash flow 28536000 comparable prior year period decrease 2003 compared 2002 primarily due increased inventories pension funding 6800000 increased dividends partially offset increases accounts payable reductions accounts receivable effect free cash flow proceeds stock offering reduce net debt capitalization ratio defined short long term interestbearing liabilities less cash equivalents percentage sum short long term interest bearing liabilities less cash equivalents plus total stockholders equity including minority interest 88 2003 294 2002 believe free cash flow appropriate supplemental measure operating performance company provides investors measure ability repay debt fund acquisitions computation may comparable companies may define free cash flow differently free cash flow represent cash generated operating activities accordance gaap therefore considered alternative net cash flows operating activities indication performance free cash flow also considered alternative net cash flows operating activities defined gaap reconciliation free cash flow net cash provided continuing operations provided net debt capitalization computed accordance gaap management believes appropriate supplemental measure helps investors understand ability meet financing needs computation may comparable companies may define debt capitalization differently reconciliation net debt provided reconciliation capitalization provided anticipate available funds current operations existing cash sources liquidity sufficient meet current operating requirements anticipated capital expenditures least next 12 months however may consider external sources financing large future acquisitions current revolving credit facility expires february 2005 currently reviewing proposals syndicate banks intention structuring new revolving line credit longterm contractual obligations december 31 2003 presented following table aas recognized consolidated balance sheet maintain letters credit guarantee performance payment third parties accordance specified terms conditions amounts outstanding approximately 29880000 december 31 2003 19522000 december 31 2002 letters credit primarily letters credit associated insurance coverage lesser extent foreign purchases letters credits generally expire within one year issuance increase primarily associated insurance coverage instruments may exist expire without drawn therefore necessarily represent future cash flow obligations critical accounting policies key estimates preparation consolidated financial statements accordance gaap requires management make judgments assumptions estimates effect amounts reported critical accounting estimate assumption highly uncertain matters could material effect consolidated financial statements another also reasonable amount used change estimate reasonably likely period base assumptions historical experience estimates believe reasonable circumstances actual results could differ significantly estimates except noted product liability pension benefits changes accounting policies significant changes accounting estimates 2003 discussed development selection disclosure estimates audit committee management believes following critical accounting policies reflect significant estimates assumptions revenue recognition recognize revenue following criteria met 1 entered binding agreement 2 product shipped title passed 3 sales price customer fixed determinable 4 collectibility reasonably assured recognize revenue based upon determination criteria revenue recognition met based majority shipping terms considered occurred upon shipment finished product shipping terms require goods received customer title passes instances revenues recognized customer received goods record estimated reductions revenue customer returns allowances customer programs provisions returns allowances made time sale derived historical trends form portion allowance doubtful accounts customer programs primarily annual volume incentive plans allow customers earn credit attaining agreed upon purchase targets us record customer programs adjustment net sales allowance doubtful accounts allowance doubtful accounts established represent best estimate net realizable value outstanding accounts receivable development allowance doubtful accounts varies region general based review past due amounts historical writeoff experience well aging trends affecting specific accounts general operational factors affecting accounts north america management specifically analyzes individual accounts receivable establishes specific reserves financially troubled customers addition factors developed utilizing historical trends bad debts returns allowances ratio factors sales rolling twelvemonth basis applied total outstanding receivables net accounts specifically identified establish reserve europe management develops bad debt allowance aging analysis accounts analysis aging specific delinquent accounts china payment terms generally extended reserve accounts receivable excess one year invoice date specifically reserve identified uncollectible accounts receivable less one year old uniformly consider current economic trends changes customer payment terms evaluating adequacy allowance doubtful accounts also aggressively monitor credit worthiness largest customers periodically review customer credit limits reduce risk circumstances relating specific customers change unanticipated changes occur general business environment estimates recoverability receivables could adjusted inventory valuation inventories stated lower cost market costs generally determined firstin firstout basis utilize specific product identification historical product demand basis determining excess obsolete inventory reserve identify inventories exceed range one three years sales determined comparing current inventory balance unit sales trailing twelve months new products added inventory within past twelve months excluded analysis portion products contain recoverable materials therefore excess obsolete reserve established net recoverable amounts changes market conditions lower expected customer demand changes technology features could result additional obsolete inventory saleable could require additional inventory reserve provisions certain countries additional inventory reserves maintained potential losses experienced manufacturing process reserve established based prior years inventory losses adjusted change gross inventory balance goodwill intangibles adopted financial accounting standards board statement 142 goodwill intangible assets fas 142 january 1 2002 result longer amortize goodwill intangible assets indefinite lives tested annually impairment accordance provisions fas 142 use judgment assessing whether assets may become impaired annual impairment tests intangible assets purchased technology generally recorded connection business acquisition larger complex acquisitions value assigned intangible assets determined independent valuation firm based estimates judgments regarding expectations success life cycle products technology acquired second year since adoption years excess economic support carrying value goodwill intangibles believe estimates future cash flows reasonable different assumptions regarding factors future sales volume selling price changes material cost changes cost savings programs capital expenditures could significantly affect valuations changes may affect valuations include limited product acceptances regulatory approval actual product acceptance differs significantly estimates may required record impairment charge write assets realizable value severe decline market value could result unexpected impairment charge goodwill could material impact results operations financial position product liability workers compensation costs retention requirements associated insurance policies generally selfinsured potential product liability claims workers compensation costs associated workplace accidents product liability cases us management estimates expected settlement costs utilizing stop loss reports provided third party administrators well developing internal historical trend factors based specific claims experience prior 2003 used insurance carrier trend factors determine product liability reserves however determined circumstances inherent trends necessarily indicative circumstances regarding claims management believes internal trend factors accurately reflect final expected settlement costs countries maintain insurance coverage relatively high deductible payments product liability claims tend smaller experienced us changes nature claims actual settlement amounts could affect adequacy estimate require changes provisions workers compensation liabilities us recognized claims incurred including claims incurred reported changes status individual case reserves time workers compensation claim filed liability estimated settle claim liability workers compensation claims determined based managements estimates nature severity claims based analysis provided third party administrators various state statutes reserve requirements developed trend factors based specific claims experience countries workers compensation costs applicable maintain insurance coverage limited deductible payments liability estimate ultimate liability may less reported maintain excess liability insurance outside insurance carriers minimize risks related catastrophic claims excess selfinsured positions material change aforementioned factors could adverse impact operating results legal contingencies defendant numerous legal matters including involving environmental law product liability discussed note 15 notes consolidated financial statements required financial accounting standards board statement 5 accounting contingencies fas 5 determine whether estimated loss contingency accrued assessing whether loss deemed probable loss amount reasonably estimated net applicable insurance proceeds estimates potential outcomes contingencies developed consultation outside counsel assessment based upon available information litigation inherently uncertain actual liability fully resolve litigation cannot predicted assurance accuracy final settlement matters could possibly result significant effects results operations cash flows financial position pension benefits account pension plans accordance financial accounting standards board statement 87 employers accounting pensions fas 87 applying fas 87 assumptions made regarding valuation benefit obligations performance plan assets primary assumptions follows •weighted average discount ratethis rate used estimate current value future benefits rate adjusted based movement longterm interest rates 2003 reduced discount rate 600 675 2002 reflect high quality bond yields measurement date september 30 •expected longterm rate return assetsthis rate used estimate future growth investments investment earnings expected return based upon combination historical market performance anticipated future returns portfolio reflecting mix equity debt investments indicative plan assets expected longterm rate return reduced 2003 850 900 2002 management believes properly reflects longterm rate return achievable asset allocation required retirement plan investment policy •rates increase compensation levelsthis rate used estimate projected annual pay increases used determine wage base used project employees pension benefits retirement rate remained unchanged 2003 400 reasonable managements estimation determine assumptions based consultation outside actuaries investment advisors variance assumptions could significant impact future recognized pension costs assets liabilities income taxes estimate use expected annual effective income tax rates accrue income taxes effective tax rates determined based budgeted earnings taxes including best estimate permanent items impact effective rate year management periodically reviews rates outside tax advisors changes made material discrepancies expectations identified recognize deferred taxes expected future consequences events reflected consolidated financial statements accordance rules financial accounting standards board statement 109 accounting income taxes fas 109 fas 109 deferred tax assets liabilities determined based differences book values tax bases particular assets liabilities using tax rates effect years differences expected reverse valuation allowance provided offset net deferred tax assets based upon available evidence likely deferred tax assets realized consider estimated future taxable income ongoing prudent tax planning strategies assessing need valuation allowance certain factors affecting future results face intense competition able respond competition markets revenues may decrease competitive pressures markets could adversely affect competitive position leading possible loss market share decrease prices either could result decreased revenues profits encounter intense competition areas business additionally customers products attempting reduce number vendors purchase order reduce size diversity inventories transaction costs remain competitive need invest continuously manufacturing marketing customer service support distribution networks may sufficient resources continue make investments may unable maintain competitive position addition anticipate may reduce prices products stay competitive potentially resulting reduction profit margin inventory valuation products competitors based foreign countries cost structures prices foreign currencies accordingly currency fluctuations could cause us dollarpriced products less competitive competitors products priced currencies reductions interruptions supply raw materials increases costs raw materials could reduce profit margins adversely impact ability meet customer delivery commitments require substantial amounts raw materials including bronze brass cast iron steel plastic substantially raw materials require purchased outside sources availability costs raw materials may subject curtailment change due among things new laws regulations suppliers allocations purchasers interruptions production suppliers changes exchange rates worldwide price demand levels currently party longterm supply agreements inability obtain adequate supplies raw materials products favorable costs could material adverse effect business financial condition results operations decreasing profit margins hindering ability deliver products customers timely basis recently experienced increase costs bronze brass cast iron steel able reduce eliminate effect cost increases lowering costs production successfully implementing price increases customers cost increases vendors could negative effect financial results implementation acquisition strategy may successful could affect ability increase revenues profitability one strategies increase revenues profitability expand markets acquisitions provide us complementary waterrelated products cannot certain able identify acquire profitably manage additional companies successfully integrate additional companies without substantial costs delays problems also companies acquired recently future may achieve revenues profitability cash flows justify investment expect spend significant time effort expanding existing businesses identifying completing integrating acquisitions faced increasing competition acquisition candidates resulted significant increases purchase prices many acquisition candidates competition resulting purchase price increases may limit number acquisition opportunities available us possibly leading decrease rate growth revenues profitability addition acquisitions may involve number special risks including limited •adverse shortterm effects reported operating results •diversion managements attention •loss key personnel acquired companies •unanticipated management operational problems legal liabilities economic cycles particularly reduced levels housing starts remodeling could adverse effect revenues operating results experienced expect continue experience fluctuations revenues operating results due economic business cycles businesses customers particularly plumbing heating wholesalers home improvement retailers cyclical therefore level business activity cyclical fluctuating economic cycles also believe level business activity influenced housing starts renovation remodeling turn heavily influenced interest rates consumer debt levels changes disposable income employment growth consumer confidence factors cause material reduction housing remodeling starts revenues profits would decrease result material adverse effect financial condition results operations economic political risks associated international sales operations could adversely affect business future operating results since sell manufacture products worldwide business subject risks associated business internationally business future operating results could harmed variety factors including •trade protection measures import export licensing requirements could increase costs business internationally •potentially negative consequences changes tax laws could adverse impact profits •the costs hiring retaining senior management overseas operations •difficulty staffing managing widespread operations could reduce productivity •costs compliance differing labor regulations especially connection restructuring overseas operations •laws foreign countries may protect intellectual property rights extent laws united states •substantial amounts raw materials including bronze plastic brass cast iron steel plastics require purchased outside sources fluctuations foreign exchange could adverse impact profits •unexpected changes regulatory requirements may costly require significant time implement •political risks specific foreign jurisdictions fluctuations foreign exchange rates could materially affect reported results exposed fluctuations foreign currencies significant portion sales certain portions costs assets liabilities denominated currencies us dollars approximately 372 sales year ended december 31 2003 sales outside us compared 314 year ended december 31 2002 year ended december 31 2003 appreciation euro us dollar positive impact sales approximately 311 million year ended december 31 2002 appreciation euro us dollar positive impact sales approximately 79 million year ended december 31 2001 depreciation euro us dollar adverse impact sales approximately 34 million share revenue nondollar denominated currencies continues increase future periods exchange rate fluctuations likely greater impact results operations financial condition chinese government may cease utilization fixed rate exchange chinese rmb us dollar could adversely affect current favorable cost structure goods source joint ventures whollyowned subsidiary china outside vendors significant risks expanding manufacturing operations china part strategy shifting significant portion manufacturing operations china reduce production costs due outbreak sars virus cost reduction efforts delayed assurance experience additional delays shift subject greater portion operations risks business china chinese legal system relatively new lacks transparency gives chinese central local government authorities higher degree control business china customary developed economies makes process obtaining necessary regulatory approval china inherently unpredictable addition protection accorded proprietary technology knowhow chinese legal system strong united states result may lose valuable trade secrets competitive advantage although chinese government pursuing economic reform policy welcoming foreign investments past two decades assurance chinese government change current policies future making continued business operations china difficult unprofitable extent successful implementing manufacturing restructuring plan results operations financial condition could adversely affected manufacturing restructuring plan began 2001 initiated reduce manufacturing costs planned manufacturing plant consolidations united states europe production capability expansion china successful results operations financial condition could materially adversely affected cannot continue operating manufacturing facilities current higher utilization levels results operations could adversely affected equipment management systems necessary operation manufacturing facilities may breakdown perform poorly fail resulting fluctuations ability manufacture products achieve manufacturing efficiencies operate number manufacturing facilities subject risk fluctuations facilities could cause increase production costs corresponding decrease profitability example 2001 one manufacturing facilities shut period time result fire required source products external vendors substantially higher costs also verticallyintegrated manufacturing process segment dependent upon prior process breakdown one segment adversely affect later components fluctuations production process may affect ability deliver products customers timely basis inability meet delivery obligations could result loss customers negatively impact business financial condition results operations experience delays introducing new products existing new products achieve maintain market acceptance regulatory approvals revenues profitability may decrease failure develop new innovative products custom design existing products could result loss existing customers competitors inability attract new business either may adversely affect revenues industry characterized •intense competition •changes specifications required customers plumbing codes andor regulatory agencies •technically complex products •constant improvement existing products introductions new products believe future success depend part ability anticipate adapt factors offer timely basis products meet customer demands requirements plumbing codes andor regulatory agencies development new enhanced products complex uncertain process requiring anticipation technological market trends may experience design manufacturing marketing difficulties inability attract sufficient number experienced engineers could delay prevent development introduction approval marketing new products enhancements result unexpected expenses difficulties could cause us lose business customers could adversely affect competitive position addition added expenses could decrease profitability associated products gain market acceptance environmental compliance costs liabilities could increase expenses reduce profitability operations properties subject extensive increasingly stringent laws regulations relating environmental protection including laws regulations governing air emissions water discharges waste management disposal workplace safety laws regulations impose substantial fines sanctions violations require installation costly pollution control equipment operational changes limit pollution emissions andor decrease likelihood accidental hazardous substance releases also could required halt one portions operations violation cured could also liable costs property damage personal injury others although attempt operate compliance environmental laws may succeed effort times costs curing violations resolving enforcement actions might initiated government authorities could substantial certain environmental laws current past owners operators real property may liable costs cleaning contamination even know responsible contamination laws also impose liability person arranges disposal treatment hazardous waste site therefore ownership operation real property disposal waste could lead liabilities laws incurred expect continue incur costs relating environmental matters addition new laws regulations stricter enforcement existing laws regulations discovery previously unknown contamination imposition new clean requirements could require us incur additional costs become basis new increased liabilities could significant environmental litigation enforcement compliance inherently uncertain may experience significant costs connection environmental matters information see part item 1 businessproduct liability environmental litigation matters third parties may infringe intellectual property may expend significant resources enforcing rights suffer competitive injury rely combination patents copyrights trademarks trade secrets confidentiality provisions licensing arrangements establish protect proprietary rights may required spend significant resources monitor police intellectual property rights fail successfully enforce intellectual property rights competitive position could suffer could harm operating results limited selling products timetotime existing patents face risks product liability lawsuits may adversely affect business may subjected various product liability claims lawsuits including among others products include inadequate improper instructions use installation inadequate warnings concerning effects failure products event adequate insurance contractual indemnification damages claims would paid assets could material adverse effect results operations liquidity financial condition particular settle conclude litigation quarterly annual reporting period could material impact operating results quarter year like manufacturers distributors products designed control regulate fluids face inherent risk exposure product liability claims lawsuits event use products results personal injury property damage business interruption customers although maintain strict quality controls procedures including testing raw materials safety testing selected finished products cannot certain products completely free defect addition certain cases rely thirdparty manufacturers products components products although product liability general insurance coverage cannot certain insurance coverage continue available us reasonable cost available adequate cover liabilities information see part item 1 businessproduct liability environmental litigation matters requirements fas 142 may result writeoff portion goodwill would negatively impact operating results financial condition required take impairment charge goodwill connection requirements fas 142 operating results may decrease financial condition may harmed december 31 2003 goodwill 1849 million 221 total assets 424 total stockholders equity fas 142 goodwill identifiable intangible assets indefinite useful lives longer amortized lieu amortization required perform initial impairment review goodwill required perform annual impairment reviews thereafter concluded impairment existed january 1 2002 time adoption fas 142 october 26 2003 time annual review perform annual test indications goodwill impairment fourth quarter fiscal year sooner indicators exist loss major customer could adverse effect results operations largest customer home depot inc accounted approximately 748 million 106 total net sales year ended december 31 2003 630 million 102 total net sales year ended december 31 2002 customers generally obligated purchase minimum volume products us able terminate relationships us time significant reduction orders change terms home depot inc could material adverse effect future results operations certain indebtedness may limit ability pay dividends incur additional debt make acquisitions investments revolving credit facility senior indebtedness contain operational financial covenants restrict ability make distributions stockholders incur additional debt make acquisitions investments unless satisfy certain financial tests comply various financial ratios maintain compliance covenants creditors could declare default revolving credit facility indebtedness could declared immediately due payable ability comply provisions indebtedness may affected changes economic business conditions beyond control one stockholders exercise substantial influence company february 1 2004 timothy p horne member board directors beneficially owned approximately 238 outstanding shares class common stock assuming conversion shares class b common stock beneficially owned mr horne class common stock approximately 968 outstanding shares class b common stock represents approximately 732 total outstanding voting power long mr horne controls shares representing least majority total voting power outstanding stock mr horne able unilaterally determine outcome stockholder votes stockholders able affect outcome stockholder vote shares class common stock eligible public sale could adversely affect market price class common stock february 1 2004 outstanding 24607425 shares class common stock 7471700 shares class b common stock shares class b common stock may converted class common stock time one basis shares class common stock freely transferable without restriction registration federal securities laws except shares held affiliates sales limited rule 144 securities act addition terms registration rights agreement respect outstanding shares class b common stock holders class b common stock rights respect registration underlying class common stock registration rights holders class b common stock may require two occasions register shares public resale eligible use form s3 similar shortform registration statement holders class b common stock may require register shares public resale two times per year elect register shares class common stock public offering holders class b common stock entitled include shares class common stock shares class b common stock may converted registration however may reduce number shares proposed registered view market conditions pay expenses connection registration underwriting discounts commissions pursuant exercise registration rights registered resale 1200000 shares class common stock form s3 shelf registration statement 610000 shares remained available resale february 29 2004 available registered shares sold public market trading price class common stock could decline class common stock insignificant voting power class b common stock entitles holders ten votes share class common stock entitles holders one vote per share january 31 2004 class b common stock constituted 233 total outstanding common stock 752 total outstanding voting power thus able exercise controlling influence business trading price class common stock may volatile trading price class common stock may volatile fluctuations trading price may result substantial losses investors trading price class common stock could decline fluctuate response variety factors including limited failure meet performance estimates securities analysts changes financial estimates revenues operating results andor buysell recommendations securities analysts timing announcements us competitors concerning significant product line developments contracts acquisitions publicity regarding actual potential results performance fluctuation quarterly operating results caused fluctuations revenues expenses substantial sales class common stock existing shareholders general stock market conditions economic external factors provisions charter documents delaware law may prevent delay acquisition us could decrease value class common stock certificate incorporation bylaws delaware law contain provisions could make difficult third party acquire us without consent board directors provisions include •authorize issuance 5000000 shares preferred stock one series without stockholder vote •limit stockholders ability call special meetings •establish advance notice requirements nominations election board directors proposing matters acted stockholders stockholder meetings delaware law also imposes restrictions mergers business combinations us holder 15 outstanding common stock new accounting standards august 2001 financial accounting standards board fasb issued financial accounting standards board statement 143 accounting asset retirement obligations fas 143 requires companies record fair value asset retirement obligation liability period incurs legal obligation associated retirement tangible longlived assets result acquisition construction development andor normal use assets company must also record corresponding increase carrying value related longlived asset depreciate cost remaining useful life asset liability must increased period passage time offset recorded operating expense liability must also adjusted changes estimated future cash flows underlying initial fair value measurement companies must also recognize gain loss settlement liability provisions fas 143 effective fiscal years beginning june 15 2002 date adoption fas 143 companies required recognize liability existing asset retirement obligations associated asset retirement costs adopted fas 143 effective january 1 2003 adoption material consolidated financial statements july 2002 fasb issued financial accounting standards board statement 146 accounting costs associated exit disposal activities fas 146 principal difference statement emerging issues task force eitf issue 943 liability recognition certain employee termination benefits costs exit activity including certain costs incurred restructuring issue 943 relates requirements recognition liability cost associated exit disposal activity statement requires liability cost associated exit disposal activity recognized liability incurred issue 943 liability exit cost recognized date entitys commitment exit plan provisions statement effective exit disposal activities initiated december 31 2002 adopted fas 146 effective january 1 2003 adoption material consolidated financial statements november 2002 fasb issued financial accounting standards board interpretation 45 guarantors accounting disclosure requirements guarantees including indirect guarantees indebtedness others fin 45 fin 45 requires liability recorded guarantors balance sheet upon issuance certain guarantees addition fin 45 requires disclosures guarantees entity issued including rollforward entitys product warranty liabilities fin 45 required application recognition provisions fin 45 prospectively guarantees issued december 31 2002 adopted disclosure provisions fin 45 effective december 31 2002 offer warranties products returns warranty immaterial warranty reserve part sales returns allowances component allowance doubtful accounts adopted fin 45 effective january 1 2003 adoption material consolidated financial statements december 2002 fasb issued financial accounting standards board statement 148 accounting stockbased compensation transition disclosure fas 148 fas 148 provides alternative methods transition voluntary change fair value based method accounting stockbased employee compensation fas 148 also requires disclosures pro forma effect using fair value method accounting stockbased employee compensation displayed prominently tabular format additionally fas 148 requires disclosure pro forma effect interim financial statements additional disclosure requirements fas 148 effective fiscal years ended december 15 2002 currently continuing account stockbased compensation accordance accounting principles board opinion 25 accounting stock issued employees apb 25 provided disclosures required fas 148 december 2002 eitf issued eitf 0021 accounting revenue arrangements multiple deliverables consensus provides guidance determining revenue arrangement multiple deliverables divided separate units accounting separation appropriate arrangement consideration allocated identified accounting units provisions eitf 0021 effective revenue arrangements entered fiscal periods beginning june 15 2003 adopted eitf 0021 effective july 1 2003 adoption material consolidated financial statements january 2003 fasb issued financial accounting standards board interpretation 46 consolidation variable interest entities fin 46 requires consolidation variable interest entities vie primary beneficiary entity equity investors entity characteristics controlling financial interest sufficient equity risk entity finance activities without additional subordinated financial support parties fin 46 effective new vies created acquired january 31 2003 october 2003 fasb delayed effective date vies existed prior february 1 2003 provided reporting entity issued financial statements reporting vie accordance interpretation 46 fin 46 effective first interim annual period ending december 15 2003 december 2003 fasb issued revision fin 46 fin 46r revised provisions public entities required apply guidance entity interests vies commonly referred specialpurpose entities periods ending december 15 2003 adopted fin 46r result consolidated jameco international llc effective october 1 2003 fourth quarter fiscal 2003 llc imports sells vitreous china imported faucets faucet parts imported bathroom accessories north american home improvement retail market annual sales twelve months ended december 31 2003 approximately 16079000 llc maintains line credit financial institution collateralized first security interest llcs assets creditors recourse company assets december 31 2003 3960000 comprised primarily accounts receivable inventory believe collectable saleable respectively within normal course business subordinated security interest assets llc pertaining loan receivable 2230680 december 31 2003 eliminates consolidation result application fin 46r prior adoption fin 46r accounted investment 49 llc using equity method also maintain another variable interest vie 2000 entered agreement plumworldcouk ltd maintain 20 interest plumbworld primarily ebusiness sells bathroom sanitary appliances well plumbing heating products tools plumbing consumables annualized sales approximately 7100000 maintain notional amount approximately 500 investment plumbworld maintain loan receivable amount approximately 850000 plumbworld continue account investment plumbworld using equity method april 2003 fasb issued financial accounting standards board statement 149 amendment statement 133 derivative instruments hedging activities fas 149 fas 149 amends clarifies financial accounting reporting derivative instruments including certain derivative instruments embedded contracts hedging activities fas 133 accounting derivative instruments hedging activities fas 133 fas 149 multiple effective date provisions depending nature amendments fas 133 including one contracts entered modified june 30 2003 adopted fas 149 adoption material consolidated financial statements may 2003 fasb issued financial accounting standards board statement 150 accounting certain financial instruments characteristics liabilities equity fas 150 fas 150 establishes standards issuer classifies measures certain financial instruments characteristics liabilities equity fas 150 effective certain financial instruments entered modified may 31 2003 unmodified financial instruments existing may 31 2003 fas 150 effective beginning first interim period beginning june 15 2003 company adopted fas 150 apart deferral fasb staff position 1503 fas 1503 certain mandatorilly redeemable non controlling interests adoption material consolidated financial statements item 7aitem 7 management’s discussion analysis financial condition results operations overview leading supplier products use water quality water safety water flow control water conservation markets north america europe 130 years designed manufactured products promote comfort safety people quality conservation water used commercial residential light industrial applications earn revenue income almost exclusively sale products principal product lines include · backflow preventers preventing contamination potable water caused reverse flow within water supply lines fire protection systems · wide range water pressure regulators commercial residential applications · water supply drainage products commercial residential applications · temperature pressure relief valves water heaters boilers associated systems · pointofuse water filtration reverse osmosis systems commercial residential applications · thermostatic mixing valves tempering water commercial residential applications · systems underfloor radiant applications hydraulic pump groups gas boiler manufacturers business reported three geographic segments north america europe china distribute products three primary distribution channels wholesale doityourself diy original equipment manufacturers oems interest rates indirect effect demand products due effect rates number new residential commercial construction starts remodeling projects nonresidential commercial construction starts impact levels sales earnings 2004 organic sales north america increased wholesale diy markets approximately 10 prior year also 2004 organic sales europe increased approximately 4 prior year despite weak european economy additional factor effect sales fluctuation foreign currencies portion sales certain portions costs assets liabilities denominated currencies us dollar 2004 consolidated sales increased 17 prior year approximately 3 primarily due euro appreciating us dollar believe factors relating future growth include ability continue make selective acquisitions core markets well new complementary markets regulatory requirements relating quality conservation water increased demand clean water continued enforcement plumbing building codes healthy economic environment completed eighteen acquisitions since divesting industrial oil gas business 1999 acquisition strategy focuses businesses manufacture preferred brand name products address themes water quality water safety water conservation water flow control target businesses provide us one following entry new markets increase shelf space existing customers new improved technology expansion breadth water quality water conservation water safety water flow control products residential commercial markets 2004 sales acquisitions contributed approximately 5 total sales growth prior period products representing majority sales subject regulatory standards code enforcement typically require products meet stringent performance criteria together commissioned manufacturers’ representatives consistently advocated development enforcement plumbing codes focused maintaining stringent quality control testing procedures manufacturing facilities order manufacture products compliance code requirements take advantage resulting demand compliant products believe product development product testing capability investment plant equipment needed manufacture products compliance code requirements represents barrier entry competitors believe increasing demand among consumers products ensure water quality creates growth opportunities products require substantial amounts raw materials produce products including bronze brass cast iron steel plastic substantially raw materials require purchased outside sources experienced increases costs bronze brass cast iron steel crude oil price copper risen approximately 46 since december 31 2003 bronze brass copper based alloys since december 31 2003 experienced cost increases bronze brass approximately 48 39 respectively since december 31 2003 experienced cost increases cast iron steel 10 16 respectively additionally due increase crude oil costs certain plastic resins increased approximately 43 since december 31 2003 risk face ability deal effectively increases raw material costs manage risk monitoring related market prices working suppliers achieve maximum level stability costs related pricing seeking alternative supply sources necessary implementing cost reduction programs passing increases costs customers maximum extent possible occur additionally limited basis use commodity futures contracts manage risk although currently contracts response recent cost increases implemented price increases products become expensive manufacture due increases raw material costs result price increases believe successful offsetting cost increases able predict whether long cost increases continue cost increases continue able reduce eliminate effect cost increases reducing production costs implementing price increases profit margins could decrease another risk face areas business competition consider brand preference engineering specifications plumbing code requirements price technological expertise delivery times breadth product offerings primary competitive factors mentioned previously believe product development product testing capability investment plant equipment needed manufacture products compliance code requirements represents barrier entry competitors committed maintaining capital equipment level consistent current technologies thus spent approximately 210 million 2004 200 million 2003 committed expanding manufacturing capacity lower cost countries china tunisia bulgaria manufacturing plant relocations consolidations important part ongoing commitment reduce production costs recent developments february 8 2005 declared quarterly dividend 008 per share company’s class common stock class b common stock increase 001 per share compared dividend paid comparable period last year january 5 2005 acquired hf scientific inc located fort myers florida stock purchase transaction approximately 70 million cash plus 08 million assumed debt hf scientific manufactures distributes line instrumentation equipment test kits chemical reagents used monitoring water quality variety applications january 4 2005 acquired sea tech inc located wilmington north carolina asset purchase transaction approximately 100 million cash sea tech provides cost effective solutions fluidic connection needs sea tech offers wide range standard custom quick connect fittings valves manifolds pex tubing designed address specific customer requirements fourth quarter 2004 planned divest interest minority owned subsidiary jameco international llc recorded impairment charge discontinued operations write investment estimated fair value prior periods reflect llc discontinued operations expect divest interest llc first half 2005 results operations year ended december 31 2004 compared year ended december 31 2003 fourth quarter 2004 identified corrected errors related certain accrued expenses tax adjustments impacted selling general administrative tax expense necessary correct errors amounted 2289000 007 per share portions adjustments related year ended december 31 2004 fourth quarter 2004 1520000 005 per share 411000 001 per share respectively impact amount related prior periods material financial statements prior periods thus amount related prior periods also recorded fourth quarter 2004 estimate record additional aftertax charge approximately 900000 003 per share nine months ending october 2 2005 following table illustrates effects adjustments earnings per share continuing operations net sales business reported three geographic segments north america europe china net sales segments years ended december 31 2004 2003 follows increase net sales attributable following internal growth net sales north america due increased price unit sales wholesale diy markets wholesale market 2004 excluding sales acquisitions orion flowmatic grew 10 compared 2003 primarily due increased sales backflow preventor units well plumbing underfloor radiant heating product lines sales north american diy market 2004 increased 10 compared 2003 primarily due increased sales brass tubular products increase net sales due foreign exchange north america due canadian dollar appreciating us dollar cannot predict whether canadian dollar continue appreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact net sales acquired growth net sales north america due inclusion net sales flowmatic acquired january 5 2004 orion acquired may 21 2004 internal growth net sales europe primarily due increased sales european oem market share gains european wholesale markets increase net sales due foreign exchange europe primarily due appreciation euro us dollar cannot predict whether euro continue appreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact net sales acquired growth net sales europe due inclusion net sales martin orgee acquired april 18 2003 anello acquired july 30 2003 team acquired april 16 2004 increase net sales china primarily attributable downward adjustments made 2003 previously recorded sales increased sales rebates returns recorded twt joint venture located tianjin china repeat 2004 internal growth primarily due increased domestic shipments whollyowned subsidiary located taizhou china gross profit gross profit 2004 increased 50696000 211 compared 2003 increase gross profit attributable following internal growth primarily due 21449000 increase internal gross profit north american segment increase primarily due improved sales mix due increased sales volume north american wholesale market typically generates higher gross margins north american retail market benefits resulting completed manufacturing restructuring projects outsourcing european segment increased internal gross profit 3972000 primarily due sales growth european oem wholesale customers benefits resulting completed manufacturing restructuring projects china segment increased gross profit 7076000 primarily due inventory writedowns increased sales rebates returns net adjustments recorded 2003 repeat 2004 increased sales volumes shida improved manufacturing efficiencies wholly owned manufacturing plant tianjin 2004 increase gross profit foreign exchange primarily due appreciation euro canadian dollar us dollar increase gross profit acquisitions due inclusion gross profit orion team flowmatic martin orgee anello factors contributed increased consolidated gross profit percent 352 2004 compared 342 2003 increase gross profit partially offset increased manufacturing restructuring costs 2004 charged 2873000 accelerated depreciation cost sales compared 804000 accelerated depreciation costs 2003 selling general administrative expenses selling general administrative expense sga expense 2004 increased 37428000 221 compared 2003 increase sga expense attributable following internal increase sga expense primarily due increased variable selling expense due increased sales volume costs incurred comply requirements section 404 sarbanesoxley act 2002 sox partially offset reserve reduction due favorable ruling one legal cases 2004 commission expense selling expense approximately 42 115 respectively sales expense percentages consistent 2003 expect costs move relative sales volume 2004 recorded approximately 5900000 sox related expenses discussed previously fourth quarter 2004 identified corrected errors related certain accrued expenses adjustments net income necessary correct errors included pretax charge sga expense 4926000 sga expense percent sales 2004 increased 251 compared 241 2003 primarily sox costs fourth quarter accrual adjustments operating income operating income geographic segment 2004 2003 follows increase operating income attributable following internal growth north america primarily due increased gross profit wholesale market benefits resulting completed manufacturing restructuring projects outsourcing partially offset increased net sga expense 2004 experienced raw material cost increases able recover implementing price increases products 2004 recorded 2968000 costs associated manufacturing restructuring plan compared 162000 2003 expect record additional 750000 first half 2005 approved costs associated manufacturing restructuring plan acquired growth due inclusion operating income orion flowmatic 5650000 relates compensation expense regarding accrual adjustment internal growth europe primarily due increased gross profit increased sales volume oem wholesale markets benefits resulting previous manufacturing restructuring projects partially offset increased sga expense 2004 record costs associated manufacturing restructuring plan compared 906000 2003 expect record additional 625000 first half 2005 approved costs associated manufacturing restructuring plan increase operating income foreign exchange primarily due appreciation euro us dollar cannot predict whether euro continue appreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact operating income acquired growth includes operating income team martin orgee anello increase internal growth china 5529000 attributable inventory writedowns net adjustments recorded 2003 repeat 2004 internal growth primarily due increased sales volumes improved manufacturing efficiencies associated manufacturing plant tianjin 2003 start phase decrease operating income corporate 5280000 primarily attributable costs incurred compliance sox 724000 includes adjustments correct errors accrued expenses interest expense interest expense decreased 1544000 128 2004 compared 2003 primarily due overlapping interest charges three separate senior note issues outstanding 2003 two senior note issues remain outstanding 2004 partially offset elimination favorable amortization interest rate swap increased indebtedness 125000000 senior notes decreased indebtedness us revolving credit facility september 1 2001 entered interest rate swap respect 75000000 83¤8 notes due december 2003 swap converted interest fixed floating august 5 2002 sold swap received 2315000 cash 2003 reduced interest expense 1420000 amortizing adjustment fair value swap amortization swap completed upon repayment 75000000 83¤8 notes december 1 2003 may 15 2003 refinanced 75000000 83¤8 notes proceeds issuance 125000000 senior notes july 1 2003 entered interest rate swap notional amount 25000000 outstanding prior revolving credit facility swapped variable rate revolving credit facility three month euribor plus 07 fixed rate 23 2004 euribor rate fluctuated materially impact swap immaterial overall interest expense income taxes effective tax rate continuing operations 2004 decreased 329 380 2003 decrease primarily due improvements results chinese operations allowed us recognize benefit deferred tax assets also provided favorable mix earnings also recognized benefit significant amount state income tax credits 2004 addition credit 462000 recorded accounting corrections made fourth quarter 2004 accrual related prior years income continuing operations income continuing operations 2004 increased 12319000 338 48738000 149 per common share 36419000 132 per common share 2003 case diluted basis appreciation euro canadian dollar us dollar resulted positive impact income continuing operations 005 per share 2004 compared 2003 cannot predict whether euro canadian dollar continue appreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact net income continuing operations 2004 2003 includes net costs incurred manufacturing restructuring plan 1825000 006 per share 1084000 004 per share respectively also included income continuing operations 2004 net charge 2289000 007 per share accounting corrections relating certain accrued expenses loss discontinued operations recorded charge net tax discontinued operations 2004 1918000 006 per common share 3057000 011 per common share 2003 case diluted basis included loss discontinued operations 2004 charges attributable legal fees associated james jones litigation obligations former shareholders james jones company 1125000 004 per share compared 3111000 011 per share 2003 see part item 1 “businessproduct liability environmental litigation matters” additionally losses discontinued operations 2004 2003 include impairment charge operating loss totaling 793000 002 per share income 54000 000 per share respectively planned divesture interest llc year ended december 31 2003 compared year ended december 31 2002 net sales business reported three geographic segments north america europe china net sales segments years ended december 31 2003 2002 follows increase net sales north america 2003 compared 2002 due internal growth 18381000 30 appreciation canadian dollar us dollar accounted 3904000 06 cannot predict whether canadian dollar continue appreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact net sales increase internal growth rate north america primarily due increased unit sales diy wholesale markets sales north american diy market grew 128 2003 2002 due increasing store count large customers successful introduction new products consistent reliable delivery products wholesale market grew 21 2003 2002 due increased sales backflow preventors increase decrease interest rates increase drop new housing construction market could positive negative impact sales increase net sales europe 2003 compared 2002 primarily due appreciation euro us dollar accounted 31107000 51 increase inclusion net sales acquired companies 21313000 35 internal growth 12565000 20 foreign exchange growth due average year date euro rate increasing 206 average year date rate 2002 cannot predict whether euro continue appreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact net sales acquired growth due inclusion net sales adev electronic sa ek eminent ab acquired july 15 2002 fr foerster rothman gmbh acquired july 29 2002 martin orgee acquired april 18 2003 giuliani anello acquired july 30 2003 expect recent acquisitions positive impact sales next two quarters internal growth sales primarily due increased sales european oem market inclusive acquisitions exclusive impact foreign exchange sales european oem market increased approximately 28900000 372 decrease net sales china 2003 compared 2002 primarily due adjustment 2200000 made second quarter 2003 previously recorded sales increased sales rebates returns recorded twt joint venture tianjin partially offset inclusion net sales shida joint venture whollyowned subsidiary established march 5 2002 approximately 2636000 gross profit gross profit 2003 increased 31145000 149 compared 2002 increase primarily due internal growth 12006000 change foreign exchange rates accounted 11075000 increase inclusion gross profit acquired companies 5961000 reduction restructuring charges 2103000 2003 compared 2002 excluding costs restructuring periods gross profits would increased 29042000 137 internal growth primarily due north american segment increased internal gross profits 11408000 increase primarily due improved manufacturing efficiencies increased sales volume internal growth gross profit offset loss china segment 3873000 loss due startup costs absorbed manufacturing costs due delay production new whollyowned manufacturing plant china believe capacity utilization increasing 2004 plant also offset inventory writedowns increased sales rebates returns net adjustments twt joint venture located tianjin china selling general administrative expenses selling general administrative sga expenses 2003 increased 18885000 125 compared 2002 increase primarily due internal increase 8386000 change foreign exchange rates accounted 6935000 increase inclusion operating expenses acquired companies accounted 3564000 increase internal increase sga expenses primarily due increased product liability expense workers compensation expenses professional fees include legal audit expenses pension costs variable selling expenses due increased sales volumes although absolute increase sga expense 2002 sga expense percent sales 2003 decreased 241 compared 245 2002 operating income operating income geographic segment years ended december 31 2003 2002 follows increase operating income north america 2003 compared 2002 primarily due internal growth 6753000 reduction restructuring charges 1691000 appreciation canadian dollar us dollar accounted 618000 increase internal growth due increased gross profit partially offset increased sga expense extent unable recover raw material cost increases customers cost increases would adversely affect operating income 2003 recorded 162000 compared 1853000 2002 costs associated manufacturing restructuring plan increase operating income europe 2003 compared 2002 due euro appreciating us dollar accounted 3522000 increase internal growth 2744000 inclusion income acquired companies 1932000 reduction restructuring charges 786000 cannot predict whether euro continue appreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact operating income internal operating profit primarily due increased sales volume partially offset increased sga expenses recorded 906000 2003 compared 1692000 2002 costs associated manufacturing restructuring plan increase operating losses china 2003 compared 2002 due increase internal operating losses 3512000 partially offset inclusion income acquired companies 465000 december 2003 incurred restructuring charge twt facility 162000 severance internal operating loss due inventory writedowns increased sales rebates returns net adjustments twt joint venture absorbed manufacturing costs due delay production start costs associated whollyowned manufacturing plant china corporate expenses primarily compensation expense professional fees including legal audit expenses benefit administration costs increase corporate expenses primarily due increased legal audit expenses 2003 interest expense interest expense increased 3416000 393 2003 compared 2002 primarily due inclusion interest expense 125000000 senior notes issued may 15 2003 december 1 2003 repaid 75000000 83¤8 notes expect interest expense decrease result repayment september 1 2001 entered interest rate swap respect 75000000 83¤8 notes due december 2003 swap converted interest fixed floating august 5 2002 sold swap received 2315000 cash year ended december 31 2003 reduced interest expense 1420000 amortizing adjustment fair value swap year ended december 31 2002 reduced interest expense 1711000 effectiveness swap amortization swap completed upon repayment 75000000 83¤8 notes july 1 2003 entered interest rate swap notional amount 25000000 euros outstanding revolving credit facility swapped variable rate revolving credit facility three month euribor plus 07 fixed rate 233 impact swap immaterial overall interest expense income taxes effective tax rate continuing operations 2003 increased 380 350 2002 increase primarily due losses china received tax benefit accordance fas 109 certain chinese entities tax holiday income continuing operations income continuing operations 2003 increased 3797000 116 36419000 132 per common share 32622000 121 per common share 2002 case diluted basis appreciation euro us dollar resulted positive impact income continuing operations 007 per share year ended december 31 2003 compared prior year cannot predict whether euro continue appreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact net income loss discontinued operations recorded charge net tax discontinued operations 2003 3057000 011 per common share diluted basis charge primarily attributable legal expenses associated litigation involving james jones company see part item 1 “businessproduct liability environmental litigation matters” addition recorded charge second quarter 2003 attributed payments made selling shareholders james jones company pursuant original purchase agreement additionally losses discontinued operations 2003 include income 54000 000 per share respectively planned divesture interest llc liquidity capital resources generated 40210000 cash continuing operations 2004 experienced increase inventory north america china north america increase primarily due planned increases finished goods set additional distribution centers lengthened supply chain producing products abroad increased sales volume addition due cost increases certain raw materials carrying value inventory north america 2004 increased approximately 9000000 compared 2003 additionally experienced increase accounts receivable north america partially offset decrease europe north america increase primarily due increased sales volume timing certain cash receipts certain large customers used 111379000 net cash investing activities 2004 invested 20999000 capital equipment capital expenditures primarily manufacturing machinery equipment part ongoing commitment improve manufacturing capabilities received 2143000 proceeds primarily sale one north american manufacturing facilities respect entered sale lease back arrangement business acquisitions net cash acquired consisted cash purchases 16796000 assets flowmatic 5750000 40 equity interest shida held former joint venture partner 17247000 team acquisition 27873000 orion acquisition 787000 additional 34 investment watts stern rubinetti srl additionally net investment securities primarily investment grade auction rate securities increased 26600000 2004 4000000 2003 used 16526000 net cash financing activities 2004 primarily dividend payments debt repayment china 3750000 debt paid former shareholders hunter innovations partially offset proceeds stock option exercises september 23 2004 entered unsecured revolving credit facility syndicate banks revolving credit facility revolving credit facility provides multicurrency borrowings 300000000 including standby letters credit expires september 2009 revolving credit facility used support acquisition program working capital requirements general corporate purposes december 31 2004 longterm debt included 49414000 outstanding revolving credit facility eurobased borrowings amounts outstanding us dollar borrowings 218445000 unused potentially available revolving credit december 31 2004 borrowings outstanding revolving credit facility bear interest fluctuating rate per annum applicable percentage equal case eurocurrency rate loans british bankers association libor rate plus applicable percentage 875 based company’s current consolidated leverage ratio debt rating ii case base rate loans swing line loans higher federal funds rate plus 05 b annual rate interest announced bank america na “prime rate” december 31 2004 average interest rate borrowings revolving credit facility approximately 28 effective september 23 2004 used funds revolving credit facility pay existing debt previous credit facility expire february 2005 revolving credit facility includes operational financial covenants customary facilities type including among others restrictions additional indebtedness liens investments maintenance certain leverage ratios december 31 2004 compliance covenants related revolving credit facility effective july 1 2003 entered interest rate swap notional amount 25000000 outstanding prior revolving credit facility swapped variable rate revolving credit facility three month euribor plus 07 fixed rate 23 term swap two years designated swap hedging instrument using cash flow method swap hedges cash flows associated interest payments first 25000000 revolving credit facility mark market changes value swap comprehensive income ineffectiveness recorded income amounts recorded immaterial december 31 2004 2003 generated 6553000 net cash discontinued operations net impact deferred taxes 2004 received 11723000 cash contested reimbursement partial settlement including interest 469000 cash contested reimbursement settlement costs incurred james jones case cash recorded liability december 31 2004 possibility may required reimburse insurance company ultimately successful future appeal also received 874000 cash reimbursement defense costs related james jones case paid 2094000 defense costs 1071000 indemnity costs incurred james jones case working capital defined current assets less current liabilities december 31 2004 300506000 compared 308258000 december 31 2003 ratio current assets current liabilities 25 1 december 31 2004 compared 28 1 december 31 2003 cash equivalents 65913000 december 31 2004 compared 145001000 december 31 2003 decrease cash primarily due cash paid acquisitions increased working capital requirements increased investment securities capital expenditures positive free cash flow 12283000 defined net cash provided continuing operations minus capital expenditures dividends plus proceeds sale assets year ended december 31 2004 versus positive free cash flow 27179000 comparable prior year period decrease 2004 compared 2003 primarily due increased inventories increased accounts receivable increased dividends partially offset increases accrued expenses net debt capitalization ratio defined short long term interestbearing liabilities less cash equivalents percentage sum short long term interestbearing liabilities less cash equivalents plus total stockholders equity including minority interest increased 193 2004 93 2003 increase resulted decrease cash due acquisitions working capital requirements 2004 2003 additional cash due proceeds december 2003 stock offering believe free cash flow appropriate supplemental measure operating performance company provides investors measure ability repay debt fund acquisitions computation may comparable companies may define free cash flow differently free cash flow represent cash generated operating activities accordance gaap therefore considered alternative net cash provided operations indication performance free cash flow also considered alternative net cash provided operations defined gaap reconciliation free cash flow net cash provided continuing operations provided net debt capitalization computed accordance gaap management believes appropriate supplemental measure helps investors understand ability meet financing needs computation may comparable companies may define debt capitalization differently reconciliation net debt provided reconciliation capitalization provided anticipate available funds current operations existing cash revolving credit facility sources liquidity sufficient meet current operating requirements anticipated capital expenditures least next 12 months however may consider external sources financing large future acquisitions longterm contractual obligations december 31 2004 presented following table recognized consolidated balance sheet b includes 5650000 recognized consolidated balance sheet c includes commodity capital expenditure commitments december 31 2004 maintain letters credit guarantee performance payment third parties accordance specified terms conditions amounts outstanding approximately 42570000 december 31 2004 29880000 december 31 2003 letters credit primarily associated insurance coverage lesser extent foreign purchases generally expire within one year issuance increase primarily associated insurance coverage instruments may exist expire without drawn therefore necessarily represent future cash flow obligations 20 interest plumworldcouk ltd variable interest entity plumbworld primarily ebusiness sells bathroom sanitary appliances well plumbing heating products tools plumbing consumables annualized sales approximately 11000000 nominal investment approximately 500 plumbworld maintain loan receivable amount approximately 890000 plumbworld continue account investment plumbworld using equity method critical accounting policies key estimates preparation consolidated financial statements accordance us gaap requires management make judgments assumptions estimates affect amounts reported critical accounting estimate assumption highly uncertain matters could material effect consolidated financial statements another also reasonable amount used change estimate reasonably likely period base assumptions historical experience estimates believe reasonable circumstances actual results could differ significantly estimates changes accounting policies significant changes accounting estimates 2004 discussed development selection disclosure estimates audit committee management believes following critical accounting policies reflect its’ significant estimates assumptions revenue recognition recognize revenue following criteria met 1 entered binding agreement 2 product shipped title passed 3 sales price customer fixed determinable 4 collectibility reasonably assured recognize revenue based upon determination criteria revenue recognition met based majority shipping terms considered occurred upon shipment finished product shipping terms require goods received customer title passes instances revenues recognized customer received goods record estimated reductions revenue customer returns allowances customer programs provisions returns allowances made time sale derived historical trends form portion allowance doubtful accounts customer programs primarily annual volume incentive plans allow customers earn credit attaining agreed upon purchase targets us record customer programs adjustment net sales allowance doubtful accounts allowance doubtful accounts established represent best estimate net realizable value outstanding accounts receivable development allowance doubtful accounts varies region general based review past due amounts historical writeoff experience well aging trends affecting specific accounts general operational factors affecting accounts north america management specifically analyzes individual accounts receivable establishes specific reserves financially troubled customers addition factors developed utilizing historical trends bad debts returns allowances ratio factors sales rolling twelvemonth basis applied total outstanding receivables net accounts specifically identified establish reserve europe management develops bad debt allowance aging analysis accounts china payment terms generally extended reserve accounts receivable excess one year invoice date specifically reserve identified uncollectible accounts receivable less one year old uniformly consider current economic trends changes customer payment terms evaluating adequacy allowance doubtful accounts also aggressively monitor creditworthiness largest customers periodically review customer credit limits reduce risk circumstances relating specific customers change unanticipated changes occur general business environment estimates recoverability receivables could adjusted inventory valuation inventories stated lower cost market costs generally determined firstin firstout basis utilize specific product identification historical product demand basis determining excess obsolete inventory reserve identify inventories exceed range one three years sales determined comparing current inventory balance unit sales trailing twelve months new products added inventory within past twelve months excluded analysis portion products contain recoverable materials therefore excess obsolete reserve established net recoverable amounts changes market conditions lower expected customer demand changes technology features could result additional obsolete inventory saleable could require additional inventory reserve provisions certain countries additional inventory reserves maintained potential losses experienced manufacturing process reserve established based prior year’s inventory losses adjusted change gross inventory balance goodwill intangibles adopted financial accounting standards board statement 142 “goodwill intangible assets” fas 142 january 1 2002 result longer amortize goodwill intangible assets indefinite lives tested annually impairment accordance provisions fas 142 use judgment assessing whether assets may become impaired annual impairment tests perform annual test indications goodwill impairment last day fiscal october 24 fiscal 2004 intangible assets purchased technology generally recorded connection business acquisition larger complex acquisitions value assigned intangible assets determined independent valuation firm based estimates judgments regarding expectations success life cycle products technology acquired three years since adoption fas 142 years valuations greater carrying value goodwill intangibles believe estimates future cash flows reasonable different assumptions regarding factors future sales volume selling price changes material cost changes cost savings programs capital expenditures could significantly affect valuations changes may affect valuations include limited product acceptances regulatory approval actual product acceptance differs significantly estimates may required record impairment charge write assets realizable value severe decline market value could result unexpected impairment charge goodwill could material impact results operations financial position product liability workers compensation costs retention requirements associated insurance policies generally selfinsured potential product liability claims workers’ compensation costs associated workplace accidents product liability cases us management estimates expected settlement costs utilizing loss reports provided third party administrators well developing internal historical trend factors based specific claims experience prior 2003 used insurance carrier trend factors determine product liability reserves however determined circumstances inherent trends necessarily indicative circumstances regarding claims management believes internal trend factors accurately reflect final expected settlement costs countries maintain insurance coverage relatively high deductible payments product liability claims tend smaller experienced us changes nature claims actual settlement amounts could affect adequacy estimate require changes provisions workers compensation liabilities us recognized claims incurred including claims incurred reported changes status individual case reserves time workers’ compensation claim filed liability estimated settle claim liability workers’ compensation claims determined based management’s estimates nature severity claims based analysis provided third party administrators various state statutes reserve requirements developed trend factors based specific claims experience countries workers compensation costs applicable maintain insurance coverage limited deductible payments liability estimate ultimate liability may less reported maintain excess liability insurance outside insurance carriers minimize risks related catastrophic claims excess selfinsured positions material change aforementioned factors could adverse impact operating results legal contingencies defendant numerous legal matters including involving environmental law product liability discussed note 15 notes consolidated financial statements required financial accounting standards board statement 5 “accounting contingencies” fas 5 determine whether estimated loss contingency accrued assessing whether loss deemed probable loss amount reasonably estimated net applicable insurance proceeds estimates potential outcomes contingencies developed consultation outside counsel assessment based upon available information litigation inherently uncertain actual liability fully resolve litigation cannot predicted assurance accuracy final settlement matters could possibly result significant effects results operations cash flows financial position pension benefits account pension plans accordance financial accounting standards board statement 87 “employers accounting pensions” fas 87 applying fas 87 assumptions made regarding valuation benefit obligations performance plan assets primary assumptions follows · weighted average discount ratethis rate used estimate current value future benefits rate adjusted based movement longterm interest rates · expected longterm rate return assetsthis rate used estimate future growth investments investment earnings expected return based upon combination historical market performance anticipated future returns portfolio reflecting mix equity debt investments indicative plan assets · rates increase compensation levelsthis rate used estimate projected annual pay increases used determine wage base used project employees’ pension benefits retirement determine assumptions based consultation outside actuaries investment advisors variance assumptions could significant impact future recognized pension costs assets liabilities income taxes estimate use expected annual effective income tax rates accrue income taxes effective tax rates determined based budgeted earnings taxes including best estimate permanent items impact effective rate year management periodically reviews rates outside tax advisors changes made material discrepancies expectations identified recognize deferred taxes expected future consequences events reflected consolidated financial statements accordance rules financial accounting standards board statement 109 “accounting income taxes” fas 109 fas 109 deferred tax assets liabilities determined based differences book values tax bases particular assets liabilities using tax rates effect years differences expected reverse valuation allowance provided offset net deferred tax assets based upon available evidence likely deferred tax assets realized consider estimated future taxable income ongoing prudent tax planning strategies assessing need valuation allowance certain factors affecting future results face intense competition able respond competition markets revenues may decrease competitive pressures markets could adversely affect competitive position leading possible loss market share decrease prices either could result decreased revenues profits encounter intense competition areas business additionally customers products attempting reduce number vendors purchase order reduce size diversity inventories transaction costs remain competitive need invest continuously manufacturing marketing customer service support distribution networks may sufficient resources continue make investments may unable maintain competitive position addition anticipate may reduce prices products stay competitive potentially resulting reduction profit margin inventory valuation products competitors based foreign countries cost structures prices foreign currencies accordingly currency fluctuations could cause us dollarpriced products less competitive competitors’ products priced currencies reductions interruptions supply raw materials increases costs raw materials could reduce profit margins adversely impact ability meet customer delivery commitments require substantial amounts raw materials including bronze brass cast iron steel plastic substantially raw materials require purchased outside sources availability costs raw materials may subject curtailment change due among things new laws regulations suppliers’ allocations purchasers interruptions production suppliers changes exchange rates worldwide price demand levels currently party longterm supply agreements inability obtain adequate supplies raw materials products favorable costs could material adverse effect business financial condition results operations decreasing profit margins hindering ability deliver products customers timely basis costs raw materials highest levels many years may continue experience cost increases materials able continue reduce eliminate effect cost increases lowering costs production successfully implementing price increases customers cost increases vendors could negative effect financial results implementation acquisition strategy may successful could affect ability increase revenues profitability one strategies increase revenues profitability expand markets acquisitions provide us complementary waterrelated products increase market share existing product lines cannot certain able identify acquire profitably manage additional companies successfully integrate additional companies without substantial costs delays problems also companies acquired recently future may achieve revenues profitability cash flows justify investment expect spend significant time effort expanding existing businesses identifying completing integrating acquisitions faced increasing competition acquisition candidates resulted significant increases purchase prices many acquisition candidates competition resulting purchase price increases may limit number acquisition opportunities available us possibly leading decrease rate growth revenues profitability addition acquisitions may involve number special risks including limited · adverse shortterm effects reported operating results · diversion management’s attention · loss key personnel acquired companies · unanticipated management operational problems legal liabilities economic cycles particularly reduced levels residential nonresidential starts remodeling could adverse effect revenues operating results experienced expect continue experience fluctuations revenues operating results due economic business cycles businesses customers particularly plumbing heating wholesalers home improvement retailers cyclical therefore level business activity cyclical fluctuating economic cycles also believe level business activity influenced residential nonresidential starts renovation remodeling turn heavily influenced interest rates consumer debt levels changes disposable income employment growth consumer confidence factors cause material reduction residential nonresidential remodeling starts revenues profits would decrease result material adverse effect financial condition results operations economic risks associated international sales operations could adversely affect business future operating results since sell manufacture products worldwide business subject risks associated business internationally business future operating results could harmed variety factors including · trade protection measures import export licensing requirements could increase costs business internationally · potentially negative consequences changes tax laws could adverse impact profits · difficulty staffing managing widespread operations could reduce productivity · costs compliance differing labor regulations especially connection restructuring overseas operations · laws foreign countries may protect intellectual property rights extent laws united states · unexpected changes regulatory requirements may costly require time implement fluctuations foreign exchange rates particularly euro could materially affect reported results exposed fluctuations foreign currencies portion sales certain portions costs assets liabilities denominated currencies us dollars approximately 385 sales year ended december 31 2004 sales outside us compared 374 year ended december 31 2003 years ended december 31 2004 2003 2002 appreciation euro us dollar positive impact sales approximately 209 million 311 million 79 million respectively additionally canadian operations require significant amounts us purchases operations share revenue nondollar denominated currencies continues increase future periods exchange rate fluctuations likely greater impact results operations financial condition chinese government may cease utilization fixed rate exchange chinese rmb us dollar could adversely affect current favorable cost structure goods source joint ventures whollyowned subsidiary china outside vendors risks expanding manufacturing operations china part strategy shifting portion manufacturing operations china reduce production costs sell product chinese market shift subject greater portion operations risks business china increased production levels china require increased levels working capital rapidly increasing headcount manufacturing equipment unable quickly train new employees may experience product quality issues chinese central local government authorities high degree control business china customary developed economies makes process obtaining necessary regulatory approval china inherently unpredictable addition protection accorded proprietary technology knowhow chinese legal system strong united states result may lose valuable trade secrets competitive advantage cannot continue operating manufacturing facilities current higher utilization levels results operations could adversely affected equipment management systems necessary operation manufacturing facilities may breakdown perform poorly fail resulting fluctuations ability manufacture products achieve manufacturing efficiencies operate number manufacturing facilities subject risk fluctuations facilities could cause increase production costs corresponding decrease profitability also verticallyintegrated manufacturing process segment dependent upon prior process breakdown one segment adversely affect later components fluctuations production process may affect ability deliver products customers timely basis inability meet delivery obligations could result loss customers negatively impact business financial condition results operations addition manufacturing restructuring plan began 2001 initiated reduce manufacturing costs transition operations overseas result manufacturing restructuring plan transferring capacity utilization planned manufacturing plant consolidations united states europe production capability expansion china successful results operations financial condition could materially adversely affected experience delays introducing new products existing new products achieve maintain market acceptance regulatory approvals revenues profitability may decrease failure develop new innovative products custom design existing products could result loss existing customers competitors inability attract new business either may adversely affect revenues industry characterized · intense competition · changes specifications required customers plumbing codes andor regulatory agencies · technically complex products · constant improvement existing products introductions new products believe future success depend part ability anticipate adapt factors offer timely basis products meet customer demands requirements plumbing codes andor regulatory agencies development new enhanced products complex uncertain process requiring anticipation technological market trends may experience design manufacturing marketing difficulties inability attract sufficient number experienced engineers could delay prevent development introduction approval marketing new products enhancements result unexpected expenses difficulties could cause us lose business customers could adversely affect competitive position addition added expenses could decrease profitability associated products gain market acceptance environmental compliance costs liabilities could increase expenses reduce profitability operations properties subject extensive increasingly stringent laws regulations relating environmental protection including laws regulations governing air emissions water discharges waste management disposal workplace safety laws regulations impose substantial fines sanctions violations require installation costly pollution control equipment operational changes limit pollution emissions andor decrease likelihood accidental hazardous substance releases also could required halt one portions operations violation cured could also liable costs property damage personal injury others although attempt operate compliance environmental laws may succeed effort times costs curing violations resolving enforcement actions might initiated government authorities could substantial certain environmental laws current past owners operators real property may liable costs cleaning contamination even know responsible contamination laws also impose liability person arranges disposal treatment hazardous waste site therefore ownership operation real property disposal waste could lead liabilities laws incurred expect continue incur costs relating environmental matters addition new laws regulations stricter enforcement existing laws regulations discovery previously unknown contamination imposition new clean requirements could require us incur additional costs become basis new increased liabilities could significant environmental litigation enforcement compliance inherently uncertain may experience significant costs connection environmental matters information see part item 1 “businessproduct liability environmental litigation matters” third parties may infringe intellectual property may expend resources enforcing rights suffer competitive injury rely combination patents copyrights trademarks trade secrets confidentiality provisions licensing arrangements establish protect proprietary rights may required spend resources monitor police intellectual property rights fail successfully enforce intellectual property rights competitive position could suffer could harm operating results limited selling products timetotime existing patents face risks product liability lawsuits may adversely affect business may continue subject various product liability claims lawsuits including among others products include inadequate improper instructions use installation inadequate warnings concerning effects failure products event adequate insurance contractual indemnification damages claims would paid assets could material adverse effect results operations liquidity financial condition particular settle conclude litigation quarterly annual reporting period could material impact operating results quarter year like manufacturers distributors products designed control regulate fluids face inherent risk exposure product liability claims lawsuits event use products results personal injury property damage business interruption customers although maintain strict quality controls procedures including testing raw materials safety testing selected finished products cannot certain products completely free defect addition certain cases rely thirdparty manufacturers products components products although product liability general insurance coverage cannot certain insurance coverage continue available us reasonable cost available adequate cover liabilities information see part item 1 “businessproduct liability environmental litigation matters” requirements fas 142 may result writeoff portion goodwill would negatively impact operating results financial condition december 31 2004 goodwill 2262 million 245 total assets 459 total stockholders’ equity required take impairment charge goodwill connection requirements fas 142 operating results may decrease financial condition may harmed fas 142 goodwill identifiable intangible assets indefinite useful lives longer amortized lieu amortization required perform initial impairment review goodwill required perform annual impairment reviews thereafter concluded impairment existed october 24 2004 time annual review perform annual test indications goodwill impairment fourth quarter fiscal year sooner indicators exist loss major customer could adverse effect results operations largest customer home depot inc accounted approximately 813 million 99 total net sales year ended december 31 2004 748 million 107 total net sales year ended december 31 2003 customers generally obligated purchase minimum volume products us able terminate relationships us time significant reduction orders change terms home depot inc could material adverse effect future results operations certain indebtedness may limit ability pay dividends incur additional debt make acquisitions investments revolving credit facility senior indebtedness contain operational financial covenants restrict ability make distributions stockholders incur additional debt make acquisitions investments unless satisfy certain financial tests comply various financial ratios maintain compliance covenants creditors could declare default revolving credit facility indebtedness could declared immediately due payable ability comply provisions indebtedness may affected changes economic business conditions beyond control one stockholders exercise substantial influence company january 31 2005 timothy p horne member board directors beneficially owned approximately 227 outstanding shares class common stock assuming conversion shares class b common stock beneficially owned mr horne class common stock approximately 990 outstanding shares class b common stock represents approximately 739 total outstanding voting power long mr horne controls shares representing least majority total voting power outstanding stock mr horne able unilaterally determine outcome stockholder votes stockholders able affect outcome stockholder vote conversion sale significant number shares class b common stock could adversely affect market price class common stock january 31 2005 outstanding 25049338 shares class common stock 7343880 shares class b common stock shares class b common stock may converted class common stock time one basis shares class common stock freely transferable without restriction registration federal securities laws except shares held affiliates sales limited rule 144 securities act addition terms registration rights agreement respect outstanding shares class b common stock holders class b common stock rights respect registration underlying class common stock registration rights holders class b common stock may require two occasions register shares public resale eligible use form s3 similar shortform registration statement holders class b common stock may require register shares public resale two times per year elect register shares class common stock public offering holders class b common stock entitled include shares class common stock shares class b common stock may converted registration however may reduce number shares proposed registered view market conditions pay expenses connection registration underwriting discounts commissions available registered shares sold public market trading price class common stock could decline class common stock insignificant voting power class b common stock entitles holders ten votes share class common stock entitles holders one vote per share january 31 2005 class b common stock constituted 227 total outstanding common stock 746 total outstanding voting power thus able exercise controlling influence business new accounting standards december 2003 financial accounting standards board fasb issued financial accounting standards board statement 132 revised 2003 “employers’ disclosures pensions postretirement benefits” fas 132r standard increases existing disclosure requirements requiring details pension plan assets benefit obligations cash flows benefit costs related information companies required segregate plan assets category debt equity real estate provide certain expected rates return informational disclosures fas 132r also requires companies disclose various elements pension postretirement benefit costs interimperiod financial statements quarters beginning december 15 2003 adopted additional interim disclosure provisions fas 132r effective january 1 2004 may 15 2003 fasb issued financial accounting standards board statement 150 “accounting certain financial instruments characteristics liabilities equity” fas 150 fas 150 requires issuers classify liabilities assets circumstances three classes freestanding financial instruments embody obligations issuer generally fas 150 effective financial instruments entered modified may 31 2003 otherwise effective beginning first interim period beginning june 15 2003 adopted provisions fas 150 july 1 2003 existing financial instruments entered prior june 30 2003 concluded adoption fas 150 material impact consolidated financial statements november 29 2004 fasb issued financial accounting standards board statement 151 “inventory costs” fas 151 fas 151 amends guidance accounting research bulletin 43 chapter 4 “inventory pricing” clarify accounting inventory costs provisions statement effective beginning june 15 2005 although early application permitted expect impact statement material consolidated financial statements december 16 2004 fasb issued final standard accounting sharebased payments sbp financial accounting standards board statement 123r revised 2004 requires companies expense value employee stock options similar awards statement effective public companies interim annual periods beginning june 15 2005 applies outstanding unvested sbp awards company’s adoption date impact statement results operations estimated approximately 002 per share december 16 2004 fasb issued financial accounting standards board statement 153 “exchanges nonmonetary assets amendment apb opinion 29 accounting nonmonetary transactions” fas 153 amendments made fas 153 based principle exchanges nonmonetary assets measured based fair value assets exchanged amendments eliminate narrow exception nonmonetary exchanges similar productive assets replace broader exception exchanges nonmonetary assets commercial substance previously opinion 29 required accounting exchange productive asset similar productive asset equivalent interest similar productive asset based recorded amount asset relinquished statement effective nonmonetary asset exchanges occurring fiscal periods beginning june 15 2005 earlier application permitted nonmonetary asset exchanges occurring fiscal periods beginning date issuance provisions statement shall applied prospectively expect impact statement material consolidated financial statements item 7aitem 7 management’s discussion analysis financial condition results operations overview leading supplier products use water quality water safety water flow control water conservation markets north america europe emerging presence china 130 years designed manufactured products promote comfort safety people quality conservation water used commercial residential applications earn revenue income almost exclusively sale products principal product lines include · backflow preventers preventing contamination potable water caused reverse flow within water supply lines fire protection systems · wide range water pressure regulators commercial residential applications · water supply drainage products commercial residential applications · temperature pressure relief valves water heaters boilers associated systems · pointofuse water filtration reverse osmosis systems commercial residential applications · thermostatic mixing valves tempering water commercial residential applications · systems underfloor radiant applications hydraulic pump groups gas boiler manufacturers renewable energy applications including solar heat pump control packages · flexible stainless steel connectors natural liquid propane gas commercial food service residential applications · large diameter butterfly valves use china’s water infrastructure business reported three geographic segments north america europe china distribute products three primary distribution channels wholesale doityourself diy original equipment manufacturers oems interest rates indirect effect demand products due effect rates number new residential commercial construction starts remodeling projects three activities impact levels sales earnings additional factor effect sales fluctuation foreign currencies portion sales certain portions costs assets liabilities denominated currencies us dollar believe factors relating future growth include ability continue make selective acquisitions core markets well new complementary markets regulatory requirements relating quality conservation water increased demand clean water continued enforcement plumbing building codes healthy economic environment completed 30 acquisitions since divesting industrial oil gas business 1999 acquisition strategy focuses businesses manufacture preferred brand name products address themes water quality water conservation water safety water flow control related complementary markets target businesses provide us one following entry new markets increase shelf space existing customers new improved technology expansion breadth water quality water conservation water safety water flow control products residential commercial markets 2006 sales acquisitions contributed approximately 209 total sales growth prior year products representing majority sales subject regulatory standards code enforcement typically require products meet stringent performance criteria together commissioned manufacturers’ representatives consistently advocated development enforcement plumbing codes focused maintaining stringent quality control testing procedures manufacturing facilities order manufacture products compliance code requirements take advantage resulting demand compliant products believe product development product testing capability investment plant equipment needed manufacture products compliance code requirements represent barrier entry competitors believe increasing demand among consumers products ensure water quality creates growth opportunities products require substantial amounts raw materials produce products including bronze brass cast iron steel plastic substantially raw materials require purchased outside sources experienced increases costs certain raw materials particularly copper bronze brass copperbased alloys 2006 spot price copper increased approximately 33 risk face ability deal effectively increases raw material costs manage risk monitoring related market prices working suppliers achieve maximum level stability costs related pricing seeking alternative supply sources necessary implementing cost reduction programs passing increases costs customers maximum extent possible occur additionally time may use commodity futures contracts limited basis manage risk able predict whether long cost increases continue cost increases continue able reduce eliminate effect cost increases reducing production costs implementing price increases profit margins could decrease another risk face areas business competition consider brand preference engineering specifications code requirements price technological expertise delivery times breadth product offerings primary competitive factors mentioned previously believe product development product testing capability investment plant equipment needed manufacture products compliance code requirements represent barrier entry competitors committed maintaining capital equipment level consistent current technologies thus spent approximately 44648000 2006 including approximately 18000000 related purchase subsequent saleleaseback building italy 18590000 2005 committed expanding manufacturing capacity lower cost countries china tunisia bulgaria recent developments february 2007 board directors approved amendment certificate incorporation increase number shares class common stock authorized issuance 80000000 shares 200000000 shares amendment remains subject approval stockholders annual meeting stockholders scheduled may 2 2007 february 2007 declared quarterly dividend ten cents 010 per share outstanding share class common stock class b common stock increase 001 per share compared dividend paid comparable period last year november 2006 issued sold 5750000 shares class common stock underwritten public offering price public shares sold offering 4000 per share proceeds company net underwriting discounts commissions offering expenses approximately 218611000 expect use net proceeds offering general corporate purposes including funding future acquisitions results operations year ended december 31 2006 compared year ended december 31 2005 net sales business reported three geographic segments north america europe china net sales segments years ended december 31 2006 2005 follows increase net sales attributable following internal growth net sales north america due increased price unit sales certain product lines wholesale diy markets wholesale market 2006 excluding sales acquisitions alamo savard calflex flexflow core dormont grew 97 compared 2005 primarily due increased sales water pressure regulators relief valves backflow preventer units well plumbing underfloor radiant heating product lines sales north american diy market 2006 increased 54 compared 2005 primarily due increased sales fittings supply lines plumbing underfloor radiant heating product lines partially offset fewer new retail product introductions 2006 2005 increase net sales due foreign exchange north america due canadian dollar appreciating us dollar cannot predict whether canadian dollar continue appreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact net sales acquired growth net sales north america due inclusion net sales alamo acquired june 20 2005 savard acquired july 8 2005 flexflow acquired november 4 2005 core acquired december 2 2005 dormont acquired december 28 2005 calflex acquired june 2 2006 internal sales growth europe broadbased markets channels exhibiting improvement sales wholesale oem markets 2006 excluding sales acquisitions electro controls microflex ats kimsafe teknigas grew 185 164 respectively compared 2005 increase net sales due foreign exchange europe primarily due appreciation euro us dollar cannot predict whether euro appreciate depreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact net sales acquired growth net sales europe due inclusion net sales electro controls acquired may 11 2005 microflex acquired july 5 2005 ats acquired may 19 2006 kimsafe acquired june 7 2006 teknigas acquired august 14 2006 internal sales growth china due increased sales domestic export markets partially offset lost sales due approximately four week work stoppage jointventure facility tianjin additionally yuan strengthened us dollar acquired growth net sales china due inclusion net sales changsha acquired april 26 2006 ningbo acquired june 2 2006 gross profit gross profit gross profit percent net sales gross margin 2006 2005 follows gross margin percent sales 2006 decreased slightly 2005 raw materials cost increases predominantly offset increased sales prices exception north american retail market certain markets europe particular price increases difficult pass along customers germany margins also negatively affected sales lower margin products sold core european acquisition costs north american gross margin percentage decreases partially offset favorable sales mix toward higher margin wholesale sales margins also negatively affected 2006 increased charges related manufacturing restructuring efforts recorded 4667000 cost sales primarily severance costs 2006 compared 1816000 2005 accelerated depreciation costs selling general administrative expenses selling general administrative expenses sga expenses 2006 increased 70761000 308 compared 2005 increase sga expenses attributable following internal increase sga expenses primarily due increased variable selling expenses due increased sales volumes increased insurance costs increased compensation costs corporate administration costs including costs incurred compliance fas 123r partially offset lower costs complying section 404 sarbanesoxley act 2002 sox lower earnout costs related prior acquisition increase sga expenses foreign exchange primarily due appreciation euro canadian dollar yuan us dollar increase sga expenses acquisitions due inclusion electro controls alamo microflex savard flexflow core dormont changsha ats calflex ningbo kimsafe teknigas restructuring income charges restructuring income charges 2006 decreased 6377000 primarily due gain approximately 8188000 related sale two buildings italy partially offset charge 2540000 primarily severance costs related european restructuring plans 2005 recorded 729000 primarily severance costs related european restructuring plans operating income operating income geographic segment 2006 2005 follows increase operating income attributable following internal growth north america primarily due increased gross profit price increases favorable sales mix towards wholesale market benefits resulting completed manufacturing restructuring projects product outsourcing partially offset increased net sga expense inventory writedowns 2006 record costs associated manufacturing restructuring plan compared costs 1005000 2005 acquired growth due inclusion operating income alamo savard flexflow core dormont calflex internal growth europe primarily due increased gross profit price unit increases wholesale oem markets benefits resulting completed manufacturing restructuring projects partially offset increased net sga expense 2006 recorded net gain 6038000 associated manufacturing restructuring plan compared charge 1540000 2005 recorded gain 8188000 building sales italy partially offset 2150000 primarily severance costs acquired growth europe due inclusion operating income electro controls microflex ats kimsafe teknigas increase internal growth china attributable sales volume increase favorable material purchases improved manufacturing efficiencies associated wholly owned manufacturing plants partially offset increased net sga expense acquired growth china due inclusion operating income changsha ningbo 2006 recorded 5057000 severance accelerated depreciation costs associated planned move chinese joint venture facility expect record approximately 2000000 2007 accelerated depreciation severance costs related move record costs associated manufacturing restructuring plan 2005 decrease internal operating income corporate primarily attributable incremental administration charges variable compensation including costs incurred compliance fas 123r increased audit costs increased pension costs partially offset lower costs incurred sox compliance net increase operating income foreign exchange primarily due appreciation euro canadian dollar yuan us dollar cannot predict whether currencies continue appreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact operating income interest income interest income increased 3782000 3070 2006 compared 2005 primarily due investment residual proceeds private placement 225000000 585 senior notes april 2006 net proceeds public offering 5750000 shares class common stock november 2006 interest expense interest expense increased 11795000 1139 2006 compared 2005 primarily due interest expense associated 225000000 585 senior notes increased debt levels acquisitions made 2005 2006 increase average variable rates charged revolving credit facility effective july 1 2005 entered interest rate swap notional amount 25000000 outstanding revolving credit facility swapped three month euribor plus 06 fixed rate 302 recorded reduction interest expense approximately 673000 recognize fair value swap 2006 swap terminated october 3 2006 income expense income expense increased 201000 276 2006 compared 2005 primarily due gains settlements officers’ life insurance policies minority interest minority interest increased 2178000 6223 2006 compared 2005 primarily due credit recorded 40 liability joint venture partner’s share recording 5057000 manufacturing restructuring costs income taxes effective tax rate continuing operations decreased 336 2006 359 2005 decrease primarily due higher earnings european china segments shift mix earnings segments causes rate decrease segments lower effective tax rates worldwide average effect european earnings mix partially offset higher effective tax gain sales italian facilities able claim tax credits based qualified fixed asset purchases china helped reduce worldwide rate income continuing operations income continuing operations 2006 increased 22073000 401 77093000 229 per common share 55020000 167 per common share 2005 case diluted basis income continuing operations 2006 2005 includes income net tax restructuring plan 1465000 004 per share costs 1633000 005 per share respectively gains sales buildings italy resulted aftertax gain 5138000 015 per share appreciation canadian dollar euro chinese yuan us dollar resulted positive impact income continuing operations 1262000 004 per share 2006 compared 2005 cannot predict whether euro canadian dollar yuan continue appreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact net income loss discontinued operations recorded charge net tax discontinued operations 2006 2005 3357000 010 per common share 421000 001 per common share respectively case diluted basis third quarter 2006 recorded pretax charge 5000000 due recent federal appellate court decision affirmed arbitration panel could decide deductible agreements watts zurich american insurance company zurich would control zurich’s reimbursement claim defense costs paid james jones case charges primarily attributable legal fees associated james jones litigation described part item 1 “businessproduct liability environmental litigation matters” year ended december 31 2005 compared year ended december 31 2004 net sales net sales three segments years ended december 31 2005 2004 follows increase net sales attributable following internal growth net sales north america broadbased wholesale diy markets wholesale market 2005 excluding sales acquisitions grew 85 compared 2004 primarily due increased sales backflow preventor units well increased underfloor radiant heating product lines increased unit selling prices product lines sales north american diy market 2005 increased organically 123 compared 2004 primarily due increased sales fittings supply lines underfloor radiant heating products increase net sales due foreign exchange north america due canadian dollar appreciating us dollar cannot predict whether canadian dollar continue appreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact net sales acquired growth net sales north america due inclusion net sales dormont acquired december 28 2005 core acquired december 2 2005 flexflow acquired november 4 2005 savard acquired july 8 2005 alamo acquired june 20 2005 hf acquired january 5 2005 sea tech acquired january 4 2005 orion acquired may 21 2004 internal growth europe net sales results increased sales wholesale market result gaining market share particularly germany sales european oem market primarily flat compared last year net sales negatively affected foreign exchange europe primarily depreciation euro us dollar cannot predict whether euro continue depreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact net sales acquired growth europe net sales due inclusion net sales microflex acquired july 5 2005 electro controls acquired may 11 2005 team acquired april 16 2004 increase net sales china primarily attributable increased sales chinese domestic export markets gross profit gross profit gross profit percent net sales gross margin 2005 2004 follows gross margin percent sales 2005 decreased slightly 2004 experienced internal sales volume growth regions however commodity costs especially copperbased products oilbased products sales mix shift north america europe dampened margin percentage growth 2005 experienced raw material cost increases able fully recover price increases products north america experienced higher growth lowermargin retail sales partially offset reclassification product liability costs cost sales selling general administrative expense europe’s oem business flat increase lower margin wholesale product sales regions benefited completed manufacturing restructuring efforts china segment increased gross margin primarily due increased sales volume domestic marketplace margins positively affected 2005 decreased manufacturing restructuring costs recorded 1816000 cost sales primarily accelerated depreciation costs 2005 compared 2873000 accelerated depreciation costs 2004 selling general administrative expenses selling general administrative expenses sga expenses 2005 increased 22552000 109 compared 2004 increase sga expenses attributable following internal sga expenses increased primarily higher variable selling expenses caused increased sales volumes north america china duediligence related charges increased bad debt reserves cost increases partially offset lower costs complying section 404 sarbanesoxley act 2002 sox additionally recorded 1000000 reserve reductions 2004 related favorable ruling legal matter increase sga expenses foreign exchange primarily due appreciation canadian dollar yuan us dollar partially offset depreciation euro us dollar increase sga expenses acquisitions due inclusion dormont core savard microflex alamo electro controls hf sea tech orion team includes costs 2454000 prior period corrections including earnout arrangement prior period acquisition accounted compensation expense earnout arrangement completed august 31 2005 operating income operating income geographic segment 2005 2004 follows increase operating income attributable following internally north american segment experienced decrease operating income primarily increased commodity costs increased sga expenses partially offset benefits resulting completed manufacturing restructuring projects outsourcing 2005 experienced raw material cost increases able fully recover price increases products 2005 recorded 1005000 net costs associated manufacturing restructuring plan compared 2968000 2004 acquired growth due inclusion operating income dormont core savard alamo hf sea tech orion represents costs accrued earnout arrangement prior period acquisition earnout arrangement completed august 31 2005 increase operating income due foreign exchange north america due canadian dollar appreciating us dollar cannot predict whether canadian dollar continue appreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact net sales internally european segment also experienced decrease operating income primarily due soft european economy increased sales lower margin wholesale products increased sga expenses offset benefits resulting completed manufacturing restructuring projects outsourcing 2005 recorded 1540000 costs associated manufacturing restructuring plan record costs 2004 decrease europe’s operating income foreign exchange primarily due depreciation euro us dollar cannot predict whether euro continue depreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact operating income increase internal growth china 1622000 primarily attributable increased capacity utilization low cost sourcing domestic facilities offset increased sga expenses primarily related increased variable selling expenses due increased sales volumes increased bad debt reserves increase internal operating income corporate 1149000 primarily attributable reductions sox audit expenses partially offset 1000000 reserve reduction first quarter 2004 due favorable ruling legal matter consists 724000 adjustments made fourth quarter 2004 correct errors accrued expenses interest expense interest expense decreased 211000 20 2005 compared 2004 primarily due reduced debt levels europe debt levels increased us december 2005 result fourth quarter acquisition activity effective july 1 2005 entered threeyear interest rate swap counter party notional amount 25000000 outstanding revolving credit facility swapped threemonth euribor plus 06 fixed rate 302 impact swap immaterial overall interest expense previously entered interest rate swap notional amount 25000000 outstanding prior revolving credit facility swapped threemonth euribor plus 07 fixed rate 23 swap terminated june 30 2005 impact swap immaterial overall interest expense income taxes effective tax rate continuing operations 2005 increased 359 329 2004 increase primarily due benefits realized 2004 approximately 800000 previously unrecognized deferred tax assets china addition 2004 recorded multiyear refund claims relating state tax credits 2005 tax credits realized current year increase partially offset decrease european tax rate 2005 compared 2004 due earnings mix europe income continuing operations income continuing operations 2005 increased 6282000 129 55020000 167 per common share 48738000 149 per common share 2004 case diluted basis income continuing operations 2005 2004 includes net costs incurred manufacturing restructuring plan 1633000 005 per share 1825000 006 per share respectively also included income continuing operations 2004 net charge 2289000 007 per share accounting corrections relating certain accrued expenses loss discontinued operations recorded charge net tax discontinued operations 2005 421000 001 per common share 1918000 006 per common share 2004 case diluted basis included loss discontinued operations 2005 2004 charges attributable legal fees associated james jones litigation obligations former shareholders james jones company 421000 001 per share 1125000 004 per share respectively see part item 1 “businessproduct liability environmental litigation matters” additionally losses discontinued operations 2004 include impairment charge operating loss totaling 793000 002 per share divesture interest jameco llc liquidity capital resources generated 82231000 cash continuing operations 2006 experienced increase inventory accounts receivable north america europe china increase accounts receivable 16957000 primarily due increased sales volume selling prices increase inventory 37293000 primarily due increased cost raw materials planned increases european safety stocks increase inventory accounts receivable partially offset increased accounts payable accrued expenses liabilities 29524000 used 119213000 net cash investing activities 2006 used 91093000 fund acquisitions changsha ats calflex ningbo kimsafe teknigas 1940000 additional costs related 2005 acquisitions 387000 complete planned increase ownership stern invested 11825000 investment grade auction rate securities invested 44648000 capital equipment capital expenditures consisted approximately 26648000 manufacturing machinery equipment part ongoing commitment improve manufacturing capabilities approximately 18000000 purchase land building infrastructure improvements site italy subsequently entered saleleaseback transaction respect building received proceeds 31867000 primarily included 15957000 related saleleaseback italy 13414000 sales two facilities northern italy also received proceeds two buildings held sale totaling approximately 2496000 2006 expect invest approximately 38000000 capital equipment 2007 generated 332091000 net cash financing activities 2006 november 21 2006 completed public offering 5750000 shares newly issued class common stock 4000 per share net proceeds approximately 218611000 taking account underwriting discounts expenses associated transaction additionally generated cash completion 225000000 private placement 585 notes april 2006 increased borrowings line credit use europe proceeds exercise stock options partially offset payments debt dividend payments debt issue costs april 2006 amended revolving credit facility syndicate banks provide multicurrency unsecured borrowings standby letters credit 350000000 extend maturity date april 2011 original facility provided 300000000 borrowings would expired september 2009 revolving credit facility used support acquisition program working capital requirements general corporate purposes outstanding indebtedness revolving credit facility bears interest rate determined type loan plus applicable margin determined debt rating depending applicable base rate bond rating 2006 average interest rate revolving credit facility eurobased borrowings approximately 35 us dollar borrowings december 31 2006 revolving credit facility includes operational financial covenants customary facilities type including among others restrictions additional indebtedness liens investments maintenance certain leverage ratios december 31 2006 compliance covenants related revolving credit facility 226300000 unused potentially available credit revolving credit facility 91059000 eurobased borrowings outstanding 32641000 standby letters credit outstanding revolving credit facility effective july 1 2005 entered threeyear interest rate swap counter party notional amount 25000000 outstanding original revolving credit facility swapped threemonth euribor plus 06 fixed rate 302 swap terminated october 3 2006 generated 903000 net cash operations discontinued operations 2006 received approximately 16500 cash indemnification payment settlement costs incurred james jones litigation cash recorded liability december 31 2006 possibility might reimburse insurance company ultimately successful future appeal also received approximately 2783000 cash reimbursement defense costs related james jones litigation 2006 paid approximately 600000 defense costs approximately 530000 indemnity costs incurred james jones litigation working capital defined current assets less current liabilities december 31 2006 653024000 compared 305092000 december 31 2005 increase primarily due increases cash inventories accounts receivable cash equivalents increased 342979000 december 31 2006 compared 45758000 december 31 2005 primarily due class common stock public offering residual proceeds completion 225000000 private placement cash generated operations ratio current assets current liabilities 32 1 december 31 2006 compared 24 1 december 31 2005 generated 51867000 cash continuing operations 2005 experienced increase accounts receivable north america europe china totaling 16546000 increase primarily due increased sales volume additionally experienced increase inventories north america europe china totaling 20330000 portion overall increase inventory due increased costs raw materials increase inventory europe primarily due increased finished goods support delivery requirements oem customers europe increase safety stocks restructuring north american china inventories increased primarily due incremental volume products sourced extended china supply chain increase inventory accounts receivable partially offset increased accounts payable approximately 14257000 used 183203000 net cash investing activities 2005 used 191396000 fund acquisitions dormont core flexflow savard microflex alamo electro controls hf sea tech also invested 18590000 capital equipment capital expenditures primarily manufacturing machinery equipment part ongoing commitment improve manufacturing capabilities generated 26600000 sale investment securities generated 112924000 net cash financing activities 2005 primarily increased borrowings us europe acquisitions proceeds exercise stock options offset dividend payments debt paid 3750000 debt owed former shareholders hunter innovations used 1050000 net cash discontinued operations 2005 received approximately 548000 cash settlement payment indemnification costs incurred james jones case offsetting liability recorded december 31 2005 possibility might reimburse insurance company ultimately successful future appeal also received approximately 2100000 cash reimbursement defense costs related james jones case 2005 paid approximately 2503000 defense costs 550000 legal costs approximately 1021000 indemnity costs incurred james jones case generated 40210000 cash continuing operations 2004 experienced increase inventory north america china north america increase primarily due planned increases finished goods set additional distribution centers lengthened supply chain producing products abroad increased sales volume addition due cost increases certain raw materials carrying value inventory north america 2004 increased approximately 9000000 compared 2003 additionally experienced increase accounts receivable north america partially offset decrease europe north america increase primarily due increased sales volume timing certain cash receipts certain large customers used 111379000 net cash investing activities 2004 invested 20999000 capital equipment capital expenditures primarily manufacturing machinery equipment part ongoing commitment improve manufacturing capabilities received 2143000 proceeds primarily sale one north american manufacturing facilities respect entered sale lease back arrangement business acquisitions net cash acquired consisted cash purchases 16796000 assets flowmatic 5750000 40 equity interest shida held former joint venture partner 17247000 team acquisition 27873000 orion acquisition 787000 additional 34 investment watts stern rubinetti srl additionally net investment securities primarily investment grade auction rate securities increased 26600000 2004 4000000 2003 used 16526000 net cash financing activities 2004 primarily dividend payments debt repayment china 3750000 debt paid former shareholders hunter innovations partially offset proceeds stock option exercises free cash flow 57005000 nongaap financial measure defined net cash provided continuing operations minus capital expenditures dividends plus proceeds sale assets year ended december 31 2006 versus free cash flow 23449000 2005 increase 2006 compared 2005 primarily due growth cash generated operations less net capital expenditures partially offset increased dividends net debt capitalization ratio defined short longterm interestbearing liabilities less cash equivalents percentage sum short long term interestbearing liabilities less cash equivalents plus total stockholders’ equity including minority interest decreased 113 2006 331 2005 decrease resulted increase cash class common stock public offering residual proceeds completion 225000000 private placement free cash flow 23449000 year ended december 31 2005 versus free cash flow 12283000 2004 increase 2005 compared 2004 primarily due decreased growth inventories partially offset increased accounts receivable believe free cash flow appropriate supplemental measure operating performance provides investors measure ability generate cash repay debt fund acquisitions may comparable companies may define free cash flow differently free cash flow represent cash generated operating activities accordance gaap therefore considered alternative net cash provided operations indication performance free cash flow also considered alternative net cash provided operations defined gaap reconciliation net cash provided continuing operations free cash flow provided net debt capitalization ratio also nongaap financial measure used management believes appropriate supplemental measure helps investors understand ability meet financing needs basis evaluate financial structure computation may comparable companies may define net debt capitalization differently reconciliation longterm debt including current portion net debt net debt capitalization ratio provided reconciliation capitalization provided anticipate available funds current operations existing cash revolving credit facility sources liquidity sufficient meet current operating requirements anticipated capital expenditures least next 12 months however may consider external sources financing large future acquisitions contractual obligations december 31 2006 presented following table recognized consolidated balance sheet b assumes balance revolving credit facility remains 91059000 interest rate remains approximately 40 presented periods c includes commodity capital expenditure commitments benefits december 31 maintain letters credit guarantee performance payment third parties accordance specified terms conditions amounts outstanding approximately 49637000 december 31 2006 48651000 december 31 2005 letters credit primarily associated insurance coverage lesser extent foreign purchases generally expire within one year issuance instruments may exist expire without drawn therefore necessarily represent future cash flow obligations divested 20 interest wwwplumbworldcouk limited plumbworld variable interest entity august 21 2006 nominal investment approximately 500 plumbworld maintained loan receivable paid full time relinquished shares plumbworld offbalance sheet arrangements except operating lease commitments offbalance sheet arrangements reasonably likely current future effect financial condition changes financial condition revenues expenses results operations liquidity capital expenditures capital resources material investors application critical accounting policies key estimates preparation consolidated financial statements accordance us gaap requires management make judgments assumptions estimates affect amounts reported critical accounting estimate assumption highly uncertain matters could material effect consolidated financial statements another also reasonable amount used change estimate reasonably likely period base assumptions historical experience estimates believe reasonable circumstances actual results could differ significantly estimates changes accounting policies significant changes accounting estimates 2006 periodically discuss development selection disclosure estimates audit committee management believes following critical accounting policies reflect significant estimates assumptions revenue recognition recognize revenue following criteria met 1 entered binding agreement 2 product shipped title passed 3 sales price customer fixed determinable 4 collectibility reasonably assured recognize revenue based upon determination criteria revenue recognition met based majority shipping terms considered occurred upon shipment finished product shipping terms require goods received customer title passes instances revenues recognized customer received goods record estimated reductions revenue customer returns allowances customer programs provisions returns allowances made time sale derived historical trends form portion allowance doubtful accounts customer programs primarily annual volume incentive plans allow customers earn credit attaining agreed upon purchase targets us record customer programs adjustment net sales allowance doubtful accounts allowance doubtful accounts established represent best estimate net realizable value outstanding accounts receivable development allowance doubtful accounts varies region general based review past due amounts historical writeoff experience well aging trends affecting specific accounts general operational factors affecting accounts north america management specifically analyzes individual accounts receivable establishes specific reserves financially troubled customers addition factors developed utilizing historical trends bad debts returns allowances ratio factors sales rolling twelvemonth basis applied total outstanding receivables net accounts specifically identified establish reserve europe management develops bad debt allowance aging analysis accounts china management specifically analyzes individual accounts receivable establishes specific reserves needed addition waterworks customers whose payment terms generally extended reserve majority accounts receivable excess one year invoice date uniformly consider current economic trends changes customer payment terms evaluating adequacy allowance doubtful accounts also aggressively monitor creditworthiness largest customers periodically review customer credit limits reduce risk circumstances relating specific customers change unanticipated changes occur general business environment estimates recoverability receivables could adjusted inventory valuation inventories stated lower cost market costs generally determined firstin firstout basis utilize specific product identification historical product demand basis determining excess obsolete inventory reserve identify inventories exceed range one four years sales determined comparing current inventory balance unit sales trailing twelve months new products added inventory within past twelve months excluded analysis portion products contain recoverable materials therefore excess obsolete reserve established net recoverable amounts changes market conditions lower expected customer demand changes technology features could result additional obsolete inventory saleable could require additional inventory reserve provisions certain countries additional inventory reserves maintained potential shrinkage experienced manufacturing process reserve established based prior year’s inventory losses adjusted change gross inventory balance goodwill intangibles goodwill intangible assets indefinite lives tested annually impairment accordance provisions financial accounting standards board statement 142 “goodwill intangible assets” fas 142 use judgment assessing whether assets may become impaired annual impairment tests concluded impairment existed october 29 2006 time latest annual review perform annual test indicators goodwill nonamortizable intangible assets impairment fourth quarter fiscal year sooner indicators impairment exist intangible assets purchased technology generally recorded connection business acquisition values assigned intangible assets determined independent valuation firm based estimates judgments regarding expectations success life cycle products technology acquired since adoption fas 142 valuations greater carrying value goodwill intangibles believe estimates future cash flows reasonable different assumptions regarding factors future sales volume selling price changes material cost changes cost savings programs capital expenditures could significantly affect valuations changes may affect valuations include limited product acceptances regulatory approval actual product acceptance differs significantly estimates may required record impairment charge write assets realizable value severe decline market value could result unexpected impairment charge goodwill could material impact results operations financial position product liability workers’ compensation costs retention requirements associated insurance policies generally selfinsured potential product liability claims workers’ compensation costs associated workplace accidents product liability cases us management estimates expected settlement costs utilizing loss reports provided thirdparty administrators well developing internal historical trend factors based specific claims experience management utilizes internal trend factors reflect final expected settlement costs countries maintain insurance coverage relatively high deductible payments product liability claims tend smaller experienced us changes nature claims actual settlement amounts could affect adequacy estimate require changes provisions liability estimate ultimate liability may less reported workers’ compensation liabilities us recognized claims incurred including claims incurred reported changes status individual case reserves time workers’ compensation claim filed liability estimated settle claim liability workers’ compensation claims determined based management’s estimates nature severity claims based analysis provided third party administrators various state statutes reserve requirements developed trend factors based specific claims experience countries workers’ compensation costs applicable maintain insurance coverage limited deductible payments liability estimate ultimate liability may less reported maintain excess liability insurance outside insurance carriers minimize risks related catastrophic claims excess selfinsured positions material change aforementioned factors could adverse impact operating results legal contingencies defendant numerous legal matters including involving environmental law product liability discussed “businessproduct liability environmental litigation matters” required financial accounting standards board statement 5 “accounting contingencies” fas 5 determine whether estimated loss contingency accrued assessing whether loss deemed probable loss amount reasonably estimated net applicable insurance proceeds estimates potential outcomes contingencies developed consultation outside counsel assessment based upon available information litigation inherently uncertain actual liability fully resolve litigation cannot predicted assurance accuracy final settlement matters could possibly result significant effects results operations cash flows financial position pension benefits account pension plans accordance financial accounting standards board statement 87 “employers accounting pensions” fas 87 financial accounting standards board statement 158 “employers’ accounting defined benefit pension postretirement plansan amendment fasb statements 87 88 106 132r ” fas 158 applying fas 87 fas 158 assumptions made regarding valuation benefit obligations performance plan assets primary assumptions follows · weighted average discount ratethis rate used estimate current value future benefits rate adjusted based movement longterm interest rates · expected longterm rate return assetsthis rate used estimate future growth investments investment earnings expected return based upon combination historical market performance anticipated future returns portfolio reflecting mix equity debt investments indicative plan assets · rates increase compensation levelsthis rate used estimate projected annual pay increases used determine wage base used project employees’ pension benefits retirement determine assumptions based consultation outside actuaries investment advisors variance assumptions could significant impact future recognized pension costs assets liabilities income taxes estimate use expected annual effective income tax rates accrue income taxes effective tax rates determined based budgeted earnings taxes including best estimate permanent items affect effective rate year management periodically reviews rates outside tax advisors changes made material discrepancies expectations identified recognize deferred taxes expected future consequences events reflected consolidated financial statements accordance rules financial accounting standards board statement 109 “accounting income taxes” fas 109 fas 109 deferred tax assets liabilities determined based differences book values tax bases particular assets liabilities using tax rates effect years differences expected reverse valuation allowance provided offset net deferred tax assets based upon available evidence likely deferred tax assets realized consider estimated future taxable income ongoing prudent tax planning strategies assessing need valuation allowance new accounting standards february 2007 financial accounting standards board fasb issued financial accounting standards board statement fas 159 “the fair value option financial assets financial liabilitiesincluding amendment fas 115” fas 159 permits entities chose measure many financial instruments certain items fair value fas 159 effective financial statements issued fiscal years beginning november 15 2007 interim periods within fiscal years earlier application encouraged currently evaluating impact fas 159 consolidated financial statements september 2006 securities exchange commission issued staff accounting bulletin 108 “considering effects prior year misstatements quantifying misstatements current year financial statements” sab 108 provides interpretive guidance effects carryover reversal prior year misstatements considered quantifying current year misstatement sab 108 effective fiscal years ending november 15 2006 impact sab 108 material consolidated financial statements september 2006 fasb issued fas 158 “employers’ accounting defined benefit pension postretirement plansan amendment fasb statements 87 88 106 132r” fas 158 requires employer recognize statement financial position asset plan’s overfunded status liability plan’s underfunded status b measure plan’s assets obligations determine funded status end employer’s fiscal year c recognize changes funded status defined benefit postretirement plan year changes occur changes reported comprehensive income requirement recognize funded status benefit plan disclosure requirements effective end fiscal year ending december 15 2006 companies publicly traded equity securities requirement measure plan assets benefit obligations date employer’s fiscal yearend statement financial position effective fiscal years ending december 15 2008 although earlier adoption permitted result requirement recognize funded status benefit plans december 31 2006 recorded increase pension liability approximately 8300000 decrease approximately 1300000 assets net decrease accumulated comprehensive income approximately 5800000 net tax september 2006 fasb issued fas 157 “fair value measurements” fas 157 defines fair value establishes framework measuring fair value generally accepted accounting principles expands disclosures fair value measurements fas 157 effective financial statements issued fiscal years beginning november 15 2007 interim periods within fiscal years earlier application encouraged provided reporting company yet issued financial statements fiscal year including financial statements interim period within fiscal year expect adoption fas 157 material impact consolidated financial statements july 2006 fasb issued financial interpretation 48 “accounting uncertainty income taxes” fin 48 clarifies accounting uncertainty income taxes recognized financial statements accordance sfas 109 “accounting income taxes” fin 48 provides tax benefit uncertain tax position may recognized likely position sustained upon examination based technical merits interpretation also provides guidance measurement derecognition classification interest penalties accounting interim periods disclosure transition adopted provisions fin 48 january 1 2007 impact material consolidated financial statements march 2006 fasb issued fas 156 “accounting servicing financial assetsan amendment fasb statement 140” fas 156 fas 156 amends fas statement 140 “accounting transfers servicing financial assets extinguishments liabilities” respect accounting separately recognized servicing assets servicing liabilities fas 156 addresses recognition measurement separately recognized servicing assets liabilities provides approach simplify efforts obtain hedgelike offset accounting adopted fas 156 january 1 2007 impact material consolidated financial statements february 2006 fasb issued fas 155 “accounting certain hybrid financial instrumentsan amendment fasb statements 133 140” fas 155 fas 155 amends fas 133 “accounting derivatives hedging activities” fas 140 “accounting transfers servicing financial assets extinguishments liabilities” allows entity remeasure fair value hybrid financial instrument contains embedded derivative otherwise would require bifurcation host holder irrevocably elects account whole instrument fair value basis subsequent changes fair value instrument would recognized earnings adopted fas 155 january 1 2007 impact material consolidated financial statements may 2005 fasb issued fas 154 “accounting changes error correction replacement apb opinion 20 fasb statement 3” fas 154 fas 154 replaces apb opinion 20 “accounting changes” apb 20 fasb statement 3 “reporting accounting changes interim financial statements” changes requirements accounting reporting change accounting principle apb 20 previously required voluntary changes accounting principle recognized including net income period change cumulative effect changing new accounting principle fas 154 requires retrospective application prior periods’ financial statements changes accounting principle fas 154 defines retrospective application different accounting principle prior accounting periods principle always used fas 154 also requires change depreciation amortization depletion method longlived nonfinancial assets accounted change accounting estimate affected change accounting principle impact fas 154 material consolidated financial statements december 2004 fasb issued fas 153 “exchanges nonmonetary assets amendment apb opinion 29 accounting nonmonetary transactions” fas 153 amendments made fas 153 based principle exchanges nonmonetary assets measured based fair value assets exchanged amendments eliminate narrow exception nonmonetary exchanges similar productive assets replace broader exception exchanges nonmonetary assets commercial substance previously opinion 29 required accounting exchange productive asset similar productive asset equivalent interest similar productive asset based recorded amount asset relinquished statement effective nonmonetary asset exchanges occurring fiscal periods beginning june 15 2005 earlier application permitted nonmonetary asset exchanges occurring fiscal periods beginning date issuance impact fas 153 material consolidated financial statements november 2004 fasb issued fas 151 “inventory costs” fas 151 fas 151 amends guidance accounting research bulletin 43 chapter 4 “inventory pricing” clarify accounting inventory costs provisions statement effective fiscal years beginning june 15 2005 impact fas 151 material consolidated financial statements item 7aitem 7 managements discussion analysis financial condition results operations overview leading supplier products use water quality water safety water flow control water conservation markets north america europe presence asia 135 years designed manufactured products promote comfort safety people quality conservation water used commercial residential applications earn revenue income almost exclusively sale products principal product lines include •water quality products including backflow preventers check valves preventing reverse flow within water lines fire protection systems pointofuse pointofentry water filtration reverse osmosis systems commercial residential applications •a wide range water pressure regulators commercial residential applications •drainage products industrial commercial marine residential applications •water supply products commercial residential applications •temperature pressure relief valves water heaters boilers associated systems •thermostatic mixing valves tempering water commercial residential applications •systems underfloor radiant applications hydraulic pump groups gas boiler manufacturers renewable energy applications including solar heat pump control packages •flexible stainless steel connectors natural liquid propane gas commercial food service residential applications business reported three geographic segments north america europe china distribute products three primary distribution channels wholesale doityourself diy original equipment manufacturers oems interest rates indirect effect demand products due effect rates number new residential commercial construction starts remodeling projects three activities impact sales earnings additional factor effect sales fluctuation foreign currencies portion sales certain portions costs assets liabilities denominated currencies us dollar believe factors relating future growth include ability continue make selective acquisitions core markets well new complementary markets regulatory requirements relating quality conservation water increased demand clean water continued enforcement plumbing building codes healthy economic environment completed 32 acquisitions since divesting industrial oil gas business 1999 acquisition strategy focuses businesses manufacture preferred brand name products address themes water quality water conservation water safety water flow control related complementary markets target businesses provide us one following entry new markets increase shelf space existing customers new improved technology expansion breadth water quality water conservation water safety water flow control products residential commercial markets products representing majority sales subject regulatory standards code enforcement typically require products meet stringent performance criteria together commissioned manufacturers representatives consistently advocated development enforcement plumbing codes focused maintaining stringent quality control testing procedures manufacturing facilities order manufacture products compliance code requirements take advantage resulting demand compliant products believe product development product testing capability investment plant equipment needed manufacture products compliance code requirements represent barrier entry competitors believe long term increasing demand among consumers products ensure water quality creates growth opportunities products sales 2009 affected downward pressure weak us commercial construction marketplace addition us residential construction activity historically low levels continued see marked reductions european sales european economy migrated recession plant underabsorption negative foreign currency movements affected operating results 2009 foreign currency movements mainly related strengthening us dollar euro canadian dollar negatively affected 2009 diluted earnings per share 003 compared 2008 response concerns took numerous steps ensure remain firm fiscal platform latter half 2008 announced reduction united states workforce implemented tenmonth salary freeze north america initiated review discretionary spending order reduce operating expenses 2009 expanded cost savings programs worldwide basis initiated salary reductions worker furloughs cost reductions effort leverage costs anticipated lower sales volumes additionally february 2009 expanded accelerated restructuring program consolidate manufacturing footprint north america china savings program realized 2010 lastly continuing implementation lean manufacturing six sigma disciplines partially offset negative pressures operating income require substantial amounts raw materials produce products including bronze brass cast iron steel plastic components used products substantially raw materials require purchased outside sources experienced volatility costs certain raw materials particularly copper bronze brass copperbased alloys spot price copper 2009 increased approximately 1531 december 31 2008 typically carry several months inventory onhand primarily due significant extent international sourcing risk face ability deal effectively changes raw material costs manage risk monitoring related market prices working suppliers achieve maximum level stability costs related pricing seeking alternative supply sources necessary implementing cost reduction programs passing increases costs customers additionally time may use commodity futures contracts limited basis manage risk able predict whether long volatility continue another risk face areas business competition consider brand preference engineering specifications code requirements price technological expertise delivery times breadth product offerings primary competitive factors mentioned previously believe product development product testing capability investment plant equipment needed manufacture products compliance code requirements represent barrier entry competitors committed maintaining capital equipment level consistent current technologies thus spent approximately 242 million 2009 262 million 2008 september 2009 board directors approved sale investment watts valve changsha co ltd cwv completed sale cwv january 2010 additionally may 2009 liquidated team precision pipework ltd team subsidiary administration process united kingdom law fully described note 3 notes consolidated financial statements classified cwv teams results operations related losses discontinued operations periods presented recent developments february 9 2010 declared quarterly dividend eleven cents 011 per share outstanding share class common stock class b common stock february 8 2010 board directors approved restructuring program respect operating facilities france restructuring program expected include shutdown three facilities including two manufacturing sites one distribution center program expected include pretax charges totaling approximately 125 million including costs severance relocation cleanup certain asset writedowns result elimination approximately 95 positions total net aftertax charges restructuring program expected approximately 83 million 11 million noncash charges costs incurred 2011 expect spend approximately 66 million capital expenditures consolidate operations annual cash savings net tax estimated 39 million expect fully realize 2012 recorded aftertax charges approximately 30 million 008 per share fourth quarter 2009 severance costs related program february 8 2010 daniel j murphy iii one directors informed board decision stand reelection 2010 annual meeting stockholders held may 12 2010 mr murphy advised board decision made personal reasons result dispute disagreement us matter relating operations policies practices mr murphy currently serves member compensation committee nominating corporate governance committee corporate governance guidelines provide member board shall nominated board serve director passed 72nd birthday unless board voted waive mandatory retirement age person director timothy p horne member board pass 72nd birthday april 2010 prior 2010 annual meeting stockholders february 8 2010 mr horne advised board wish board waive mandatory retirement age corporate governance guidelines therefore mr horne also stand reelection 2010 annual meeting stockholders january 18 2010 david j coghlan promoted chief operating officer new role mr coghlan assume responsibility european operations addition continuing responsibilities operations north america asia mr coghlan served president north america asia since june 2008 results operations year ended december 31 2009 compared year ended december 31 2008 net sales business reported three geographic segments north america europe china net sales segments years ended december 31 2009 2008 follows change net sales attributable following organic decline net sales north america primarily due decreased unit sales plumbing heating backflow gas connector product lines organic sales north american wholesale market 2009 declined 179 compared 2008 primarily due decreased unit sales across product lines organic sales north american diy market 2009 increased 06 compared 2008 primarily due incremental product line penetration certain retail customers selected market share gains offset lower sales certain customers organic net sales declined europe primarily due decreased sales european wholesale oem markets sales european wholesale market 2009 decreased 135 sales european oem market decreased 157 compared 2008 primarily due markets italy germany soft acquired sales growth europe due inclusion blücher metal blücher acquired may 30 2008 organic net sales declined china primarily due decreased sales chinese export markets china sales also negatively affected compared 2008 disposal twt fourth quarter 2008 decreases net sales due foreign exchange north america europe primarily due depreciation canadian dollar euro respectively us dollar cannot predict whether currencies continue depreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact net sales gross profit gross profit gross profit percent net sales gross margin 2009 2008 follows gross profit declined due decreased sales volume partially offset increased gross margin gross margin increased 180 basis points 2009 compared 2008 primarily due lower raw material costs fewer acquisition charges european gross margin increased 2009 compared 2008 primarily due inclusion higher margin blücher sales reduced acquisition costs offset partially plant underabsorption china segments gross margin increased result operational improvements one significant facilities divestiture twt north american margin also increased 2009 compared last year due lower raw material costs cost savings initiatives offset recessionary unit volume sales declines plant absorption selling general administrative expenses selling general administrative expenses sga expenses 2009 decreased 321 million 90 compared 2008 decrease sga expenses attributable following organic decrease sga expenses primarily due decreased variable selling expenses due lower shipments various cost savings measures lower product liability costs net settlement two lawsuits partially offset increased legal pension expenses decrease sga expenses foreign exchange primarily due depreciation euro us dollar lesser extent canadian dollar us dollar increase sga expenses acquisitions due inclusion blücher reduction due disposal relates sale twt total sga expenses percentage sales 264 2009 compared 248 2008 restructuring charges 2009 recorded net charge 161 million primarily asset impairments severance relocation costs north america europe china included 2009 restructuring charges 11 million gain 2008 disposition twt gain deferred legal regulatory matters relating sale twt resolved 2008 recorded 56 million severance relocation costs north america china see note 4 notes consolidated financial statements annual report form 10k additional information regarding restructuring plans goodwill indefinitelived intangible asset impairment charges recorded 33 million 2009 intangible impairment charges related certain trademarks technology goodwill impairment charge 2008 approximately 220 million related water quality business unit north america see note 2 notes consolidated financial statements annual report form 10k additional information regarding impairments operating income operating income geographic segment 2009 2008 follows change operating income attributable following decrease consolidated organic operating income due primarily recessionary unit volume sales declines partially offset stronger gross margins lower raw material costs reductions variable sga expenses commissions shipping costs cost savings derived various cost reduction programs corporate costs increased due increased legal pension costs partially offset recovery past legal expenses blücher acquisition accounts net increase operating profits acquisitions chinas improved organic operating profit due operational improvements one significant facilities chinas operating profit disposal due divestiture twt net decrease operating income foreign exchange primarily due depreciation euro us dollar lesser extent canadian dollar us dollar cannot predict whether currencies appreciate depreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact operating income interest income interest income decreased 42 million 824 2009 compared 2008 decrease primarily result lower market interest rates interest expense interest expense decreased 42 million 160 2009 compared 2008 primarily due decrease average variable rates charged revolving credit facility reduction amounts outstanding revolving credit facility income expense decreased 107 million 2009 compared 2008 primarily foreign currency transactions resulted gains 2009 2008 losses realized result foreign currency movements primarily europe income taxes effective rate continuing operations increased 433 363 2009 2008 respectively increase primarily due previously realized tax benefits china expected recaptured result decision restructure operations intangible asset impairments tax deductible north america less tax exempt interest income generated 2009 compared 2008 net income continuing operations attributable watts water technologies inc net income continuing operations attributable watts water technologies inc 2009 410 million 110 per common share compared 452 million 123 per common share 2008 results 2009 included aftertax charges totaling 181 million 049 per share related restructuring programs compared aftertax charge 39 million 010 per share 2008 also results 2009 included noncash net aftertax charge 26 million 007 cents per share write certain intangible assets 2008 net loss continuing operations attributable watts water technologies inc included noncash aftertax charge 173 million 047 cents per share writeoff goodwill one reporting unit depreciation euro canadian dollar us dollar resulted negative impact operations 003 per common share 2009 compared last year cannot predict whether euro canadian dollar chinese yuan appreciate depreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact net income loss discontinued operations income loss discontinued operations primarily attributable deconsolidation team loss disposal loss operations cwv offset resolution james jones litigation described note 3 notes consolidated financial statements described part item 1 businessproduct liability environmental litigation matters year ended december 31 2008 compared year ended december 31 2007 net sales net sales segments years ended december 31 2008 2007 follows change net sales attributable following organic net sales 2008 decreased north america primarily due decreased sales wholesale market sales 25 lower 2007 unit sale declines due large part soft economy widespread across number product lines backflow product line impacted organic sales north american retail market 2008 remained relatively flat compared 2007 decreasing 06 unit sale reductions retail market due soft economy offset selected price increases new product rollouts growth north america due acquisitions due inclusion sales topway global inc topway acquired november 2007 organic net sales 2008 increased europe primarily due 110 increase sales european oem market compared 2007 oem sales positively affected germany sales products alternative energy conservation markets strong sales wholesale market 2008 decreased 45 compared 2007 negatively affected declines construction activity acquired sales growth europe due inclusion blücher seven months 2008 organic net sales 2008 declined china due decreased sales chinese domestic export markets china sales also negatively affected compared 2007 disposal commodity butterfly valve business fourth quarter 2008 decrease partially offset increase sales large diameter butterfly valves water infrastructure customers 2008 increases net sales due foreign exchange north america europe china primarily due appreciation canadian dollar euro yuan respectively us dollar gross profit gross profit gross profit percent net sales gross margin 2008 2007 follows gross margin improved 20 basis points 337 2008 compared 2007 improvement attributable primarily margin improvements north america europe offset declines china north americas margin improved 70 basis points 344 primarily due price increases implemented offset prior raw material cost increases lesser extent mix products sold north american gross margins 2007 negatively affected approximately 65 million approximately 100 basis points prior year gross margin charges associated product discontinuances change estimate workers compensation costs gross margin europe increased 328 314 primarily due ability leverage additional volume alternative energy product sales better factory absorption levels due rationalization efforts made last two years italy china gross margin deteriorated compared 2007 primarily due excess capacity due sales declines value added tax increases negative impact increase value chinese yuan us dollar disruptions plant move labor disputes selling general administrative expenses selling general administrative expenses sga expenses 2008 increased 286 million 87 compared 2007 increase sga expenses attributable following organic increase sga expenses primarily due increased incentive compensation costs increased variable european selling expenses due increased sales volumes partially offset decreased shipping costs variable north american selling expenses due decreased sales volumes increase sga expenses foreign exchange primarily due appreciation euro yuan canadian dollar us dollar increase sga expenses acquisitions due inclusion blücher topway total sga expenses percentage sales 248 2008 compared 241 2007 restructuring charges 2008 recorded 56 million severance asset writedowns accelerated depreciation north america china europe 2007 recorded 32 million asset writedowns accelerated depreciation severance north america china goodwill indefinitelived intangible asset impairment charges goodwill impairment charge 2008 approximately 220 million related water quality business unit north america see note 2 notes consolidated financial statements annual report form 10k additional information regarding impairment operating income operating income geographic segment 2008 2007 follows change operating income attributable following decrease consolidated organic operating income due primarily underutilization capacity china lesser extent north america caused recessionary unit volume declines oneoff events china labor strike plant move also sga expenses salaries product liability costs fixed spending increased items partially offset higher sales better productivity europe reductions certain sga expenses shipping pension costs bad debts corporate costs decreased result lower benefit costs including lower stockbased compensation reduced costs nonqualified deferred compensation plan lower costs related sarbanes oxley compliance efforts reduced legal costs blücher acquisition accounts net increase operating profits acquisitions net increase operating income foreign exchange primarily due appreciation euro us dollar interest income interest income decreased 94 million 648 2008 compared 2007 primarily due cash used fund blücher acquisition stock buyback program initiated november 2007 well lower interest rate environment 2008 compared 2007 interest expense interest expense decreased 09 million 33 2008 compared 2007 primarily due lower outstanding balances revolving credit facility partially offset increase average variable rates charged revolving credit facility income expense increased 72 million 3130 2008 compared 2007 primarily due foreign currency transaction losses metal commodity transactions negative changes asset valuation nonqualified deferred compensation plan foreign currency transaction losses increased china europe canada 2008 compared 2007 income taxes effective tax rate continuing operations increased 363 2008 332 2007 main driver increase goodwill impairment portion goodwill relates stock acquisitions impaired tax deductible european effective rate declined due provision releases favorable tax treatments related blücher acquisition financing net income continuing operations attributable watts water technologies inc net income continuing operations attributable watts water technologies inc 2008 decreased 305 million 403 452 million 123 per common share 757 million 194 per common share 2007 case diluted basis repurchased shares accretive impact 007 per common share 2008 income continuing operations included aftertax goodwill impairment charge 173 million 047 per common share 2008 income continuing operations 2007 included tax refund 19 million 005 per common share income continuing operations 2008 2007 included costs net tax restructuring plan reductioninforce product line discontinuances 39 million 010 per common share 51 million 013 per common share respectively appreciation euro chinese yuan canadian dollar us dollar resulted positive impact income continuing operations 007 per common share 2008 compared comparable period last year income discontinued operations income discontinued operations 2008 2007 primarily attributable operating income cwv team partially offset increased legal fees associated james jones litigation described part item 1 businessproduct liability environmental litigation matters liquidity capital resources 2009 generated 2046 million cash operating activities compared 1450 million 2008 generated approximately 1812 million free cash flow nongaap financial measure reconcile defined net cash provided continuing operating activities minus capital expenditures plus proceeds sale assets compares favorably free cash flow 1199 million 2008 free cash flow percentage net income continuing operations attributable watts water technologies inc 442 2009 compared 265 2008 primarily due better working capital management temporary decreases commodity costs cash containment measures careful monitoring capital spending 2009 used 213 million net cash investing activities primarily purchases capital equipment expect invest approximately 310 capital equipment 2010 part ongoing commitment improve manufacturing capabilities received proceeds 17 million sale auction rate securities received 11 million cash purchase price settlement related prioryear acquisition paid 04 million earnout payments related acquisition prior years december 31 2009 held 54 million investments auction reset feature auction rate securities ars total par value 66 million time purchase auction rate securities carried aaa credit rating auction rate securities longterm debt obligations secured municipal bonds student loans fourth quarter 2008 elected participate settlement offer ubs ag ubs terms settlement issued rights ubs right entitles holder sell underlying ars par ubs time period june 30 2010 july 2 2012 ubs could elect anytime settlement date july 2 2012 purchase ars par value rights valued 11 million december 31 2009 liquidity ars typically provided auction process allows holders sell notes resets applicable interest rate predetermined intervals usually every 7 35 days auction rate securities investment portfolio december 31 2009 experienced failed auctions assurance future auctions securities succeed classified investment ars ubs rights shortterm investments exercise right put ars ubs par earliest date possible used 772 million net cash financing activities 2009 primarily due payments debt dividend payments maintain 3500 million revolving credit facility syndicate banks support acquisition program working capital requirements general corporate purposes outstanding indebtedness revolving credit facility bears interest rate determined type loan plus applicable margin determined debt rating depending applicable base rate bond rating 2009 average interest rate revolving credit facility eurobased borrowings approximately 22 borrowings credit facility december 31 2009 covenant compliance revolving credit facility required satisfy maintain specified financial ratios financial condition tests december 31 2009 compliance covenants related revolving credit facility financial ratios include consolidated interest coverage ratio based consolidated earnings income taxes interest expense depreciation amortization consolidated ebitda consolidated interest expense defined revolving credit facility agreement revolving credit facility defines consolidated ebitda exclude unusual nonrecurring charges gains addition definition excludes charges gains associated certain discontinued operations also required maintain consolidated leverage ratio consolidated funded debt consolidated ebitda consolidated funded debt defined revolving credit facility agreement includes long shortterm debt capital lease obligations trade letters credit outstanding finally required maintain consolidated net worth exceeds minimum net worth calculation consolidated net worth defined total stockholders equity reported adjusted cumulative translation adjustments december 31 2009 actual financial ratios calculated accordance revolving credit facility compared required levels revolving credit facility follows december 31 2009 actual financial ratio calculated accordance senior note agreements compared required levels senior note agreements follows addition financial ratios revolving credit facility senior note agreements contain affirmative negative covenants include limitations disposition sale assets prohibitions assuming incurring liens assets limited exceptions limitations making investments permitted agreements several note agreements detailed note 11 notes consolidated financial statements note agreements require us maintain fixed charge coverage ratio consolidated ebitda plus consolidated rent expense period consolidated fixed charges consolidated fixed charges sum consolidated interest expense period consolidated rent expense december 31 2009 3144 million unused credit revolving credit facility 356 million standby letters credit outstanding revolving credit facility due primarily consolidated leverage ratio could borrow approximately 1085 million existing facility excluding standbyletters credit would violate one covenants used 212 million net cash operating activities discontinued operations 2009 primarily due settlement 153 million related james jones litigation addition separate settlement paid outside counsel additional 50 million services rendered connection litigation used 03 million net cash investing activities discontinued operations 2009 primarily due purchasing capital equipment working capital defined current assets less current liabilities december 31 2009 4898 million compared 4978 million december 31 2008 decrease primarily due reductions inventory accounts receivable classification 50 million 487 notes due may 2010 current liabilities offset increase cash although currently exploring alternatives refinancing notes ability pay debt available cash equivalents increased 2582 million december 31 2009 compared 1656 million december 31 2008 primarily due fewer acquisitions costs 2009 better working capital management ratio current assets current liabilities 26 1 december 31 2009 compared 27 1 december 31 2008 cash flows 2008 generated 1450 million cash operating activities compared 900 million 2007 managements enhanced focus 2008 working capital management net working capital cash outflows decreased 228 million 2007 net working capital cash inflow 455 million 2008 683 million positive change better overall management inventory accounts receivable accounts payable drove improvement working capital change offset extent lower income continuing operations used 1700 million net cash investing activities 2008 used approximately 1679 million net cash fund acquisition blücher spent 76 million acquisition costs related prior years acquisitions received proceeds 333 million sale auction rate securities invested 262 million capital equipment part ongoing commitment improve manufacturing capabilities used 924 million net cash financing activities 2008 primarily due payments stock repurchase program payments debt dividend payments partially offset increased borrowings line credit generated 08 million net cash operating activities discontinued operations 2008 primarily attributable team cwv partially offset approximately 12 million defense legal costs incurred james jones litigation also received 13 million reimbursements defense costs used 22 million net cash investing activities discontinued operations 2008 primarily due acquisition costs related team purchase capital equipment 2007 cash flows generated 900 million cash operating activities 2007 experienced increases inventory north america china increases primarily due increased raw material costs also decrease accounts payable accrued expenses liabilities primarily europe north america europe accounts payable declined 2007 due decline inventory north america payments cash compensation increased 2007 also cash payments cover income tax obligations greater 2007 accounts receivable decreased three segments used 847 million net cash investing activities 2007 invested 369 million capital equipment part ongoing commitment improve manufacturing capabilities invested 275 million auction rate securities used 181 million fund acquisition topway paid 32 million additional acquisition costs related prior years acquisitions used 665 million net cash financing activities 2007 primarily due payments debt payments stock repurchase program dividend payments partially offset increased borrowings line credit tax benefits exercise stock awards generated 18 million net cash operating activities discontinued operations 2007 primarily attributable cwv team paid approximately 05 million defense costs approximately 05 million legal costs incurred james jones litigation also received 10 million indemnity payments used 27 million net cash investing activities discontinued operations 2007 primarily due acquisition costs related cwv purchase capital equipment nongaap financial measures net debt capitalization ratio nongaap financial measure reconciled defined short longterm interestbearing liabilities less cash equivalents percentage sum short long term interestbearing liabilities less cash equivalents plus total stockholders equity decreased 99 2009 228 2008 decrease resulted decreased borrowings line credit increased cash believe free cash flow appropriate supplemental measure operating performance provides investors measure ability generate cash repay debt fund acquisitions may comparable companies may define free cash flow differently free cash flow represent cash generated operating activities accordance gaap therefore considered alternative net cash provided operations indication performance free cash flow also considered alternative net cash provided operations defined gaap reconciliation net cash provided continuing operations free cash flow provided net debt capitalization ratio also nongaap financial measure used management believes appropriate supplemental measure helps investors understand ability meet financing needs basis evaluate financial structure computation may comparable companies may define net debt capitalization differently reconciliation longterm debt including current portion net debt net debt capitalization ratio provided reconciliation capitalization provided contractual obligations contractual obligations december 31 2009 presented following table aas recognized consolidated balance sheet bexpected pension contributions include amounts fully fund defined benefit pension plan 2011 potential funding service costs beyond 2011 included contractual obligations costs currently estimated 5 million per year cassumes borrowings revolving credit facility dincludes commodity capital expenditure commitments benefits december 31 2009 maintain letters credit guarantee performance payment third parties accordance specified terms conditions amounts outstanding approximately 370 million december 31 2009 393 million december 31 2008 letters credit primarily associated insurance coverage lesser extent foreign purchases generally expire within one year issuance instruments may exist expire without drawn therefore necessarily represent future cash flow obligations offbalance sheet arrangements except operating lease commitments offbalance sheet arrangements reasonably likely current future effect financial condition changes financial condition revenues expenses results operations liquidity capital expenditures capital resources material investors application critical accounting policies key estimates preparation consolidated financial statements accordance us gaap requires management make judgments assumptions estimates affect amounts reported critical accounting estimate assumption highly uncertain matters could material effect consolidated financial statements another also reasonable amount used change estimate reasonably likely period base assumptions historical experience estimates believe reasonable circumstances actual results could differ significantly estimates changes accounting policies significant changes accounting estimates 2009 periodically discuss development selection disclosure estimates audit committee management believes following critical accounting policies reflect significant estimates assumptions revenue recognition recognize revenue following criteria met 1 entered binding agreement 2 product shipped title passed 3 sales price customer fixed determinable 4 collectability reasonably assured recognize revenue based upon determination criteria revenue recognition met based majority shipping terms considered occurred upon shipment finished product shipping terms require goods received customer title passes instances revenues recognized customer received goods record estimated reductions revenue customer returns allowances customer programs provisions returns allowances made time sale derived historical trends form portion allowance doubtful accounts customer programs primarily annual volume incentive plans allow customers earn credit attaining agreed upon purchase targets us record estimated reductions revenue made time sale customer programs based estimated purchase targets allowance doubtful accounts allowance doubtful accounts established represent best estimate net realizable value outstanding accounts receivable development allowance doubtful accounts varies region general based review past due amounts historical writeoff experience well aging trends affecting specific accounts general operational factors affecting accounts north america management specifically analyzes individual accounts receivable establishes specific reserves financially troubled customers addition factors developed utilizing historical trends bad debts returns allowances ratio factors sales rolling twelvemonth basis applied total outstanding receivables net accounts specifically identified establish reserve europe management develops bad debt allowance aging analysis accounts china management specifically analyzes individual accounts receivable establishes specific reserves needed along providing reserves based aging analysis uniformly consider current economic trends changes customer payment terms evaluating adequacy allowance doubtful accounts also aggressively monitor creditworthiness largest customers periodically review customer credit limits reduce risk circumstances relating specific customers change unanticipated changes occur general business environment estimates recoverability receivables could adjusted inventory valuation inventories stated lower cost market costs determined primarily firstin firstout basis utilize specific product identification historical product demand basis determining excess obsolete inventory reserve identify inventories exceed range one four years sales determined comparing current inventory balance unit sales trailing twelve months new products added inventory within past twelve months excluded analysis portion products contain recoverable materials therefore excess obsolete reserve established net recoverable amounts changes market conditions lowerthanexpected customer demand changes technology features could result additional obsolete inventory saleable could require additional inventory reserve provisions certain countries additional inventory reserves maintained potential shrinkage experienced manufacturing process reserve established based prior years inventory losses adjusted change gross inventory balance goodwill intangibles made numerous acquisitions years included recognition significant amount goodwill tested impairment annually frequently event circumstance indicates impairment loss may incurred application goodwill impairment test requires judgment including identification reporting units assignment assets liabilities reporting units determination fair value reporting unit 2008 2009 estimated fair value reporting units using income approach based present value estimated future cash flows believe approach yields appropriate evidence fair value reporting units easily compared corporations involved similar businesses intangible assets purchased technology generally recorded connection business acquisition values assigned intangible assets determined independent valuation firm based estimates judgments regarding expectations success life cycle products technology acquired october 25 2009 testing date determined seven reporting units continuing operations one goodwill review goodwill impairment utilizing twostep process first step impairment test requires comparison fair value reporting units respective carrying value carrying value reporting unit less fair value indication impairment exists second step performed carrying amount reporting unit higher fair value indication impairment may exist second step must performed second step impairment computed comparing implied fair value reporting units goodwill carrying amount goodwill carrying amount reporting units goodwill greater implied fair value goodwill impairment loss must recognized excess charged operations inherent development present value future cash flow projections assumptions estimates derived review operating results business plans expected growth rates cost capital tax rates also make certain assumptions future economic conditions market data develop assumptions based historical results including sales growth operating profits working capital levels tax rates believe discounted cash flow model sensitive selected discount rate use thirdparty valuation specialists help develop appropriate discount rates reporting unit use standard valuation practices arrive weighted average cost capital based market guideline public companies higher discount rate lower discounted cash flows believe estimates future cash flows reasonable different assumptions could significantly affect valuations result impairments future 2009 recognized noncash pretax charge approximately 33 million impairment indefinite lived intangible assets fourth quarter 2008 recognized aggregate noncash goodwill impairment charge 220 million related water quality business unit within north america segment charge reflected challenges residential construction cycle well broader economic credit environment october 25 2009 testing date approximately 4358 million goodwill balance sheet impairment testing indicated fair values reporting units exceeded carrying values thereby resulting impairment results impairment analysis summarized table underlying analyses supporting fair value assessment related outlook business longterm performance included key assumptions appropriate discount rate longterm growth rate connection october 25 2009 impairment test utilized discount rates ranging 113 15 longterm terminal growth rates 3 5 beyond planning periods product liability workers compensation costs retention requirements associated insurance policies generally selfinsured potential product liability claims workers compensation costs associated workplace accidents product liability cases us management estimates expected settlement costs utilizing loss reports provided thirdparty administrators well developing internal historical trend factors based specific claims experience management utilizes internal trend factors reflect final expected settlement costs countries maintain insurance coverage relatively high deductible payments product liability claims tend smaller experienced us changes nature claims actual settlement amounts could affect adequacy estimate require changes provisions liability estimate ultimate liability may less reported workers compensation liabilities us recognized claims incurred including claims incurred reported changes status individual case reserves time workers compensation claim filed liability estimated settle claim liability workers compensation claims determined based managements estimates nature severity claims based analysis provided thirdparty administrators various state statutes reserve requirements developed trend factors based specific claims experience discounted based riskfree interest rates countries workers compensation costs applicable maintain insurance coverage limited deductible payments liability estimate ultimate liability may less reported subject changes discount rates determine trend factors product liability workers compensation liabilities based consultation outside actuaries maintain excess liability insurance outside insurance carriers minimize risks related catastrophic claims excess selfinsured positions material change aforementioned factors could adverse impact operating results legal contingencies defendant numerous legal matters including involving environmental law product liability discussed detail part item 1 businessproduct liability environmental litigation matters required gaap determine whether estimated loss contingency accrued assessing whether loss deemed probable loss amount reasonably estimated net applicable insurance proceeds estimates potential outcomes contingencies developed consultation outside counsel assessment based upon available information litigation inherently uncertain actual liability fully resolve litigation cannot predicted assurance accuracy final resolution matters could possibly result significant effects results operations cash flows financial position pension benefits account pension plans accordance gaap involves recording liability asset based projected benefit obligation fair value plan assets assumptions made regarding valuation benefit obligations performance plan assets primary assumptions follows •weighted average discount ratethis rate used estimate current value future benefits rate adjusted based movement longterm interest rates •expected longterm rate return assetsthis rate used estimate future growth investments investment earnings expected return based upon combination historical market performance anticipated future returns portfolio reflecting mix equity debt investments indicative plan assets •rates increase compensation levelsthis rate used estimate projected annual pay increases used determine wage base used project employees pension benefits retirement determine assumptions based consultation outside actuaries investment advisors variance assumptions could significant impact future recognized pension costs assets liabilities income taxes estimate use expected annual effective income tax rates accrue income taxes effective tax rates determined based budgeted earnings taxes including best estimate permanent items affect effective rate year management periodically reviews rates outside tax advisors changes made material variances expectations identified recognize deferred taxes expected future consequences events reflected consolidated financial statements deferred tax assets liabilities determined based differences book values tax bases particular assets liabilities using tax rates effect years differences expected reverse valuation allowance provided offset net deferred tax assets based upon available evidence likely deferred tax assets realized consider estimated future taxable income ongoing prudent tax planning strategies assessing need valuation allowance new accounting standards october 2009 financial accounting standards board fasb issued accounting standard update improve disclosures related fair value measurements update require new disclosures significant transfers various fair value levels occur update require reconciliation fair value measurements using significant unobservable inputs level 3 prepared gross basis separately presenting information purchases sales issuance settlements addition update amend current disclosure requirements postretirement benefit plan assets update effective interim annual periods beginning december 15 2009 except disclosures regarding level 3 fair value measurements disclosures effective fiscal years beginning december 15 2010 interim periods within fiscal years evaluating impact update expect adoption material impact consolidated financial statements october 2009 fasb issued accounting standard update address accounting multipledeliverable arrangements specifically addressing separate deliverables measure allocate arrangement consideration one units accounting update established hierarchy determining selling price deliverable standard also expands disclosures relating entitys multipledeliverable revenue arrangements update effective prospectively arrangements entered materially modified fiscal years beginning june 15 2010 adoption update expected material impact consolidated financial statements june 2009 fasb issued new standard identifies sources accounting principles framework selecting principles used preparation financial statements presented conformity generally accepted accounting principles gaap united states gaap hierarchy standard also establishes fasb accounting standards codification asc source authoritative accounting principles recognized fasb applied preparation nongovernmental financial statements standard effective interim annual financial statements issued september 15 2009 adoption standard material impact consolidated financial statements june 2009 fasb issued new standard requires entity perform analysis determine whether variable interest interests give controlling financial interest statement also requires entity regularly reassess whether entity controlling financial interest variable interest interests statement also expand disclosures variable interest interests footnotes standard effective first annual reporting period beginning november 15 2009 well interim period therein adoption standard material impact consolidated financial statements june 2009 fasb issued new standard eliminates concept qualifying specialpurpose entity defined gaap literature statement also establishes stringent conditions reporting transfer portion financial asset sale changes initial measurement transferors interest transferred financial assets statement expands disclosures interim annual reports effective first annual reporting period beginning november 15 2009 adoption standard material impact consolidated financial statements item 7aitem 7 managements discussion analysis financial condition results operations overview leading supplier products use water quality water safety water flow control water conservation markets north america europe presence asia 136 years designed manufactured products promote comfort safety people quality conservation water used commercial residential applications earn revenue income almost exclusively sale products principal product lines include •water quality products including backflow preventers check valves preventing reverse flow within water lines fire protection systems pointofuse pointofentry water filtration reverse osmosis systems commercial residential applications •a wide range water pressure regulators commercial residential applications •drainage products commercial industrial marine residential applications •water supply products commercial residential applications •temperature pressure relief valves water heaters boilers associated systems •thermostatic mixing valves tempering water commercial residential applications •systems underfloor radiant applications hydraulic pump groups gas boiler manufacturers renewable energy applications including thermal control solar heat pump control packages •flexible stainless steel connectors natural liquid propane gas commercial food service residential applications business reported three geographic segments north america europe china distribute products three primary distribution channels wholesale doityourself diy original equipment manufacturers oems believe factors relating future growth include ability continue make selective acquisitions core markets well new complementary markets regulatory requirements relating quality conservation water safe use water increased demand clean water continued enforcement plumbing building codes healthy economic environment completed 34 acquisitions since divesting industrial oil gas business 1999 acquisition strategy focuses businesses manufacture preferred brand name products address themes water quality water conservation water safety water flow control related complementary markets target businesses provide us one following entry new markets increase shelf space existing customers new improved technology expansion breadth water quality water conservation water safety water flow control products commercial industrial residential markets products representing majority sales subject regulatory standards code enforcement typically require products meet stringent performance criteria together commissioned manufacturers representatives consistently advocated development enforcement plumbing codes focused maintaining stringent quality control testing procedures manufacturing facilities order manufacture products compliance code requirements take advantage resulting demand compliant products believe product development product testing capability investment plant equipment needed manufacture products compliance code requirements represent barrier entry competitors despite struggling commercial marketplace low residential activity foreign exchange headwinds able grow sales organically 4 grow income continuing operations 54 define organic sales growth increase decrease sales current period compared prior period excluding impact change foreign currency exchange excluding sales 1 current period business product line acquisitions included actual results operations less twelve months 2 prior period business product line divestitures included actual results operations twelvemonth period prior divestiture saw growth repair remodeling markets throughout year continued restructuring programs right size manufacturing footprint sustained continuous improvement initiatives gain productivity operations two major trends affected results 2010 stronger first half sales partially offset declines second half diy market north america oem market europe believe first half sales enhanced anticipated expiration home buying credit us minor inventory restocking within wholesale retail channels incremental leadfree compliant product sales california vermont started earnest fourth quarter 2009 stronger oem drain sales europe resulted heavier destocking customers fourth quarter 2009 sales grew organically 7 compared period 2009 first two quarters 2010 whereas experienced 5 organic sales increase third quarter 1 decline fourth quarter second major trend experienced 2010 increasing commodity costs especially copperbased materials spot price copper increased 332 december 31 2009 december 31 2010 productivity gains selective pricing able offset much commodity cost increase year progressed however gross margins negatively affected especially certain european markets announced plans increase pricing 2011 customers key markets reaction increased commodity costs number competitors also announced similar price increases able determine whether 2011 pricing initiatives successful marketplace continually review business implement restructuring plans needed recently announced plans us europe shut consolidate certain operations expect announced programs completed end 2011 please see note 4 notes consolidated financial statements detailed explanation restructuring activities march 2010 connection manufacturing footprint consolidation closed operations tianjin watts valve company ltd twvc relocated manufacturing facilities april 12 2010 signed definitive equity transfer agreement third party sell equity ownership remaining assets twvc sale expected finalized first quarter 2011 subject receiving applicable government approvals expect receive net proceeds approximately 59 million sale already received approximately 43 million deposits also time closing anticipate recognizing gain approximately 110 million 029 per share relating favorable tax adjustment favorable cumulative translation adjustment 2009 board directors approved sale watts valve changsha co ltd cwv subsidiary also liquidated team precision pipework ltd team subsidiary administration process united kingdom law fully described note 3 notes consolidated financial statements classified cwvs teams results operations related losses discontinued operations periods presented report acquisitions 2010 made two acquisitions estimated aggregate purchase price 361 million including estimated fair value contingent consideration also made payment approximately 05 million earnout previously acquired company april 13 2010 acquired 100 outstanding stock blue ridge atlantic enterprises inc brae located oakboro north carolina brae provider engineered rain water harvesting solutions addresses commercial industrial residential markets brae annual sales prior acquisition approximately 20 million june 28 2010 acquired outstanding stock austroflex rohrisoliersysteme gmbh austroflex austrianbased manufacturer preinsulated flexible pipe systems district heating solar applications underfloor radiant heating systems acquisition austroflex provides us full range preinsulated pex tubing preinsulated solar tubes underfloor heating insulation distribution capability positions us major supplier preinsulated pipe systems europe austroflex annual sales prior acquisition approximately 230 million results operations brae included north america segment results operations austroflex included europe segment since respective acquisition dates material consolidated financial statements recent developments february 9 2011 announced intention acquire danfoss socla related water control business danfoss announcement made response public disclosure related regulatory filings made german merger control authorities proposed acquisition subject signing definitive purchase agreement conditioned receipt customary regulatory approvals proposed purchase price expected range €115 million €120 million february 8 2011 declared quarterly dividend eleven cents 011 per share outstanding share class common stock class b common stock february 7 2011 board directors elected merilee raines serve member board directors ms raines also appointed board serve member audit committee nominating corporate governance committee board directors february 7 2011 kenneth j mcavoy one directors informed board decision stand reelection 2011 annual meeting stockholders held may 11 2011 mr mcavoy advised board decision made personal reasons result dispute disagreement us matter relating operations policies practices mr mcavoy currently serves member audit committee nominating corporate governance committee corporate governance guidelines provide member board shall nominated board serve director passed 72nd birthday unless board voted waive mandatory retirement age person director gordon w moran member board passed 72nd birthday therefore mr moran also stand reelection 2011 annual meeting stockholders january 26 2011 patrick okeefe resigned positions chief executive officer president director connection mr okeefes resignation entered separation agreement mr okeefe pursuant separation agreement mr okeefe continue employment us january 26 2011 august 3 2011 period receive greater either aggregate compensation 100000 shortterm disability benefits claim shortterm disability plan approved following termination mr okeefes employment us august 3 2011 mr okeefe entitled receive following payments benefits cash severance payment approximately 29 million equal two years mr okeefes 2010 annual salary plus two years bonus mr okeefes target bonus amount 2010 payable 50 initial lump sum payment within ten days august 3 2011 balance monthly installments following 24 months ii accelerated vesting unvested stock options restricted stock awards effective february 3 2011 extension time exercise shorter three years following mr okeefes termination date original term option modification options restricted stock awards result noncash charge approximately 30 million iii ancillary costs vacation auto professional fees total approximately 01 million total pretax costs separation agreement approximately 61 million recorded consolidated statement operations first quarter 2011 addition accordance provisions management stock purchase plan mr okeefe paid unvested portion including interest accrued dividends restricted stock units six months termination date total amount expected paid management stock purchase plan approximately 15 million january 26 2011 board directors appointed david j coghlan serve chief executive officer president member board directors january 4 2011 president united states signed reduction lead drinking water act reduce permissable weighted average lead content faucets fittings valves used potable water applications 8 025 nationwide effective january 2014 new law consistent current laws california vermont went effect january 2010 results operations year ended december 31 2010 compared year ended december 31 2009 net sales business reported three geographic segments north america europe china net sales segments years ended december 31 2010 2009 follows change net sales attributable following organic net sales 2010 north american wholesale market increased 61 compared 2009 increase primarily due increased unit sales plumbing heating backflow product lines organic sales north american diy market 2010 increased 25 compared 2009 primarily increased product sales volume associated repair remodeling activity new product introductions organic net sales increased european wholesale market 53 compared 2009 increase primarily due stronger repair remodeling market strong sales drain product line higher sales eastern europe organic sales european oem market 2010 essentially flat 2009 primarily due increased sales hydronic underfloor manifold packages offset heat pump solar packages whose lower sales driven renewable energy subsidies expired organic sales european diy market 2010 increased 64 compared 2009 primarily initial new store sales major retail customer net decrease sales due foreign exchange primarily due depreciation euro partially offset appreciation canadian dollar us dollar cannot predict whether currencies continue appreciate depreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact net sales acquired net sales growth europe north america due inclusion austroflex brae respectively gross profit gross profit gross profit percent net sales gross margin 2010 2009 follows gross margin increased 10 percentage point 2010 compared 2009 north americas gross margin improvement primarily attributable increased sales volumes better absorption factories productivity gains lean six sigma cost savings initiatives partially offset increased raw materials costs inefficiencies due relocation manufacturing operations related restructuring program us europes gross margin remained relatively flat better product mix discontinuance various lowmargin products increased sales volumes better absorption factories offset increased commodity costs inefficiencies restructuring program france selling general administrative expenses selling general administrative expenses sga expenses 2010 increased 132 million 41 compared 2009 increase sga expenses attributable following organic increase sga expenses primarily due increased personnelrelated costs due diligence acquisition costs including new enterprise resource planning system erp system related licensing costs legal costs increased variable selling expenses due higher sales volumes partially offset reduced product liability costs decrease sga expenses foreign exchange primarily due depreciation euro us dollar total sga expenses percentage sales remained constant 264 2010 2009 restructuring charges 2010 recorded charge 126 million primarily severance costs incurred part previously announced restructuring programs compared 161 million 2009 included 2009 restructuring charges 11 million gain 2008 disposition tianjin tanggu watts valve co ltd twt gain deferred legal regulatory matters relating sale twt resolved detailed description current restructuring plans see notes 4 5 notes consolidated financial statements annual report form 10k goodwill indefinitelived intangible asset impairment charges recorded 14 million 33 million 2010 2009 respectively intangible impairment charges related certain trademarks technology see note 2 notes consolidated financial statements annual report form 10k additional information regarding impairments operating income operating income geographic segment 2010 2009 follows change operating income attributable following increase consolidated organic operating income due primarily increased unit volume sales stronger gross margins partially offset increased sga expenses north america margin increase primarily due increased sales volumes better factory absorption levels impact cost savings initiatives 2009 corporate segment recorded recovery past legal expenses reoccur 2010 net decrease operating income foreign exchange primarily due depreciation euro us dollar partially offset appreciation canadian dollar us dollar cannot predict whether currencies appreciate depreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact operating income interest expense interest expense increased 08 million 36 2010 compared 2009 primarily due issuance 750 million senior notes higher facility fees new revolving credit agreement partially offset payment 500 million outstanding notes see note 11 notes consolidated financial statements annual report form 10k additional information regarding financing arrangements net increased 09 million 750 2010 compared 2009 primarily foreign currency transactions resulted net gains 2010 2009 net losses recognized income taxes effective tax rate continuing operations decreased 332 2010 433 2009 decrease primarily due reversal valuation allowance europe recorded 2010 also 2009 significant writedown assets one chinese facilities derived tax benefit additionally recorded reversal previously recognized tax benefits china 2009 chinarelated items recur 2010 favorable impact partially offset higher european taxes due mix income country recognition tax expense repatriation earnings twvc china upon decision dispose entity net income continuing operations attributable watts water technologies inc net income continuing operations 2010 631 million 169 per common share compared 410 million 110 per common share 2009 results 2010 include aftertax charge 112 million 029 per common share restructuring charges related primarily severance accelerated depreciation compared aftertax restructuring charge 181 million 049 per common share 2009 release valuation allowance net operating losses europe noted contributed tax benefit 008 per common share 2010 results 2010 2009 included noncash net aftertax charge 09 million 003 per share 26 million 007 per share respectively write certain intangible assets depreciation euro partially offset appreciation canadian dollar us dollar resulted negative impact operations 004 per common share 2010 compared comparable period 2009 cannot predict whether euro canadian dollar chinese yuan appreciate depreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact net income loss discontinued operations loss discontinued operations 2010 primarily attributable estimated profits disgorgement legal costs related fcpa investigation former subsidiary china loss discontinued operations 2009 primarily attributable deconsolidation team loss disposal loss operations cwv offset resolution james jones litigation described note 3 notes consolidated financial statements year ended december 31 2009 compared year ended december 31 2008 net sales net sales segments years ended december 31 2009 2008 follows change net sales attributable following organic decline net sales north america primarily due decreased unit sales plumbing heating backflow gas connector product lines organic sales north american wholesale market 2009 declined 179 compared 2008 primarily due decreased unit sales across product lines organic sales north american diy market 2009 increased 06 compared 2008 primarily due incremental product line penetration certain retail customers selected market share gains offset lower sales certain customers organic net sales declined europe primarily due decreased sales european wholesale oem markets sales european wholesale market 2009 decreased 135 sales european oem market decreased 157 compared 2008 primarily due markets italy germany soft acquired sales growth europe due inclusion blücher metal blücher acquired may 30 2008 organic net sales declined china primarily due decreased sales chinese export markets china sales also negatively affected compared 2008 disposal twt fourth quarter 2008 decreases net sales due foreign exchange north america europe primarily due depreciation canadian dollar euro respectively us dollar gross profit gross profit gross profit percent net sales gross margin 2009 2008 follows gross profit declined due decreased sales volume partially offset increased gross margin gross margin increased 180 basis points 2009 compared 2008 primarily due lower raw material costs fewer acquisition charges european gross margin increased 2009 compared 2008 primarily due inclusion higher margin blücher sales reduced acquisition costs offset partially plant underabsorption china segments gross margin increased result operational improvements one significant facilities divestiture twt north american margin also increased 2009 compared 2008 due lower raw material costs cost savings initiatives offset recessionary unit volume sales declines plant absorption selling general administrative expenses sga expenses 2009 decreased 321 million 90 compared 2008 decrease sga expenses attributable following organic decrease sga expenses primarily due decreased variable selling expenses due decreased sales various cost savings measures lower product liability costs net settlement two lawsuits partially offset increased legal pension expenses decrease sga expenses foreign exchange primarily due depreciation euro us dollar lesser extent canadian dollar us dollar increase sga expenses acquisitions due inclusion blücher reduction due disposal relates sale twt total sga expenses percentage sales 264 2009 compared 248 2008 restructuring charges 2009 recorded net charge 161 million primarily asset impairments severance relocation costs north america europe china included 2009 restructuring charges 11 million gain 2008 disposition twt gain deferred legal regulatory matters relating sale twt resolved 2008 recorded 56 million severance relocation costs north america china see note 4 notes consolidated financial statements annual report form 10k additional information regarding restructuring plans goodwill indefinitelived intangible asset impairment charges recorded 33 million 2009 intangible impairment charges related certain trademarks technology goodwill impairment charge 2008 approximately 220 million related water quality business unit north america see note 2 notes consolidated financial statements annual report form 10k additional information regarding impairments operating income operating income geographic segment 2009 2008 follows change operating income attributable following decrease consolidated organic operating income due primarily recessionary unit volume sales declines partially offset stronger gross margins lower raw material costs reductions variable sga expenses commissions shipping costs cost savings derived various cost reduction programs corporate costs increased due increased legal pension costs partially offset recovery past legal expenses blücher acquisition accounts net increase operating profits acquisitions chinas improved organic operating profit due operational improvements one significant facilities chinas operating profit disposal due divestiture twt net decrease operating income foreign exchange primarily due depreciation euro us dollar lesser extent canadian dollar us dollar interest income interest income decreased 42 million 824 2009 compared 2008 decrease primarily result lower market interest rates interest expense interest expense decreased 42 million 160 2009 compared 2008 primarily due decrease average variable rates charged revolving credit facility reduction amounts outstanding revolving credit facility income expense decreased 107 million 2009 compared 2008 primarily foreign currency transactions resulted gains 2009 2008 losses realized result foreign currency movements primarily europe income taxes effective rate continuing operations increased 433 2009 363 2008 increase primarily due previously realized tax benefits china expected recaptured result decision restructure operations intangible asset impairments tax deductible north america less taxexempt interest income generated 2009 compared 2008 net income continuing operations attributable watts water technologies inc net income continuing operations attributable watts water technologies inc 2009 410 million 110 per common share compared 452 million 123 per common share 2008 results 2009 included aftertax charges totaling 181 million 049 per share related restructuring programs compared aftertax charge 39 million 010 per share 2008 also results 2009 included noncash net aftertax charge 26 million 007 per share write certain intangible assets 2008 net loss continuing operations attributable watts water technologies inc included noncash aftertax charge 173 million 047 per share writeoff goodwill one reporting unit depreciation euro canadian dollar us dollar resulted negative impact operations 003 per common share 2009 compared 2008 income loss discontinued operations income loss discontinued operations primarily attributable deconsolidation team loss disposal loss operations cwv legal costs related fcpa investigation offset resolution james jones litigation described note 3 notes consolidated financial statements liquidity capital resources 2010 cash flows 2010 generated 1134 million cash operating activities compared 2046 million 2009 generated approximately 910 million free cash flow nongaap financial measure reconcile defined net cash provided continuing operating activities minus capital expenditures plus proceeds sale assets compared free cash flow 1812 million 2009 free cash flow percentage net income continuing operations attributable watts water technologies inc 1442 2010 compared 4420 2009 free cash flow results affected reduction investment accounts receivable inventory driven worldwide recession third consecutive year generated free cash flows excess net income 2010 used 572 million net cash investing activities primarily purchase austroflex capital equipment expect invest approximately 300 million capital equipment 2011 part ongoing commitment improve manufacturing capabilities elected participate settlement offer ubs ag ubs outstanding auction rate securities ars investments terms settlement offer issued rights ubs entitling holder require ubs purchase underlying ars par value period june 30 2010 july 2 2012 elected exercise right 2010 received 65 million ubs settlement outstanding ars investments addition 2010 invested ninemonth certificates deposits totaling approximately 40 million 2010 generated 69 million net cash financing activities primarily issuing 750 million 10year private placement notes june notes partially offset repayment 500 million private placement notes 164 million dividend payments notes issued pursuant note purchase agreement 2010 note purchase agreement pay interest outstanding balance notes rate 505 per annum payable semiannually june 18 december 18 principal notes shall become due payable may option upon notice subject terms 2010 note purchase agreement prepay time part notes amount less 1 million paying principal amount plus makewhole amount defined 2010 note purchase agreement 2010 note purchase agreement includes operational financial covenants required comply including among others maintenance certain financial ratios restrictions additional indebtedness liens dispositions events defaults 2010 note purchase agreement include failure comply financial operational covenants well bankruptcy insolvency events event default occurs continuing majority note holders right accelerate require us repay outstanding notes 2010 note purchase agreement limited circumstances acceleration automatic december 31 2010 compliance covenants related 2010 note purchase agreement june 18 2010 entered credit agreement credit agreement among company certain subsidiaries company become borrowers credit agreement bank america na administrative agent swing line lender letter credit issuer lenders referred therein credit agreement provides 300 million fiveyear senior unsecured revolving credit facility may increased additional 150 million certain circumstances subject terms credit agreement credit agreement sublimit 75 million letters credit borrowings outstanding credit agreement bear interest fluctuating rate per annum equal case eurocurrency rate loans british bankers association libor rate plus applicable percentage ranging 170 230 determined reference consolidated leverage ratio plus case certain lenders mandatory cost calculated accordance terms credit agreement ii case base rate loans swing line loans highest federal funds rate plus 05 b rate interest effect day announced bank america na prime rate c british bankers association libor rate plus 10 plus applicable percentage ranging 070 130 determined reference consolidated leverage ratio addition paying interest credit agreement also required pay certain fees connection credit facility including limited facility fee letter credit fees credit agreement matures june 18 2015 may repay loans outstanding credit agreement time without premium penalty customary breakage costs subject terms credit agreement covenant compliance credit agreement required satisfy maintain specified financial ratios financial condition tests financial ratios include consolidated interest coverage ratio based consolidated earnings income taxes interest expense depreciation amortization consolidated ebitda consolidated interest expense defined credit agreement credit agreement defines consolidated ebitda exclude unusual nonrecurring charges gains also required maintain consolidated leverage ratio consolidated funded debt consolidated ebitda consolidated funded debt defined credit agreement includes long shortterm debt capital lease obligations trade letters credit outstanding finally required maintain consolidated net worth exceeds minimum net worth calculation consolidated net worth defined total stockholders equity reported adjusted cumulative translation adjustments goodwill impairments december 31 2010 actual financial ratios calculated accordance credit agreement compared required levels credit agreement follows december 31 2010 actual financial ratio calculated accordance senior note agreements compared required ratios therein follows addition financial ratios credit agreement senior note agreements contain affirmative negative covenants include limitations disposition sale assets prohibitions assuming incurring liens assets limited exceptions limitations making investments permitted agreements several note agreements detailed note 11 notes consolidated financial statements note agreements require us maintain fixed charge coverage ratio consolidated ebitda plus consolidated rent expense period consolidated fixed charges consolidated fixed charges sum consolidated interest expense period consolidated rent expense december 31 2010 compliance covenants related credit agreement 2653 million unused available credit agreement 347 million standby letters credit outstanding credit agreement borrowings credit agreement december 31 2010 generated 55 million net cash operating activities discontinued operations 2010 primarily due realization tax deduction related james jones settlement generated 51 million net cash investing activities discontinued operations 2010 primarily cash received sale cwv working capital defined current assets less current liabilities december 31 2010 5784 million compared 4898 million december 31 2009 increase primarily due cash increase driven higher operating earnings net cash received debt issuance retirement ratio current assets current liabilities 31 1 december 31 2010 compared 26 1 december 31 2009 cash flows 2009 generated 2046 million cash operating activities compared 1450 million 2008 generated approximately 1812 million free cash flow compares favorably free cash flow 1199 million 2008 free cash flow percentage net income continuing operations attributable watts water technologies inc 4420 2009 compared 2653 2008 primarily due better working capital management temporary decreases commodity costs cost containment measures careful monitoring capital spending 2009 used 213 million net cash investing activities primarily purchases capital equipment received proceeds 17 million sale auction rate securities received 11 million cash purchase price settlement related prioryear acquisition paid 04 million earnout payments related acquisition prior years december 31 2009 held 54 million investments ars total par value 66 million auction rate securities longterm debt obligations secured municipal bonds student loans fourth quarter 2008 elected participate settlement offer ubs exercised rights settlement june 2010 previously discussed used 772 million net cash financing activities 2009 primarily due payments debt dividend payments used 212 million net cash operating activities discontinued operations 2009 primarily due settlement 153 million related james jones litigation addition separate settlement paid outside counsel additional 50 million services rendered connection litigation used 03 million net cash investing activities discontinued operations 2009 primarily due purchasing capital equipment 2008 cash flows 2008 generated 1450 million cash operating activities compared 900 million 2007 managements enhanced focus 2008 working capital management net working capital cash outflows decreased 228 million 2007 net working capital cash inflow 455 million 2008 683 million positive change better overall management inventory accounts receivable accounts payable drove improvement working capital change offset extent lower income continuing operations used 1700 million net cash investing activities 2008 used approximately 1679 million net cash fund acquisition blücher spent 76 million acquisition costs related prior years acquisitions received proceeds 333 million sale auction rate securities invested 262 million capital equipment part ongoing commitment improve manufacturing capabilities used 924 million net cash financing activities 2008 primarily due payments stock repurchase program payments debt dividend payments partially offset increased borrowings line credit generated 08 million net cash operating activities discontinued operations 2008 primarily attributable team cwv partially offset approximately 12 million defense legal costs incurred james jones litigation also received 13 million reimbursements defense costs used 22 million net cash investing activities discontinued operations 2008 primarily due acquisition costs related team purchase capital equipment nongaap financial measures net debt capitalization ratio nongaap financial measure reconciled defined short longterm interestbearing liabilities less cash equivalents percentage sum short long term interestbearing liabilities less cash equivalents plus total stockholders equity decreased 52 2010 99 2009 decrease resulted increased cash partially offset increased longterm debt believe free cash flow appropriate supplemental measure operating performance provides investors measure ability generate cash repay debt fund acquisitions companies may define free cash flow differently free cash flow represent cash generated operating activities accordance gaap therefore considered alternative net cash provided operations indication performance free cash flow also considered alternative net cash provided operations defined gaap cash conversion rate free cash flow net income continuing operations also measure performance cash flow generation reconciliation net cash provided continuing operations free cash flow calculation cash conversion rate provided 2009 free cash flow results driven worldwide recession caused reduction investment accounts receivable inventory net debt capitalization ratio also nongaap financial measure used management believes appropriate supplemental measure helps investors understand ability meet financing needs basis evaluate financial structure computation may comparable companies may define net debt capitalization differently reconciliation longterm debt including current portion net debt net debt capitalization ratio provided reconciliation capitalization provided contractual obligations contractual obligations december 31 2010 presented following table aas recognized consolidated balance sheet bexpected pension contributions include amounts fully fund defined benefit pension plan 2012 potential funding service costs beyond 2012 included contractual obligations costs currently estimated 50 million per year cassumes borrowings credit agreement dincludes commodity capital expenditure commitments benefits december 31 2010 maintain letters credit guarantee performance payment third parties accordance specified terms conditions amounts outstanding approximately 349 million december 31 2010 370 million december 31 2009 letters credit primarily associated insurance coverage lesser extent foreign purchases generally expire within one year issuance instruments may exist expire without drawn therefore necessarily represent future cash flow obligations offbalance sheet arrangements except operating lease commitments offbalance sheet arrangements reasonably likely current future effect financial condition changes financial condition revenues expenses results operations liquidity capital expenditures capital resources material investors application critical accounting policies key estimates preparation consolidated financial statements accordance us gaap requires management make judgments assumptions estimates affect amounts reported critical accounting estimate assumption highly uncertain matters could material effect consolidated financial statements another also reasonable amount used change estimate reasonably likely period base assumptions historical experience estimates believe reasonable circumstances actual results could differ significantly estimates changes accounting policies significant changes accounting estimates 2010 periodically discuss development selection disclosure estimates audit committee management believes following critical accounting policies reflect significant estimates assumptions revenue recognition recognize revenue following criteria met 1 entered binding agreement 2 product shipped title passed 3 sales price customer fixed determinable 4 collectability reasonably assured recognize revenue based upon determination criteria revenue recognition met based majority shipping terms considered occurred upon shipment finished product shipping terms require goods received customer title passes instances revenues recognized customer received goods record estimated reductions revenue customer returns allowances customer programs provisions returns allowances made time sale derived historical trends form portion allowance doubtful accounts customer programs primarily annual volume incentive plans allow customers earn credit attaining agreed upon purchase targets us record estimated reductions revenue made time sale customer programs based estimated purchase targets allowance doubtful accounts allowance doubtful accounts established represent best estimate net realizable value outstanding accounts receivable development allowance doubtful accounts varies region general based review past due amounts historical writeoff experience well aging trends affecting specific accounts general operational factors affecting accounts north america management specifically analyzes individual accounts receivable establishes specific reserves financially troubled customers addition factors developed utilizing historical trends bad debts returns allowances ratio factors sales rolling twelvemonth basis applied total outstanding receivables net accounts specifically identified establish reserve europe management develops bad debt allowance aging analysis accounts china management specifically analyzes individual accounts receivable establishes specific reserves needed along providing reserves based aging analysis uniformly consider current economic trends changes customer payment terms evaluating adequacy allowance doubtful accounts also aggressively monitor creditworthiness largest customers periodically review customer credit limits reduce risk circumstances relating specific customers change unanticipated changes occur general business environment estimates recoverability receivables could adjusted inventory valuation inventories stated lower cost market costs determined primarily firstin firstout basis utilize specific product identification historical product demand basis determining excess obsolete inventory reserve identify inventories exceed range one four years sales determined comparing current inventory balance unit sales trailing twelve months new products added inventory within past twelve months excluded analysis portion products contain recoverable materials therefore excess obsolete reserve established net recoverable amounts changes market conditions lowerthanexpected customer demand changes technology features could result additional obsolete inventory saleable could require additional inventory reserve provisions certain countries additional inventory reserves maintained potential shrinkage experienced manufacturing process reserve established based prior years inventory losses adjusted change gross inventory balance goodwill intangibles made numerous acquisitions years included recognition significant amount goodwill tested impairment annually frequently event circumstance indicates impairment loss may incurred application goodwill impairment test requires judgment including identification reporting units assignment assets liabilities reporting units determination fair value reporting unit 2010 estimated fair value reporting units using weighting income approach based present value estimated future cash flows market approach using guideline companies selected transactions believe approach yields appropriate evidence fair value reporting units easily compared corporations involved similar businesses intangible assets purchased technology generally recorded connection business acquisition values assigned intangible assets determined independent valuation firm based estimates judgments regarding expectations success life cycle products technology acquired october 31 2010 testing date determined eight reporting units continuing operations one goodwill one acquired 2010 since acquired brae april 2010 estimated fair value brae derived fair value date acquisition closed six months prior testing date review goodwill impairment utilizing twostep process first step impairment test requires comparison fair value reporting units respective carrying value carrying value reporting unit less fair value indication impairment exists second step performed carrying amount reporting unit higher fair value indication impairment may exist second step must performed second step impairment computed comparing implied fair value reporting units goodwill carrying amount goodwill carrying amount reporting units goodwill greater implied fair value goodwill impairment loss must recognized excess charged operations inherent development present value future cash flow projections assumptions estimates derived review operating results business plans expected growth rates cost capital tax rates also make certain assumptions future economic conditions market data develop assumptions based historical results including sales growth operating profits working capital levels tax rates believe discounted cash flow model sensitive selected discount rate use thirdparty valuation specialists help develop appropriate discount rates reporting unit use standard valuation practices arrive weighted average cost capital based market guideline public companies higher discount rate lower discounted cash flows believe estimates future cash flows reasonable different assumptions could significantly affect valuations result impairments future 2010 2009 recognized noncash pretax charges approximately 14 million 33 million respectively impairment indefinitelived intangible assets fourth quarter 2008 recognized aggregate noncash goodwill impairment charge 220 million related water quality conditioning reporting unit within north america segment charge reflected challenges residential construction cycle well broader economic credit environment october 31 2010 testing date approximately 4388 million goodwill balance sheet impairment testing indicated fair values reporting units exceeded carrying values thereby resulting impairment results impairment analysis summarized table underlying analyses supporting fair value assessment related outlook business longterm performance included key assumptions appropriate discount rate longterm growth rate connection october 31 2010 impairment test utilized discount rates ranging 115 150 longterm terminal growth rates 3 5 beyond planning periods orion reporting units operating results hindered downturn commercial institutional end markets us orion sells majority products orions sales decline commercial marketplace deteriorates current expectations reporting units goodwill may risk impairment future orions goodwill balance december 31 2010 246 million october 31 2010 last impairment analysis date fair value orion reporting unit exceeded carrying value 17 product liability workers compensation costs retention requirements associated insurance policies generally selfinsured potential product liability claims workers compensation costs associated workplace accidents product liability cases us management estimates expected settlement costs utilizing loss reports provided thirdparty administrators well developing internal historical trend factors based specific claims experience management utilizes internal trend factors reflect final expected settlement costs countries maintain insurance coverage relatively high deductible payments product liability claims tend smaller experienced us changes nature claims actual settlement amounts could affect adequacy estimate require changes provisions liability estimate ultimate liability may less reported workers compensation liabilities us recognized claims incurred including claims incurred reported changes status individual case reserves time workers compensation claim filed liability estimated settle claim liability workers compensation claims determined based managements estimates nature severity claims based analysis provided thirdparty administrators various state statutes reserve requirements developed trend factors based specific claims experience discounted based riskfree interest rates countries workers compensation costs applicable maintain insurance coverage limited deductible payments liability estimate ultimate liability may less reported subject changes discount rates determine trend factors product liability workers compensation liabilities based consultation outside actuaries maintain excess liability insurance outside insurance carriers minimize risks related catastrophic claims excess selfinsured positions material change aforementioned factors could adverse impact operating results legal contingencies defendant numerous legal matters including involving environmental law product liability discussed detail part item 1 businessproduct liability environmental litigation matters required gaap determine whether estimated loss contingency accrued assessing whether loss deemed probable loss amount reasonably estimated net applicable insurance proceeds estimates potential outcomes contingencies developed consultation outside counsel assessment based upon available information litigation inherently uncertain actual liability fully resolve litigation cannot predicted assurance accuracy final resolution matters could possibly result significant effects results operations cash flows financial position pension benefits account pension plans accordance gaap involves recording liability asset based projected benefit obligation fair value plan assets assumptions made regarding valuation benefit obligations performance plan assets primary assumptions follows •weighted average discount ratethis rate used estimate current value future benefits rate adjusted based movement longterm interest rates •expected longterm rate return assetsthis rate used estimate future growth investments investment earnings expected return based upon combination historical market performance anticipated future returns portfolio reflecting mix equity debt investments indicative plan assets •rates increase compensation levelsthis rate used estimate projected annual pay increases used determine wage base used project employees pension benefits retirement determine assumptions based consultation outside actuaries investment advisors variance assumptions could significant impact future recognized pension costs assets liabilities income taxes estimate use expected annual effective income tax rates accrue income taxes effective tax rates determined based budgeted earnings taxes including best estimate permanent items affect effective rate year management periodically reviews rates outside tax advisors changes made material variances expectations identified recognize deferred taxes expected future consequences events reflected consolidated financial statements deferred tax assets liabilities determined based differences book values tax bases particular assets liabilities using tax rates effect years differences expected reverse valuation allowance provided offset net deferred tax assets based upon available evidence likely deferred tax assets realized consider estimated future taxable income ongoing prudent tax planning strategies assessing need valuation allowance new accounting standards october 2009 financial accounting standards board fasb issued accounting standard update improve disclosures related fair value measurements update requires new disclosures significant transfers various fair value levels occur update requires reconciliation fair value measurements using significant unobservable inputs level 3 prepared gross basis separately presenting information purchases sales issuance settlements addition update amends current disclosure requirements postretirement benefit plan assets update effective interim annual periods beginning december 15 2009 except disclosures regarding level 3 fair value measurements disclosures effective fiscal years beginning december 15 2010 interim periods within fiscal years adoption standard material impact consolidated financial statements item 7aitem 7 managements discussion analysis financial condition results operations overview leading supplier products use water quality water safety water flow control water conservation markets north america europe presence asia 137 years designed manufactured products promote comfort safety people quality conservation water used commercial residential applications earn revenue income almost exclusively sale products principal product lines include •residential commercial flow control productsincludes products typically sold plumbing hot water applications backflow preventers water pressure regulators temperature pressure relief valves thermostatic mixing valves •hvac gas productsincludes hydronic electric heating systems underfloor radiant applications hydronic pump groups boiler manufacturers alternative energy control packages flexible stainless steel connectors natural liquid propane gas commercial food service residential applications hvac acronym heating ventilation air conditioning •drains water reuse productsincludes drainage products engineered rain water harvesting solutions commercial industrial marine residential applications •water quality productsincludes pointofuse pointofentry water filtration conditioning scale prevention systems commercial residential applications business reported three geographic segments north america europe asia distribute products three primary distribution channels wholesale doityourself diy original equipment manufacturers oems believe factors relating future growth include ability continue make selective acquisitions core markets well new complementary markets regulatory requirements relating quality conservation water safe use water increased demand clean water continued enforcement plumbing building codes healthy economic environment completed 36 acquisitions since divesting industrial oil gas business 1999 acquisition strategy focuses businesses manufacture preferred brand name products address themes water quality water conservation water safety water flow control related complementary markets target businesses provide us one following entry new markets increase shelf space existing customers new improved technology expansion breadth water quality water conservation water safety water flow control products commercial industrial residential markets products representing majority sales subject regulatory standards code enforcement typically require products meet stringent performance criteria together commissioned manufacturers representatives consistently advocated development enforcement plumbing codes focused maintaining stringent quality control testing procedures manufacturing facilities order manufacture products compliance code requirements take advantage resulting demand compliant products believe product development product testing capability investment plant equipment needed manufacture products compliance code requirements represent competitive advantage us 2011 experienced many macro challenges affected business previous year commercial marketplace continued struggle saw low residential activity commodity prices remained volatile despite challenging end markets able grow sales organically 23 grow income continuing operations 25 organic sales growth excludes impacts acquisitions divestitures foreign exchange yearoveryear comparisons believe provides investors complete understanding underlying sales trends providing sales growth consistent basis continued restructuring programs right size manufacturing footprint sustained continuous improvement initiatives gain productivity operations performance improved 2011 progressed first half 2011 increases cost copper reduced margins high copper content products encountered operational inefficiencies result french restructuring efforts copper costs increased later portion 2010 early 2011 reaching alltime high april 2011 able balance commodity costs price increases midyear providing better results second half 2011 general successful north america europe passing price increases end customers year europe continues experience uncertainties regarding economy driven largely sovereign debt concerns believe economic uncertainty affecting competitors pricing end markets believe price increases may continue difficult achieve many european markets 2012 copper costs abated somewhat second half 2011 begun trend upward early february 2012 announced selected price increases 2012 certain markets cannot determine whether initiatives successful marketplace continually review business implement restructuring plans needed recently completed restructuring projects us europe shut consolidated certain operations please see note 4 notes consolidated financial statements detailed explanation restructuring activities march 2010 connection manufacturing footprint consolidation closed operations tianjin watts valve company ltd twvc relocated manufacturing facilities north america china april 12 2010 signed definitive equity transfer agreement third party sell equity ownership remaining assets twvc sale finalized fourth quarter 2011 received net proceeds approximately 61 million sale recognized net pretax gain 77 million aftertax gain approximately 114 million 030 per share relating mainly favorable cumulative translation adjustment tax benefit related reversal china tax clawback 2009 board directors approved sale watts valve changsha co ltd cwv subsidiary also liquidated team precision pipework ltd team subsidiary administration process united kingdom law fully described note 3 notes consolidated financial statements classified cwvs teams results operations related losses discontinued operations periods presented report acquisitions april 29 2011 company completed acquisition danfoss socla sas socla related water controls business certain entities controlled danfoss share asset purchase transaction aggregate consideration paid eur 1200 million less eur 37 million working capital related adjustments net purchase price eur 1163 million financed cash hand eurobased borrowings credit agreement net purchase price equal approximately 1724 million based exchange rate euro us dollars april 29 2011 socla manufacturer water protection valves flow control solutions water market heating ventilation air conditioning market major product lines include backflow preventers check valves pressure reducing valves socla based france products distributed worldwide commercial residential municipal industrial use soclas annual revenue 2010 approximately 1300 million socla strengthens companys european residential commercial plumbing flow control products also adds hvac products recent developments january 31 2012 completed acquisition tekmar control systems tekmar share purchase transaction designer manufacturer control systems used heating ventilation air conditioning applications tekmar expected enhance hydronic systems product offerings us canada initial purchase paid cad 180 million earnout based future earnings levels achieved total purchase price exceed cad 262 million sales tekmar 2011 approximated cad 110 million february 7 2012 declared quarterly dividend eleven cents 011 per share outstanding share class common stock class b common stock results operations year ended december 31 2011 compared year ended december 31 2010 net sales business reported three geographic segments north america europe asia net sales segments years ended december 31 2011 2010 follows change net sales attributable following organic net sales 2011 north american wholesale market increased 266 million 43 compared 2010 increase primarily due improved recovery commodity costs across four principal product lines larger increases residential commercial products sales approximately 160 million drains water reuse products approximately 57 million organic sales north american diy market 2011 decreased 44 million 26 compared 2010 primarily due decreased product sales approximating 43 million mostly residential commercial products organic net sales increased european wholesale market 28 million 10 compared 2010 wholesale sales increased marginally due stronger sales drains preinsulated pipe products along increased sales eastern europe geographic expansion middle east increases offset partially lower unit sales southern europe especially italian marketplace organic sales european oem market 2011 increased 92 million 49 compared 2010 primarily due increased sales hydronic underfloor manifold packages offset lower sales heat pump solar packages driven renewable energy subsidies either reduced expired net increase sales due foreign exchange primarily due appreciation euro canadian dollar us dollar cannot predict whether currencies continue appreciate depreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact net sales acquired net sales europe related socla austroflex rohrisoliersysteme gmbh austroflex acquisitions north america due socla blue ridge atlantic enterprises inc brae acquisitions gross profit gross profit gross profit percent net sales gross margin 2011 2010 follows gross margin decreased 06 percentage points 2011 compared 2010 variety reasons first unable completely recover commodity cost increases europe north american diy market second incurred acquisition accounting adjustments 47 million connection socla acquisition third experienced inefficiencies first half 2011 french plant consolidation project completed fourth productivity initiatives offset extent higher inbound freight costs selling general administrative expenses selling general administrative expenses sga expenses 2011 increased 432 million 128 compared 2010 increase sga expenses attributable following organic increase sga expenses primarily due separation costs former ceo 63 million increase approximately 44 million variable selling costs due increase yearoveryear sales increase costs approximately 30 million due primarily implementation new enterprise resource planning system erp system licensing costs offset approximately 70 million lower legal costs increase sga expenses foreign exchange primarily due appreciation euro us dollar acquired sga costs related socla austroflex brae acquisitions total sga expenses percentage sales remained constant 264 2011 2010 restructuring charges 2011 recorded net charge 88 million primarily severance costs incurred part previously announced restructuring programs compared 126 million 2010 detailed description current restructuring plans see notes 4 5 notes consolidated financial statements annual report form 10k goodwill longlived asset impairment charges 2011 recorded asset impairment charges 174 million including 148 million impairment charges longlived assets austroflex 14 million goodwill longlived intangible asset impairments brae 12 million impairment charges certain european trade names longlived asset goodwill impairments based historical results expectations uncertain economic conditions europe related austroflex reduction expected future cash flows generated entities 2010 impairment charges 14 million relate writedowns certain trade names europe see note 2 notes consolidated financial statements annual report form 10k additional information regarding impairments gain disposal business 2011 recorded net gain approximately 77 million relating primarily recognition currency translation adjustments resulting sale twvc operating income operating income geographic segment 2011 2010 follows change operating income attributable following decrease consolidated organic operating income due primarily reduction gross margins increase sga expenses reasons discussed acquired operating income relates socla austroflex brae acquisitions net increase operating income foreign exchange primarily due appreciation euro canadian dollar us dollar cannot predict whether currencies appreciate depreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact operating income interest expense interest expense increased 30 million 132 2011 compared 2010 primarily due increase amounts outstanding year revolving credit facility used partially finance socla acquisition interest incurred 2011 june 2010 issuance 750 million senior notes see note 11 notes consolidated financial statements annual report form 10k additional information regarding financing arrangements net increased 29 million 2011 compared 2010 primarily foreign currency transactions resulted net losses 2011 2010 net gains recognized income taxes effective rate continuing operations decreased 293 2011 332 2010 primary cause decrease due tax benefit realized connection disposition twvc facility china net income continuing operation net income continuing operations 2011 647 million 173 per common share compared 631 million 169 per common share 2010 results 2011 include aftertax charge 66 million 018 per common share restructuring charges compared aftertax restructuring charge 112 million 029 per common share 2010 additionally 2011 results include aftertax charge 39 million 011 per common share related former chief executive officers separation agreement results 2011 include aftertax charge 130 million 035 per common share goodwill asset impairment charges compared aftertax asset impairment charge 12 million 003 per common share 2010 results 2011 include aftertax gain related sale twvc 114 million 030 per common share appreciation euro canadian dollar us dollar 2011 resulted positive impact operations 007 per common share 2011 compared 2010 cannot predict whether euro canadian dollar chinese yuan appreciate depreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact net income loss discontinued operations income discontinued operations 2011 primarily attributable reserve adjustment 17 million 005 per common share related fcpa investigation originally recorded 2010 adjustment reflects final disposition fcpa investigation see notes 3 14 notes consolidated financial statements additional discussion matter year ended december 31 2010 compared year ended december 31 2009 net sales net sales segments years ended december 31 2010 2009 follows change net sales attributable following organic net sales 2010 north american wholesale market increased 346 million 61 compared 2009 increase primarily due increased unit sales plumbing heating backflow product lines organic sales north american diy market 2010 increased 42 million 25 compared 2009 primarily increased product sales volume associated repair remodeling activity new product introductions organic net sales increased european wholesale market 129 million 53 compared 2009 increase primarily due stronger repair remodeling market strong sales drain product line higher sales eastern europe organic sales european oem market 2010 essentially flat 2009 primarily due increased sales hydronic underfloor manifold packages offset heat pump solar packages whose lower sales driven renewable energy subsidies expired organic sales european diy market 2010 increased 15 million 64 compared 2009 primarily initial new store sales major retail customer net decrease sales due foreign exchange primarily due depreciation euro partially offset appreciation canadian dollar us dollar acquired net sales growth europe north america due inclusion austroflex brae respectively gross profit gross profit gross margin 2010 2009 follows gross margin increased 10 percentage point 2010 compared 2009 north americas gross margin improvement primarily attributable increased sales volumes better absorption factories productivity gains lean six sigma cost savings initiatives partially offset increased raw materials costs inefficiencies due relocation manufacturing operations related restructuring program us europes gross margin remained relatively flat result better product mix discontinuance various lowmargin products increased sales volumes better absorption factories offset increased commodity costs inefficiencies restructuring program france selling general administrative expenses sga expenses 2010 increased 132 million 41 compared 2009 increase sga expenses attributable following organic increase sga expenses primarily due legal due diligence acquisition costs 81 million increased personnelrelated costs 44 million increased variable selling expenses due higher sales volumes 34 million partially offset reduced product liability costs 35 million legal costs higher 2010 result legal settlement entered 2009 pursuant received 41 million reduced legal expense decrease sga expenses foreign exchange primarily due depreciation euro us dollar total sga expenses percentage sales remained constant 264 2010 2009 restructuring charges 2010 recorded charge 126 million primarily severance costs incurred part previously announced restructuring programs compared 172 million 2009 included 2009 restructuring charges 11 million gain 2008 disposition tianjin tanggu watts valve co ltd twt gain deferred legal regulatory matters relating sale twt resolved detailed description current restructuring plans see notes 4 5 notes consolidated financial statements annual report form 10k goodwill longlived asset impairment charges recorded 14 million 33 million 2010 2009 respectively intangible impairment charges related certain trademarks technology see note 2 notes consolidated financial statements annual report form 10k additional information regarding impairments operating income operating income geographic segment 2010 2009 follows change operating income attributable following increase consolidated organic operating income due primarily increased unit volume sales stronger gross margins partially offset increased sga expenses north america margin increase primarily due increased sales volumes better factory absorption levels impact cost savings initiatives 2009 corporate segment recorded recovery past legal expenses recur 2010 net decrease operating income foreign exchange primarily due depreciation euro us dollar partially offset appreciation canadian dollar us dollar interest expense interest expense increased 08 million 36 2010 compared 2009 primarily due issuance 750 million senior notes higher facility fees revolving credit agreement partially offset payment 500 million outstanding notes see note 10 notes consolidated financial statements annual report form 10k additional information regarding financing arrangements net increased 09 million 750 2010 compared 2009 primarily foreign currency transactions resulted net gains 2010 2009 net losses recognized income taxes effective tax rate continuing operations decreased 332 2010 433 2009 decrease primarily due reversal valuation allowance europe recorded 2010 also 2009 significant writedown assets one china facilities derived tax benefit additionally recorded reversal previously recognized tax benefits china 2009 chinarelated items recur 2010 favorable impact partially offset higher european taxes due mix income country recognition tax expense repatriation earnings twvc china upon decision dispose entity net income continuing operations net income continuing operations 2010 631 million 169 per common share compared 410 million 110 per common share 2009 results 2010 include aftertax charge 112 million 029 per common share restructuring charges related primarily severance accelerated depreciation compared aftertax restructuring charge 181 million 049 per common share 2009 release valuation allowance net operating losses europe noted contributed tax benefit 008 per common share 2010 results 2010 2009 included noncash net aftertax charge 09 million 003 per share 26 million 007 per share respectively write certain intangible assets depreciation euro partially offset appreciation canadian dollar us dollar resulted negative impact operations 004 per common share 2010 compared comparable period 2009 income loss discontinued operations loss discontinued operations 2010 primarily attributable estimated profits disgorgement legal costs related fcpa investigation former subsidiary china loss discontinued operations 2009 primarily attributable deconsolidation team loss disposal loss operations cwv offset resolution james jones litigation described note 3 notes consolidated financial statements liquidity capital resources 2011 cash flows 2011 generated 1282 million cash operating activities compared 1134 million 2010 generated approximately 1063 million free cash flow nongaap financial measure reconcile defined net cash provided continuing operating activities minus capital expenditures plus proceeds sale assets compared free cash flow 910 million 2010 free cash flow percentage net income continuing operations 1643 2011 compared 1442 2010 2011 used 1883 million net cash investing activities primarily purchase socla capital equipment anticipate investing approximately 360 million capital equipment 2012 improve manufacturing capabilities 2011 used 239 million net cash financing activities borrowings repayments primarily related funds borrowed credit agreement purchase socla partially repaid cash outflows included 272 million used repurchase one million shares class common stock 2011 163 million dividend payments june 18 2010 entered credit agreement credit agreement among company certain subsidiaries company become borrowers credit agreement bank america na administrative agent swing line lender letter credit issuer lenders referred therein credit agreement provides 300 million fiveyear senior unsecured revolving credit facility may increased additional 150 million certain circumstances subject terms credit agreement credit agreement sublimit 75 million letters credit borrowings outstanding credit agreement bear interest fluctuating rate per annum equal case eurocurrency rate loans british bankers association libor rate plus applicable percentage ranging 170 230 determined reference consolidated leverage ratio plus case certain lenders mandatory cost calculated accordance terms credit agreement ii case base rate loans swing line loans highest federal funds rate plus 05 b rate interest effect day announced bank america na prime rate c british bankers association libor rate plus 10 plus applicable percentage ranging 070 130 determined reference consolidated leverage ratio addition paying interest credit agreement also required pay certain fees connection credit facility including limited facility fee letter credit fees credit agreement matures june 18 2015 may repay loans outstanding credit agreement time without premium penalty customary breakage costs subject terms credit agreement december 31 2011 held 2506 million cash equivalents ability fund operations balance could limited liquidity market well possible tax implications moving proceeds across jurisdictions amount approximately 993 million cash equivalents held foreign subsidiaries us operations currently generate sufficient cash flows meet domestic obligations also ability borrow funds reasonable interest rates utilize committed funds credit agreement recall intercompany loans however amounts held foreign subsidiaries needed fund operations united states could required accrue pay taxes repatriate funds charges may include federal tax 350 dividends received us potential state income taxes additional withholding tax payable foreign jurisdictions 100 however intent permanently reinvest undistributed earnings foreign subsidiaries current plans repatriate fund operations united states covenant compliance credit agreement required satisfy maintain specified financial ratios financial condition tests financial ratios include consolidated interest coverage ratio based consolidated earnings income taxes interest expense depreciation amortization consolidated ebitda consolidated interest expense defined credit agreement credit agreement defines consolidated ebitda exclude unusual nonrecurring charges gains also required maintain consolidated leverage ratio consolidated funded debt consolidated ebitda consolidated funded debt defined credit agreement includes long shortterm debt capital lease obligations trade letters credit outstanding finally required maintain consolidated net worth exceeds minimum net worth calculation consolidated net worth defined total stockholders equity reported adjusted cumulative translation adjustments goodwill impairments december 31 2011 actual financial ratios calculated accordance credit agreement compared required levels credit agreement follows december 31 2011 actual financial ratio calculated accordance senior note agreements compared required ratios therein follows addition financial ratios credit agreement senior note agreements contain affirmative negative covenants include limitations disposition sale assets prohibitions assuming incurring liens assets limited exceptions limitations making investments permitted agreements several note agreements detailed note 10 notes consolidated financial statements note agreements require us maintain fixed charge coverage ratio consolidated ebitda plus consolidated rent expense period consolidated fixed charges consolidated fixed charges sum consolidated interest expense period consolidated rent expense december 31 2011 compliance covenants related credit agreement 2524 million unused available credit agreement 346 million standby letters credit outstanding credit agreement 130 million euro based borrowings credit agreement december 31 2011 used 19 million net cash operating activities discontinued operations 2011 primarily settle fcpa investigation working capital defined current assets less current liabilities december 31 2011 5310 million compared 5784 million december 31 2010 decrease primarily due cash used fund socla acquisition offset partially increases accounts receivable inventories ratio current assets current liabilities 29 1 december 31 2011 compared 31 1 december 31 2010 cash flows 2010 generated 1134 million cash operating activities compared 2046 million 2009 generated approximately 910 million free cash flow compared free cash flow 1812 million 2009 free cash flow percentage net income continuing operations 1442 2010 compared 4420 2009 free cash flow results affected reduction investment accounts receivable inventory driven worldwide recession 2010 used 572 million net cash investing activities primarily purchase austroflex capital equipment elected participate settlement offer ubs ag ubs outstanding auction rate securities ars investments terms settlement offer issued rights ubs entitling holder require ubs purchase underlying ars par value period june 30 2010 july 2 2012 elected exercise right 2010 received 65 million ubs settlement outstanding ars investments addition 2010 invested ninemonth certificates deposits totaling approximately 40 million 2010 generated 69 million net cash financing activities primarily issuing 750 million 10year private placement notes june notes partially offset repayment 500 million private placement notes 164 million dividend payments notes issued pursuant note purchase agreement 2010 note purchase agreement pay interest outstanding balance notes rate 505 per annum payable semiannually june 18 december 18 principal notes shall become due payable may option upon notice subject terms 2010 note purchase agreement prepay time part notes amount less 1 million paying principal amount plus makewhole amount defined 2010 note purchase agreement 2010 note purchase agreement includes operational financial covenants required comply including among others maintenance certain financial ratios restrictions additional indebtedness liens dispositions events defaults 2010 note purchase agreement include failure comply financial operational covenants well bankruptcy insolvency events event default occurs continuing majority note holders right accelerate require us repay outstanding notes 2010 note purchase agreement limited circumstances acceleration automatic december 31 2010 compliance covenants related 2010 note purchase agreement 2009 cash flows 2009 generated 2046 million cash operating activities compared 1450 million 2008 generated approximately 1812 million free cash flow compares favorably free cash flow 1199 million 2008 free cash flow percentage net income continuing operations 4420 2009 compared 2653 2008 primarily due better working capital management temporary decreases commodity costs cost containment measures careful monitoring capital spending 2009 used 213 million net cash investing activities primarily purchases capital equipment received proceeds 17 million sale auction rate securities received 11 million cash purchase price settlement related prioryear acquisition paid 04 million earnout payments related acquisition prior years december 31 2009 held 54 million investments ars total par value 66 million auction rate securities longterm debt obligations secured municipal bonds student loans fourth quarter 2008 elected participate settlement offer ubs exercised rights settlement june 2010 used 772 million net cash financing activities 2009 primarily due payments debt dividend payments used 212 million net cash operating activities discontinued operations 2009 primarily due settlement 153 million related james jones litigation addition separate settlement paid outside counsel additional 50 million services rendered connection litigation used 03 million net cash investing activities discontinued operations 2009 primarily due purchasing capital equipment nongaap financial measures believe free cash flow appropriate supplemental measure operating performance provides investors measure ability generate cash repay debt fund acquisitions companies may define free cash flow differently free cash flow represent cash generated operating activities accordance gaap therefore considered alternative net cash provided operations indication performance free cash flow also considered alternative net cash provided operations defined gaap cash conversion rate free cash flow net income continuing operations also measure performance cash flow generation reconciliation net cash provided continuing operations free cash flow calculation cash conversion rate provided net debt capitalization ratio nongaap financial measure used management increased 139 2011 52 2010 increase resulted cash used debt incurred part socla acquisition management believes appropriate supplemental measure helps investors understand ability meet financing needs basis evaluate financial structure computation may comparable companies may define net debt capitalization differently reconciliation longterm debt including current portion net debt net debt capitalization ratio provided reconciliation capitalization provided contractual obligations contractual obligations december 31 2011 presented following table aas recognized consolidated balance sheet bassumes balance revolving credit facility remains 130 million interest rate remains approximately 30 presented periods cincludes commodity capital commitments acquisition tekmar ceo separation costs benefits december 31 2011 maintain letters credit guarantee performance payment third parties accordance specified terms conditions amounts outstanding approximately 349 million december 31 2011 2010 letters credit primarily associated insurance coverage lesser extent foreign purchases generally expire within one year issuance instruments may exist expire without drawn therefore necessarily represent future cash flow obligations offbalance sheet arrangements except operating lease commitments offbalance sheet arrangements reasonably likely current future effect financial condition changes financial condition revenues expenses results operations liquidity capital expenditures capital resources material investors application critical accounting policies key estimates preparation consolidated financial statements accordance us gaap requires management make judgments assumptions estimates affect amounts reported critical accounting estimate assumption highly uncertain matters could material effect consolidated financial statements another also reasonable amount used change estimate reasonably likely period base assumptions historical experience estimates believe reasonable circumstances actual results could differ significantly estimates changes accounting policies significant changes accounting estimates 2011 except change amortization period pension gains losses discussed caption pension benefits periodically discuss development selection disclosure estimates audit committee management believes following critical accounting policies reflect significant estimates assumptions revenue recognition recognize revenue following criteria met 1 entered binding agreement 2 product shipped title passed 3 sales price customer fixed determinable 4 collectability reasonably assured recognize revenue based upon determination criteria revenue recognition met based majority shipping terms considered occurred upon shipment finished product shipping terms require goods received customer title passes instances revenues recognized customer received goods record estimated reductions revenue customer returns allowances customer programs provisions returns allowances made time sale derived historical trends form portion allowance doubtful accounts customer programs primarily annual volume incentive plans allow customers earn credit attaining agreed upon purchase targets us record estimated reductions revenue made time sale customer programs based estimated purchase targets allowance doubtful accounts allowance doubtful accounts established represent best estimate net realizable value outstanding accounts receivable development allowance doubtful accounts varies region general based review past due amounts historical writeoff experience well aging trends affecting specific accounts general operational factors affecting accounts addition factors developed certain regions utilizing historical trends sales returns allowances cash discount activities derive reserve returns allowances cash discounts uniformly consider current economic trends changes customer payment terms evaluating adequacy allowance doubtful accounts also aggressively monitor creditworthiness largest customers periodically review customer credit limits reduce risk circumstances relating specific customers change unanticipated changes occur general business environment estimates recoverability receivables could adjusted inventory valuation inventories stated lower cost market costs determined primarily firstin firstout basis utilize specific product identification historical product demand basis determining excess obsolete inventory reserve identify inventories exceed range one four years sales determined comparing current inventory balance unit sales trailing twelve months new products added inventory within past twelve months excluded analysis portion products contain recoverable materials therefore excess obsolete reserve established net recoverable amounts changes market conditions lowerthanexpected customer demand changes technology features could result additional obsolete inventory saleable could require additional inventory reserve provisions certain countries additional inventory reserves maintained potential shrinkage experienced manufacturing process reserve established based prior years inventory losses adjusted change gross inventory balance goodwill intangibles made numerous acquisitions years included recognition significant amount goodwill tested impairment annually frequently event circumstance indicates impairment loss may incurred application goodwill impairment test requires judgment including identification reporting units assignment assets liabilities reporting units determination fair value reporting unit estimate fair value reporting units using income approach based present value estimated future cash flows believe approach yields appropriate evidence fair value reporting units easily compared corporations involved similar businesses intangible assets purchased technology generally recorded connection business acquisition values assigned intangible assets determined independent valuation firm based estimates judgments regarding expectations success life cycle products technology acquired 2011 2010 2009 recognized noncash pretax charges approximately 14 million 14 million 33 million respectively impairment indefinitelived intangible assets addition 2011 recognized noncash pretax charges 135 million impairment certain amortizable intangible assets europe segment 2011 company determined prospects austroflex rohrisoliersysteme gmbh austroflex part europe segment lower originally estimated due current operating profits forecast tempered future growth expectations accordingly company performed fair value assessment result wrote longlived assets 148 million approximately 78 including customer relationships 121 million trade names 14 million property plant equipment 13 million fair value based discounted cash flows using market participant assumptions utilized estimated weighted average cost capital revised accounting guidance issued september 2011 allows us review goodwill impairment utilizing either qualitative quantitative analyses option first assess qualitative factors determine whether existence events circumstances leads determination likely fair value reporting unit less carrying amount assessing totality events circumstances determine likely fair value reporting unit greater carrying amount performing twostep quantitative impairment test unnecessary first identify reporting units believe could pass qualitative assessment determine whether impairment testing necessary reporting unit identified qualitative analysis includes 1a review recent fair value calculation identify extent cushion fair value carrying amount determine substantial cushion existed 2a review events circumstances occurred since recent fair value calculation determine events circumstances would affected previous fair value assessment items identified reviewed include macroeconomic conditions industry market changes cost factor changes events affect reporting unit financial performance expectations reporting units performance relative peers compile information make assessment whether likely fair value reporting unit less carrying amount determine likely quantitative analysis required determined eight reporting units continuing operations one water quality goodwill 2011 performed qualitative analysis residential commercial formerly regulator dormont asia reporting units concluded impairment testing required second analysis goodwill impairment involves quantitative twostep process performed quantitative impairment analysis drains water reuse formerly orion brae europe blücher reporting units first step impairment test requires comparison fair value reporting units respective carrying value carrying value reporting unit less fair value indication impairment exists second step performed carrying amount reporting unit higher fair value indication impairment may exist second step must performed second step impairment computed comparing implied fair value reporting units goodwill carrying amount goodwill carrying amount reporting units goodwill greater implied fair value goodwill impairment loss must recognized excess charged operations inherent development present value future cash flow projections assumptions estimates derived review operating results business plans expected growth rates cost capital tax rates also make certain assumptions future economic conditions market data develop assumptions based historical results including sales growth operating profits working capital levels tax rates believe discounted cash flow model sensitive selected discount rate use thirdparty valuation specialists help develop appropriate discount rates reporting unit use standard valuation practices arrive weighted average cost capital based market guideline public companies higher discount rate lower discounted cash flows believe estimates future cash flows reasonable different assumptions could significantly affect valuations result impairments future fourth quarter 2011 recognized apretax noncash goodwill impairment charge 12 million related brae reporting unit within north america segment october 30 2011 testing date approximately 5137 million goodwill balance sheet impairment testing indicated fair values reporting units except brae exceeded carrying values thereby resulting impairment results impairment analysis summarized table underlying analyses supporting fair value assessment related outlook business longterm performance included key assumptions appropriate discount rate longterm growth rate connection october 30 2011 impairment test utilized discount rates ranging 125 285 growth rates beyond planning periods ranging 3 7 longterm terminal growth rates 3 4 operating results europe segment hindered downturn economic environment europe europes sales decline european marketplace deteriorates beyond current expectations reporting units goodwill may risk impairment future europes goodwill balance december 31 2011 2105 million october 30 2011 last impairment analysis date fair value europes reporting unit exceeded carrying value 9 blücher reporting units operating results also hindered downturn economic environment europe blüchers sales decline european marketplace deteriorates beyond current expectations reporting units goodwill may risk impairment future blüchers goodwill balance december 31 2011 748 million october 30 2011 last impairment analysis date fair value blüchers reporting unit exceeded carrying value 18 product liability workers compensation costs retention requirements associated insurance policies generally selfinsured potential product liability claims workers compensation costs associated workplace accidents subject variety potential liabilities connection product liability cases maintain product liability insurance coverage believe generally accordance industry practices product liability cases us management establishes product liability accrual utilizing third party actuarial valuations incorporates historical trend factors specific claims experience derived loss reports provided thirdparty administrators countries maintain insurance coverage relatively high deductible payments product liability claims tend smaller experienced us changes nature claims actual settlement amounts could affect adequacy estimate require changes provisions liability estimate ultimate liability may less reported workers compensation liabilities us recognized claims incurred including claims incurred reported changes status individual case reserves time workers compensation claim filed liability estimated settle claim liability workers compensation claims determined based managements estimates nature severity claims based analysis provided thirdparty administrators various state statutes reserve requirements developed trend factors based specific claims experience discounted based riskfree interest rates employ third party actuarial valuations help us estimate workers compensation accrual countries workers compensation costs applicable maintain insurance coverage limited deductible payments liability estimate ultimate liability may less reported subject changes discount rates determine trend factors product liability workers compensation liabilities based consultation outside actuaries maintain excess liability insurance outside insurance carriers minimize risks related catastrophic claims excess selfinsured positions material change aforementioned factors could adverse impact operating results legal contingencies defendant numerous legal matters including involving environmental law product liability discussed detail part item 1 businessproduct liability environmental litigation matters required gaap determine whether estimated loss contingency accrued assessing whether loss deemed probable loss amount reasonably estimated net applicable insurance proceeds possible estimate reasonably possible loss range loss amount accrued estimate aggregated disclosed estimates potential outcomes contingencies developed consultation outside counsel assessment based upon available information litigation inherently uncertain actual liability fully resolve litigation cannot predicted assurance accuracy event unfavorable outcome one legal matters ultimate liability may excess amounts currently accrued may material operating results cash flows particular quarterly annual period however based information currently known us management believes ultimate outcome legal contingencies resolved time likely material effect financial position results operations cash flows liquidity pension benefits account pension plans accordance gaap involves recording liability asset based projected benefit obligation fair value plan assets assumptions made regarding valuation benefit obligations performance plan assets primary assumptions follows •weighted average discount ratethis rate used estimate current value future benefits rate adjusted based movement longterm interest rates •expected longterm rate return assetsthis rate used estimate future growth investments investment earnings expected return based upon combination historical market performance anticipated future returns portfolio reflecting mix equity debt investments indicative plan assets •rates increase compensation levelsthis rate used estimate projected annual pay increases used determine wage base used project employees pension benefits retirement determine assumptions based consultation outside actuaries investment advisors variance assumptions could significant impact future recognized pension costs assets liabilities october 31 2011 board directors voted cease accruals effective december 31 2011 pension plan supplemental employees retirement plan recorded curtailment charge approximately 15 million fourth quarter 2011 connection action effective november 1 2011 began amortizing unamortized gains losses remaining life expectancy participants instead former policy average remaining service period income taxes estimate use expected annual effective income tax rates accrue income taxes effective tax rates determined based budgeted earnings taxes including best estimate permanent items affect effective rate year management periodically reviews rates outside tax advisors changes made material variances expectations identified recognize deferred taxes expected future consequences events reflected consolidated financial statements deferred tax assets liabilities determined based differences book values tax bases particular assets liabilities using tax rates effect years differences expected reverse valuation allowance provided offset net deferred tax assets based upon available evidence likely deferred tax assets realized consider estimated future taxable income ongoing prudent tax planning strategies assessing need valuation allowance new accounting standards june 2011 financial accounting standards board fasb issued accounting standards update asu 201105 comprehensive income asu intends enhance comparability transparency comprehensive income components guidance provides option present total comprehensive income components net income components comprehensive income single continuous statement two separate consecutive statements asu eliminates option present comprehensive income components part statement changes stockholders equity provisions asu applied retrospectively interim annual periods beginning december 15 2011 early application permitted early adopted asu 201105 effective year ended december 31 2011 september 2011 accounting guidance issued fasb accounting standards codification asc topic 350 intangiblesgoodwill guidance amends requirements goodwill impairment testing company option first assess qualitative factors determine whether existence events circumstances leads determination likely fair value reporting unit less carrying amount assessing totality events circumstances company determines likely fair value reporting unit greater carrying amount performing twostep impairment test unnecessary early adopted standard year ended december 31 2011 item 7aitem 7 managements discussion analysis financial condition results operations overview leading supplier products use water quality water safety water flow control water conservation markets north america emea growing presence asia 138 years designed manufactured products promote comfort safety people quality conservation water used commercial residential applications earn revenue income almost exclusively sale products principal product lines include •residential commercial flow control productsincludes products typically sold plumbing hot water applications backflow preventers water pressure regulators temperature pressure relief valves thermostatic mixing valves •hvac gas productsincludes hydronic electric heating systems underfloor radiant applications hydronic pump groups boiler manufacturers alternative energy control packages flexible stainless steel connectors natural liquid propane gas commercial food service residential applications hvac acronym heating ventilation air conditioning •drains water reuse productsincludes drainage products engineered rain water harvesting solutions commercial industrial marine residential applications •water quality productsincludes pointofuse pointofentry water filtration conditioning scale prevention systems commercial residential applications business reported three geographic segments north america emea asia distribute products three primary distribution channels wholesale doityourself diy original equipment manufacturers oems believe factors relating future growth include ability continue make selective acquisitions core markets well new complementary markets regulatory requirements relating quality conservation water safe use water increased demand clean water continued enforcement plumbing building codes healthy economic environment completed 36 acquisitions since divesting industrial oil gas business 1999 acquisition strategy focuses businesses manufacture preferred brand name products address themes water quality water conservation water safety water flow control related complementary markets target businesses provide us one following entry new markets increase shelf space existing customers new improved technology expansion breadth water quality water conservation water safety water flow control products commercial industrial residential markets products representing majority sales subject regulatory standards code enforcement typically require products meet stringent performance criteria together commissioned manufacturers representatives consistently advocated development enforcement plumbing codes focused maintaining stringent quality control testing procedures manufacturing facilities order manufacture products compliance code requirements take advantage resulting demand compliant products believe product development product testing capability investment plant equipment needed manufacture products compliance code requirements represent competitive advantage us performance 2012 mixed driven different opportunities challenges within region participate north america saw sequential quarterly improvement 2012 us residential marketplace began recover however commercial market continued lag emea experienced pockets growth certain pan european product lines specialty drains certain countries germany emea business also expanded sales eastern europe middle east parts europe italy recently france significantly affected general economic downturn asia solid growth expanded sales marketing efforts overall sales grew organically 07 compared 2011 organic sales growth excludes impacts acquisitions divestitures foreign exchange yearoveryear comparisons believe provides investors complete understanding underlying sales trends providing sales growth consistent basis organic sales north america asia grew 19 180 respectively substantially offset reduction emea organic sales 15 operationally much focus us 2012 concerned transition lead free production operating results negatively impacted especially first half 2012 began transition process additional costs driven preproduction runs vendormaterial recertification increased material costs production inefficiencies caused transition first half 2013 expect us operations may experience incremental costs related commissioning new lead free foundry currently scheduled come line second quarter 2013 impact commodity costs 2012 somewhat muted especially important raw material copper saw spot costs increase first third quarters abate somewhat second fourth quarters pricing turn fairly stable although experienced pricing pressures certain geographies certain product lines north america europe able selectively increase pricing certain products however believe economic uncertainty europe may continue affecting competitors pricing end markets continually review business implement restructuring plans needed recently completed restructuring projects us europe shut consolidated certain operations please see note 4 notes consolidated financial statements detailed explanation restructuring activities acquisitions disposals december 21 2012 disposed outstanding shares flomatic corporation flomatic third party cash transaction flomatic acquired part danfoss socla sas socla acquisition april 2011 flomatic specializes manufacturing various valves well water industry product line core business operating results flomatic classified discontinued operations 2012 2011 net loss disposal approximately 38 million charged discontinued operations 2012 january 31 2012 completed acquisition tekmar control systems tekmar share purchase transaction designer manufacturer control systems used heating ventilation air conditioning applications tekmar expected enhance hydronic systems product offerings us canada initial purchase price paid cad 180 million earnout based future earnings levels achieved initial purchase price paid equal approximately 178 million based exchange rate canadian dollar us dollars january 31 2012 total purchase price exceed cad 262 million recent developments february 19 2013 declared quarterly dividend eleven cents 011 per share outstanding share class common stock class b common stock results operations year ended december 31 2012 compared year ended december 31 2011 net sales business reported three geographic segments north america emea asia net sales segments years ended december 31 2012 2011 follows change net sales attributable following organic net sales 2012 north america wholesale market increased 40 million 06 compared 2011 minimal increases noted four major product categories ranging 02 water quality products 20 hvac gas products organic sales north american diy market 2012 increased 112 million 69 compared 2011 primarily due increased product sales 85 million residential commercial flow control products 21 million water quality products organic net sales emea wholesale market essentially flat compared 2011 wholesale sales increased 57 million due stronger plumbing valves sales middle east eastern europe increased drain sales pan european basis 10 million however gains offset wholesale sales reductions 35 million italy 21 million france due poor overall economy reduction preinsulated pipe products sales 11 million organic sales oem market 2012 decreased 62 million 22 compared 2011 decline primarily due decreased sales nordic region 62 million lower demands heating pump electrical heating manufacturers lower sales france italy 35 million 14 million respectively due economic slowdown reduction preinsulated piping lines 23 million declines offset increased sales 84 million related drains product line net decrease sales due foreign exchange primarily due depreciation euro canadian dollar us dollar cannot predict whether currencies appreciate depreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact net sales acquired net sales emea asia related socla acquisition north america due tekmar gross profit gross profit gross profit percent net sales gross margin 2012 2011 follows consolidated gross margin fairly stable 2012 compared 2011 varied geography north america gross margin declined due noncommodity cost increases well manufacturing inefficiencies driven preproduction costs outsourcing costs caused certain us plants transitioning lead free production north america gross margin also affected product mix diy sales grew faster wholesale sales selective price concessions meet market competition north america gross margin increased second half 2012 lead free related costs abated emea gross margin increased compared 2011 partially due acquisition accounting charges 47 million made 2011 connection socla acquisition partially due better product mix improved pricing 2012 selling general administrative expenses selling general administrative expenses sga expenses 2012 increased 72 million 19 compared 2011 increase sga expenses attributable following net organic increase sga expenses minimal 2011 2012 increases professional services 64 million insurance costs 44 million variable selling sales related costs 28 million offset lower personnel related costs 77 million lower depreciation amortization 29 million 16 million reduction expenses professional service costs increased due higher legal fees legal settlement costs tax related projects undertaken 2012 insurance costs increased due higher product liability charges north america personnel costs reduced 2012 primarily due separation costs incurred 2011 former chief executive officer lower retirement costs 2012 related 2011 pension freeze depreciation amortization costs lower 2012 principally due asset writedowns taken austroflex 2011 decrease sga expenses foreign exchange primarily due depreciation euro us dollar acquired sga costs related socla tekmar acquisitions total sga expense percentage sales 266 2012 264 2011 restructuring charges 2012 recorded net charge 43 million primarily severance costs incurred part previously announced restructuring programs compared 88 million 2011 detailed description current restructuring plans see notes 4 5 notes consolidated financial statements annual report form 10k goodwill longlived asset impairment charges 2012 recorded asset impairment charges 34 million including 17 million impairment charges longlived assets north america ultimately sold 2012 10 million goodwill impairment charge brae 04 million impairment charge north america trade name 03 million asset writedowns europe goodwill impairment based historical results expectations reduction expected future cash flows generated brae see analysis year ended december 31 2011 compared year ended december 31 2010 details 2011 goodwill longlived asset impairment charges see also note 2 notes consolidated financial statements annual report form 10k additional information regarding impairments gain adjustment disposal business 2011 booked net gain approximately 77 million relating primarily recognition currency translation adjustments resulting sale twvc 2012 recorded adjustment 16 million decrease gain operating income operating income geographic segment 2012 2011 follows change operating income attributable following decrease consolidated organic operating income due primarily reduction gross margin north america sales volume decline emea reasons previously discussed impact offset partially reduction acquisition costs europe related 2011 socla acquisition acquired operating income relates socla tekmar acquisitions reduction restructuring impairment charges 2011 2012 primarily driven reduced impairment restructuring costs offset reduced disposal gain previously discussed net decrease operating income foreign exchange primarily due depreciation euro us dollar cannot predict whether euro appreciate depreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact operating income interest expense interest expense decreased 12 million 47 2012 compared 2011 primarily due decrease amounts outstanding revolving credit facility used partially finance socla acquisition 2011 see note 10 notes consolidated financial statements annual report form 10k additional information regarding financing arrangements expense income net expense income net decreased 16 million 2012 compared 2011 primarily due reduction foreign currency transaction losses favorable customs settlement asia 2012 income taxes effective tax rate continuing operations increased 296 2012 293 2011 primary cause lower rate 2011 tax benefit realized connection disposition twvc facility china partly offset release tax reserve 2012 following completion european tax audit net income continuing operation net income continuing operations 2012 706 million 196 per common share compared 644 million 172 per common share 2011 results 2012 include net aftertax charges 80 million 022 per common share including restructuring net charges 007 goodwill longlived asset impairments 007 charge adjust twvc gain 004 retention costs former chief financial officer 003 net legalcustoms settlement charges 002 net credits 001 primarily related favorable tax adjustment due change 2012 italian tax rules results 2011 include net aftertax charges 170 million 046 per common share including goodwill asset impairment charges 035 restructuring charge 018 acquisition due diligence costs 012 charge related former chief executive officers separation agreement 011 pension curtailment loss 002 offset gain disposal twvc 030 net gains 002 primarily related earnout legal adjustments depreciation euro canadian dollar us dollar 2012 resulted negative impact operations 009 per common share compared 2011 cannot predict whether euro canadian dollar chinese yuan appreciate depreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact net income loss discontinued operations loss discontinued operations 2012 22 million 006 per common share related primarily operations disposal flomatic see note 3 notes consolidated financial statements year ended december 31 2011 compared year ended december 31 2010 net sales business reported three geographic segments north america emea asia net sales segments years ended december 31 2011 2010 follows change net sales attributable following organic net sales 2011 north american wholesale market increased 266 million 43 compared 2010 increase primarily due improved recovery commodity costs across four principal product lines larger increases residential commercial flow control products sales approximately 160 million drains water reuse products approximately 57 million organic sales north american diy market 2011 decreased 44 million 26 compared 2010 primarily due decreased product sales approximating 43 million mostly residential commercial flow control products organic net sales increased european wholesale market 28 million 10 compared 2010 wholesale sales increased marginally due stronger sales drains preinsulated pipe products along increased sales eastern europe geographic expansion middle east increases offset partially lower unit sales southern europe especially italian marketplace organic sales european oem market 2011 increased 92 million 49 compared 2010 primarily due increased sales hydronic underfloor manifold packages offset lower sales heat pump solar packages driven renewable energy subsidies either reduced expired net increase sales due foreign exchange primarily due appreciation euro canadian dollar us dollar cannot predict whether currencies appreciate depreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact net sales acquired net sales europe related socla austroflex acquisitions north america related blue ridge atlantic enterprises inc brae acquisition gross profit gross profit gross profit percent net sales gross margin 2011 2010 follows gross margin decreased 06 percentage points 2011 compared 2010 variety reasons unable completely recover commodity cost increases europe north american diy market incurred acquisition accounting adjustments 47 million connection socla acquisition experienced inefficiencies first half 2011 french plant consolidation project completed productivity initiatives also offset extent higher inbound freight costs selling general administrative expenses selling general administrative expenses sga expenses 2011 increased 409 million 121 compared 2010 increase sga expenses attributable following organic increase sga expenses primarily due separation costs former chief executive officer 63 million increase approximately 44 million variable selling costs due increase yearoveryear sales increase costs approximately 30 million due primarily implementation new enterprise resource planning system erp system licensing costs offset approximately 70 million lower legal costs increase sga expenses foreign exchange primarily due appreciation euro us dollar acquired sga costs related socla austroflex brae acquisitions total sga expenses percentage sales remained constant 264 2011 2010 restructuring charges 2011 recorded net charge 88 million primarily severance costs incurred part previously announced restructuring programs compared 126 million 2010 detailed description current restructuring plans see notes 4 5 notes consolidated financial statements annual report form 10k goodwill longlived asset impairment charges 2011 recorded asset impairment charges 174 million including 148 million impairment charges longlived assets austroflex 14 million goodwill longlived intangible asset impairments brae 12 million impairment charges certain european trade names longlived asset goodwill impairments based historical results expectations uncertain economic conditions europe related austroflex reduction expected future cash flows generated entities 2010 impairment charges 14 million relate writedowns certain trade names europe see note 2 notes consolidated financial statements annual report form 10k additional information regarding impairments gain adjustment disposal business 2011 recorded net gain approximately 77 million relating primarily recognition currency translation adjustments resulting sale twvc operating income operating income geographic segment 2011 2010 follows change operating income attributable following decrease consolidated organic operating income due primarily reduction gross margins increase sga expenses reasons discussed acquired operating income relates socla austroflex brae acquisitions net increase operating income foreign exchange primarily due appreciation euro canadian dollar us dollar cannot predict whether currencies appreciate depreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact operating income interest expense interest expense increased 30 million 132 2011 compared 2010 primarily due increase amounts outstanding year revolving credit facility used partially finance socla acquisition interest incurred 2011 june 2010 issuance 750 million senior notes see note 10 notes consolidated financial statements annual report form 10k additional information regarding financing arrangements expense income net expense income net increased 29 million 2011 compared 2010 primarily foreign currency transactions resulted net losses 2011 2010 net gains recognized income taxes effective rate continuing operations decreased 293 2011 332 2010 primary cause decrease due tax benefit realized connection disposition twvc facility china net income continuing operation net income continuing operations 2011 644 million 172 per common share compared 631 million 169 per common share 2010 results 2011 include net aftertax charges 170 million 046 per common share including goodwill asset impairment charges 035 restructuring charge 018 acquisition due diligence costs 012 charge related former chief executive officers separation agreement 011 pension curtailment loss 002 offset gain disposal twvc 030 net gains 002 primarily related earnout legal adjustments results 2010 include net aftertax charges 103 million 028 per common share including restructuring charges 026 due diligence costs 011 charges 005 offset tax adjustment 007 product liability workers compensation accrual adjustment 007 appreciation euro canadian dollar us dollar 2011 resulted positive impact operations 007 per common share 2011 compared 2010 income loss discontinued operations income discontinued operations 2011 primarily attributable reserve adjustment 17 million 005 per common share related fcpa investigation originally recorded 2010 adjustment reflects final disposition fcpa investigation see notes 3 14 notes consolidated financial statements additional discussion matter liquidity capital resources 2012 cash flows 2012 generated 1319 million cash operating activities compared 1274 million 2011 generated approximately 1048 million free cash flow nongaap financial measure reconcile defined net cash provided continuing operating activities minus capital expenditures plus proceeds sale assets compared free cash flow 1056 million 2011 free cash flow percentage net income continuing operations 1484 2012 compared 1640 2011 2012 used 427 million net cash investing activities including 175 million purchase tekmar 306 million cash capital equipment partially offset proceeds sale buildings equipment 35 million anticipate investing approximately 410 million capital equipment 2013 improve manufacturing capabilities 2012 used 807 million net cash financing activities significant cash outlays included 658 million repurchase two million shares class common stock 160 million fund dividend payments repayments longterm debt related amounts borrowed credit agreement 2012 operating purposes repayments related 2011 borrowings purchase socla june 18 2010 entered credit agreement credit agreement among company certain subsidiaries company become borrowers credit agreement bank america na administrative agent swing line lender letter credit issuer lenders referred therein credit agreement provides 300 million fiveyear senior unsecured revolving credit facility may increased additional 150 million certain circumstances subject terms credit agreement credit agreement sublimit 75 million letters credit borrowings outstanding credit agreement bear interest fluctuating rate per annum equal case eurocurrency rate loans british bankers association libor rate plus applicable percentage ranging 170 230 determined reference consolidated leverage ratio plus case certain lenders mandatory cost calculated accordance terms credit agreement ii case base rate loans swing line loans highest federal funds rate plus 05 b rate interest effect day announced bank america na prime rate c british bankers association libor rate plus 10 plus applicable percentage ranging 070 130 determined reference consolidated leverage ratio addition paying interest credit agreement also required pay certain fees connection credit facility including limited facility fee letter credit fees credit agreement matures june 18 2015 may repay loans outstanding credit agreement time without premium penalty customary breakage costs subject terms credit agreement december 31 2012 held 2718 million cash equivalents ability fund operations cash equivalents could limited market liquidity well possible tax implications moving proceeds across jurisdictions amount approximately 1318 million cash equivalents held foreign subsidiaries us operations currently generate sufficient cash flows meet domestic obligations also ability borrow funds reasonable interest rates utilize committed funds credit agreement recall intercompany loans however amounts held foreign subsidiaries needed fund operations united states could required accrue pay taxes repatriate funds charges may include federal tax 350 dividends received us potential state income taxes additional withholding tax payable foreign jurisdictions 100 however intent permanently reinvest undistributed earnings foreign subsidiaries current plans repatriate fund operations united states covenant compliance credit agreement required satisfy maintain specified financial ratios financial condition tests financial ratios include consolidated interest coverage ratio based consolidated earnings income taxes interest expense depreciation amortization consolidated ebitda consolidated interest expense defined credit agreement credit agreement defines consolidated ebitda exclude unusual nonrecurring charges gains also required maintain consolidated leverage ratio consolidated funded debt consolidated ebitda consolidated funded debt defined credit agreement includes long shortterm debt capital lease obligations trade letters credit outstanding finally required maintain consolidated net worth exceeds minimum net worth calculation consolidated net worth defined total stockholders equity reported adjusted cumulative translation adjustments goodwill impairments december 31 2012 actual financial ratios calculated accordance credit agreement compared required levels credit agreement follows december 31 2012 actual fixed charge coverage ratio calculated accordance senior note agreements compared required ratio therein follows addition financial ratios credit agreement senior note agreements contain affirmative negative covenants include limitations disposition sale assets prohibitions assuming incurring liens assets limited exceptions limitations making investments permitted agreements several note agreements detailed note 10 notes consolidated financial statements note agreements require us maintain fixed charge coverage ratio consolidated ebitda plus consolidated rent expense period consolidated fixed charges consolidated fixed charges sum consolidated interest expense period consolidated rent expense december 31 2012 compliance covenants related credit agreement 2654 million unused available credit agreement 346 million standby letters credit outstanding credit agreement borrowings outstanding credit agreement december 31 2012 january 2013 standby letter credit reduced 5 million generated 14 million net cash operating activities discontinued operations 2012 related primarily legal settlement regarding disposal former chinese subsidiary generated 81 million net cash investing activities discontinued operations resulting primarily proceeds received upon disposal flomatic december 2012 working capital defined current assets less current liabilities december 31 2012 4480 million compared 5289 million december 31 2011 decrease primarily due 75 million private placement note payable due may 2013 classified current liability december 31 2012 ratio current assets current liabilities 22 1 december 31 2012 compared 29 1 december 31 2011 reduced note payable reclassification expect repay private placement note either cash hand borrow credit facility combination 2011 cash flows 2011 generated 1274 million cash operating activities compared 1134 million 2010 generated approximately 1056 million free cash flow nongaap financial measure reconcile defined net cash provided continuing operating activities minus capital expenditures plus proceeds sale assets compared free cash flow 910 million 2010 free cash flow percentage net income continuing operations 1640 2011 compared 1442 2010 2011 used 1882 million net cash investing activities primarily purchase socla capital equipment 2011 used 239 million net cash financing activities borrowings repayments primarily related funds borrowed credit agreement purchase socla partially repaid cash outflows included 272 million used repurchase one million shares class common stock 2011 163 million dividend payments 2010 cash flows 2010 generated 1134 million cash operating activities generated approximately 910 million free cash flow free cash flow percentage net income continuing operations 1442 2010 used 572 million net cash investing activities primarily purchase austroflex capital equipment elected participate settlement offer ubs ag ubs outstanding auction rate securities ars investments terms settlement offer issued rights ubs entitling holder require ubs purchase underlying ars par value period june 30 2010 july 2 2012 elected exercise right 2010 received 65 million ubs settlement outstanding ars investments addition 2010 invested ninemonth certificates deposits totaling approximately 40 million 2010 generated 69 million net cash financing activities primarily issuing 750 million 10year private placement notes june notes partially offset repayment 500 million private placement notes 164 million dividend payments notes issued pursuant note purchase agreement 2010 note purchase agreement pay interest outstanding balance notes rate 505 per annum payable semiannually june 18 december 18 principal notes shall become due payable may option upon notice subject terms 2010 note purchase agreement prepay time part notes amount less 1 million paying principal amount plus makewhole amount defined 2010 note purchase agreement 2010 note purchase agreement includes operational financial covenants required comply including among others maintenance certain financial ratios restrictions additional indebtedness liens dispositions events defaults 2010 note purchase agreement include failure comply financial operational covenants well bankruptcy insolvency events event default occurs continuing majority note holders right accelerate require us repay outstanding notes 2010 note purchase agreement limited circumstances acceleration automatic nongaap financial measures believe free cash flow appropriate supplemental measure operating performance provides investors measure ability generate cash repay debt fund acquisitions companies may define free cash flow differently free cash flow represent cash generated operating activities accordance gaap therefore considered alternative net cash provided operations indication performance free cash flow also considered alternative net cash provided operations defined gaap cash conversion rate free cash flow net income continuing operations also measure performance cash flow generation reconciliation net cash provided continuing operations free cash flow calculation cash conversion rate provided net debt capitalization ratio nongaap financial measure used management decreased 107 2012 139 2011 decrease ratio resulted cash generated operations 2012 serves reduce net debt management believes appropriate supplemental measure helps investors understand ability meet financing needs basis evaluate financial structure computation may comparable companies may define net debt capitalization differently reconciliation longterm debt including current portion net debt net debt capitalization ratio provided reconciliation capitalization provided contractual obligations contractual obligations december 31 2012 presented following table aas recognized consolidated balance sheet bincludes commodity capital commitments ceo separation costs benefits december 31 2012 maintain letters credit guarantee performance payment third parties accordance specified terms conditions amounts outstanding approximately 348 million december 31 2012 349 million december 31 2011 respectively letters credit primarily associated insurance coverage lesser extent foreign purchases generally expire within one year issuance instruments may exist expire without drawn therefore necessarily represent future cash flow obligations offbalance sheet arrangements except operating lease commitments offbalance sheet arrangements reasonably likely current future effect financial condition changes financial condition revenues expenses results operations liquidity capital expenditures capital resources material investors application critical accounting policies key estimates preparation consolidated financial statements accordance us gaap requires management make judgments assumptions estimates affect amounts reported critical accounting estimate assumption highly uncertain matters could material effect consolidated financial statements another also reasonable amount used change estimate reasonably likely period base assumptions historical experience estimates believe reasonable circumstances actual results could differ significantly estimates changes accounting policies significant changes accounting estimates 2012 2011 changed amortization period pension gains losses discussed caption pension benefits periodically discuss development selection disclosure estimates audit committee management believes following critical accounting policies reflect significant estimates assumptions revenue recognition recognize revenue following criteria met 1 entered binding agreement 2 product shipped title passed 3 sales price customer fixed determinable 4 collectability reasonably assured recognize revenue based upon determination criteria revenue recognition met based majority shipping terms considered occurred upon shipment finished product shipping terms require goods received customer title passes instances revenues recognized customer received goods record estimated reductions revenue customer returns allowances customer programs provisions returns allowances made time sale derived historical trends form portion allowance doubtful accounts customer programs primarily annual volume incentive plans allow customers earn credit attaining agreed upon purchase targets us record estimated reductions revenue made time sale customer programs based estimated purchase targets allowance doubtful accounts allowance doubtful accounts established represent best estimate net realizable value outstanding accounts receivable development allowance doubtful accounts varies region general based review past due amounts historical writeoff experience well aging trends affecting specific accounts general operational factors affecting accounts addition factors developed certain regions utilizing historical trends sales returns allowances cash discount activities derive reserve returns allowances cash discounts uniformly consider current economic trends changes customer payment terms evaluating adequacy allowance doubtful accounts also aggressively monitor creditworthiness largest customers periodically review customer credit limits reduce risk circumstances relating specific customers change unanticipated changes occur general business environment estimates recoverability receivables could adjusted inventory valuation inventories stated lower cost market costs determined primarily firstin firstout basis utilize specific product identification historical product demand basis determining excess obsolete inventory reserve identify inventories exceed range one four years sales determined comparing current inventory balance unit sales trailing twelve months new products added inventory within past twelve months excluded analysis portion products contain recoverable materials therefore excess obsolete reserve established net recoverable amounts changes market conditions lowerthanexpected customer demand changes technology features could result additional obsolete inventory saleable could require additional inventory reserve provisions certain countries additional inventory reserves maintained potential shrinkage experienced manufacturing process reserve established based prior years inventory losses adjusted change gross inventory balance goodwill intangibles made numerous acquisitions years included recognition significant amount goodwill tested impairment annually frequently event circumstance indicates impairment loss may incurred application goodwill impairment test requires judgment including identification reporting units assignment assets liabilities reporting units determination fair value reporting unit estimate fair value reporting units using income approach based present value estimated future cash flows believe approach yields appropriate evidence fair value reporting units easily compared corporations involved similar businesses revised accounting guidance issued september 2011 allows us review goodwill impairment utilizing either qualitative quantitative analyses option first assess qualitative factors determine whether existence events circumstances leads determination likely fair value reporting unit less carrying amount assessing totality events circumstances determine likely fair value reporting unit greater carrying amount performing twostep quantitative impairment test unnecessary first identify reporting units believe could pass qualitative assessment determine whether impairment testing necessary reporting unit identified qualitative analysis includes 1a review recent fair value calculation identify extent cushion fair value carrying amount determine substantial cushion existed 2a review events circumstances occurred since recent fair value calculation determine events circumstances would affected previous fair value assessment items identified reviewed include macroeconomic conditions industry market changes cost factor changes events affect reporting unit financial performance expectations reporting units performance relative peers compile information make assessment whether likely fair value reporting unit less carrying amount determine likely quantitative analysis required determined eight reporting units continuing operations one water quality goodwill 2012 performed qualitative analysis drains water reuse formerly orion dormont asia reporting units determined fair value substantially excess carrying value second analysis goodwill impairment involves quantitative twostep process 2012 performed quantitative impairment analysis residential commercial emea blücher brae including impairment analysis second quarter emea reporting unit due results expectations first step impairment test requires comparison fair value reporting units respective carrying value carrying value reporting unit less fair value indication impairment exists second step performed carrying amount reporting unit higher fair value indication impairment may exist second step must performed second step impairment computed comparing implied fair value reporting units goodwill carrying amount goodwill carrying amount reporting units goodwill greater implied fair value goodwill impairment loss must recognized excess charged operations inherent development present value future cash flow projections assumptions estimates derived review operating results business plans expected growth rates cost capital tax rates also make certain assumptions future economic conditions market data develop assumptions based historical results including sales growth operating profits working capital levels tax rates believe discounted cash flow model sensitive selected discount rate use thirdparty valuation specialists help develop appropriate discount rates reporting unit use standard valuation practices arrive weighted average cost capital based market guideline public companies higher discount rate lower discounted cash flows believe estimates future cash flows reasonable different assumptions could significantly affect valuations result impairments future third quarter 2012 fourth quarter 2011 recognized pretax noncash goodwill impairment charge 10 million 12 million respectively related brae reporting unit within north america segment charges taken result reduced expectations regarding reporting unit october 28 2012 testing date approximately 5039 million goodwill balance sheet impairment testing indicated fair values reporting units exceeded carrying values thereby resulting impairment results impairment analysis summarized table underlying analyses supporting fair value assessment related outlook business longterm performance included key assumptions appropriate discount rate longterm growth rate connection october 28 2012 impairment test utilized discount rates ranging 10 105 growth rates beyond planning periods ranging 4 7 longterm terminal growth rates 3 4 future increases discount rates due changing interest rates declining economic environment could impact assumptions value reporting units intangible assets trademarks trade names generally recorded connection business acquisition values assigned intangible assets determined independent valuation firm based estimates judgments regarding expectations success life cycle products technology acquired 2012 2011 2010 recognized noncash pretax charges approximately 04 million 14 million 14 million respectively impairment certain indefinitelived intangible assets addition 2011 recognized noncash pretax charges 135 million impairment certain amortizable intangible assets emea segment company determined prospects austroflex part emea segment lower originally estimated due current operating profits forecast tempered future growth expectations accordingly company performed fair value assessment result wrote longlived assets 148 million approximately 78 including customer relationships 121 million trade names 14 million property plant equipment 13 million fair value based discounted cash flows using market participant assumptions utilized estimated weighted average cost capital revised accounting guidance issued 2012 allows us perform qualitative impairment assessment indefinitelived intangible assets consistent goodwill guidance noted previously 2012 impairment assessment performed quantitative assessments indefinitelived intangible assets methodology employed relief royalty method subset income approach impairment review occurred october 28 2012 product liability workers compensation costs retention requirements associated insurance policies generally selfinsured potential product liability claims workers compensation costs associated workplace accidents subject variety potential liabilities connection product liability cases maintain product liability insurance coverage believe generally accordance industry practices product liability cases us management establishes product liability accrual utilizing thirdparty actuarial valuations incorporates historical trend factors specific claims experience derived loss reports provided thirdparty administrators countries maintain insurance coverage relatively high deductible payments product liability claims tend smaller experienced us changes nature claims actual settlement amounts could affect adequacy estimate require changes provisions liability estimate ultimate liability may less reported workers compensation liabilities us recognized claims incurred including claims incurred reported changes status individual case reserves time workers compensation claim filed liability estimated settle claim liability workers compensation claims determined based managements estimates nature severity claims based analysis provided thirdparty administrators various state statutes reserve requirements developed trend factors based specific claims experience discounted based riskfree interest rates employ thirdparty actuarial valuations help us estimate workers compensation accrual countries workers compensation costs applicable maintain insurance coverage limited deductible payments liability estimate ultimate liability may less reported subject changes discount rates determine trend factors product liability workers compensation liabilities based consultation outside actuaries maintain excess liability insurance outside insurance carriers minimize risks related catastrophic claims excess selfinsured positions material change aforementioned factors could adverse impact operating results legal contingencies defendant numerous legal matters including involving environmental law product liability discussed detail part item 1 businessproduct liability environmental litigation matters required gaap determine whether estimated loss contingency accrued assessing whether loss deemed probable loss amount reasonably estimated net applicable insurance proceeds possible estimate reasonably possible loss range loss amount accrued estimate aggregated disclosed estimates potential outcomes contingencies developed consultation outside counsel assessment based upon available information litigation inherently uncertain actual liability fully resolve litigation cannot predicted assurance accuracy event unfavorable outcome one legal matters ultimate liability may excess amounts currently accrued may material operating results cash flows particular quarterly annual period however based information currently known us management believes ultimate outcome legal contingencies resolved time likely material effect financial position results operations cash flows liquidity pension benefits account pension plans accordance gaap involves recording liability asset based projected benefit obligation fair value plan assets assumptions made regarding valuation benefit obligations performance plan assets primary assumptions follows •weighted average discount ratethis rate used estimate current value future benefits rate adjusted based movement longterm interest rates •expected longterm rate return assetsthis rate used estimate future growth investments investment earnings expected return based upon combination historical market performance anticipated future returns portfolio reflecting mix equity debt investments indicative plan assets determine assumptions based consultation outside actuaries investment advisors variance assumptions could significant impact future recognized pension costs assets liabilities october 31 2011 board directors voted cease accruals effective december 31 2011 pension plan supplemental employees retirement plan recorded curtailment charge approximately 15 million fourth quarter 2011 connection action effective november 1 2011 began amortizing unamortized gains losses remaining life expectancy participants instead former policy average remaining service period income taxes estimate use expected annual effective income tax rates accrue income taxes effective tax rates determined based budgeted earnings taxes including best estimate permanent items affect effective rate year management periodically reviews rates outside tax advisors changes made material variances expectations identified recognize deferred taxes expected future consequences events reflected consolidated financial statements deferred tax assets liabilities determined based differences book values tax bases particular assets liabilities using tax rates effect years differences expected reverse valuation allowance provided offset net deferred tax assets based upon available evidence likely deferred tax assets realized consider estimated future taxable income ongoing prudent tax planning strategies assessing need valuation allowance new accounting standards july 2012 fasb issued amendment requirements indefinitelived intangible asset impairment testing option first assess qualitative factors determine whether existence events circumstances leads determination likely fair value indefinitelived intangible asset less carrying amount assessing totality events circumstances determine likely fair value indefinitelived intangible asset greater carrying amount performing impairment test unnecessary adopted new standard effective annual impairment testing date october 28 year ending december 31 2012 adoption accounting pronouncement material impact financial statements item 7aitem 7 managements discussion analysis financial condition results operations overview leading supplier products improve quality conservation safety control water markets americas emea growing presence asiapacific 140 years designed manufactured products promote comfort safety people quality conservation water used commercial residential industrial applications earn revenue income almost exclusively sale products principal product lines include • residential commercial flow control productsincludes products typically sold plumbing hot water applications backflow preventers water pressure regulators temperature pressure relief valves thermostatic mixing valves • hvac gas productsincludes hydronic electric heating systems underfloor radiant applications commercial highefficiency boilers water heaters heating solutions custom heat hot water solutions hydronic pump groups boiler manufacturers alternative energy control packages flexible stainless steel connectors natural liquid propane gas commercial food service residential applications hvac acronym heating ventilation air conditioning • drainage water reuse productsincludes drainage products engineered rain water harvesting solutions commercial industrial marine residential applications • water quality productsincludes pointofuse pointofentry water filtration conditioning scale prevention systems commercial residential applications business reported three geographic segments americas emea asiapacific distribute products three primary distribution channels wholesale original equipment manufacturers oems doityourself diy believe factors relating future growth include ability continue make selective acquisitions core markets well new complementary markets regulatory requirements relating quality conservation water safe use water increased demand clean water continued enforcement plumbing building codes healthy economic environment completed 37 acquisitions since 1999 acquisition strategy focuses businesses manufacture preferred brand name products address themes water quality water conservation water safety water flow control related complementary markets target businesses provide us one following entry new markets increase shelf space existing customers new improved technology expansion breadth water quality water conservation water safety water flow control products commercial industrial residential markets products representing majority sales subject regulatory standards code enforcement typically require products meet stringent performance criteria together commissioned manufacturers representatives consistently advocated development enforcement plumbing codes focused maintaining stringent quality control testing procedures manufacturing facilities order manufacture products compliance code requirements take advantage resulting demand compliant products believe product development product testing capability investment plant equipment needed manufacture products compliance code requirements represent competitive advantage us 2014 experienced positive results certain areas business continued challenges others divergent performance driven different economic business dynamics within region participate americas saw continued volume growth compared us residential construction marketplace continued improve repair replace end market remained strong commercial market experienced moderate growth emea overall markets declined especially second half year negatively impacted sales businesses italy france germany negatively impacted weaker markets ongoing transformation program emea various restructuring initiatives resulted productivity efficiencies cost reductions partially mitigated effect struggling eurozone economy asiapacific solid growth expanded sales marketing efforts within region overall sales grew organically 26 compared 2013 organic sales growth excludes impacts acquisitions divestitures foreign exchange yearoveryear comparisons believe provides investors complete understanding underlying sales trends providing sales growth consistent basis compared 2013 organic sales americas asiapacific grew 55 226 respectively substantially offset reduction emea organic sales 31 americas incurred incremental costs lead free foundry relating manufacturing inefficiencies including excess scrap repairs production disruption early year continued focus process discipline root cause analysis led consistent improvement manufacturing efficiency throughout second half year impact commodity costs 2014 minimal especially respect important raw material copper spot prices started higher first quarter continued decline remainder year stainless steel spot prices relatively flat first half 2014 increased second half year continued experience pricing pressures certain geographies channels emea able selectively increase pricing certain products however believe economic uncertainty europe continue affect competitors pricing end markets americas experienced pricing pressures diy channel wholesale channel able increase pricing certain products second half year review business operating structure regular basis implement restructuring initiatives needed emea 2013 restructuring actions commenced 2013 substantially complete 2014 initiated completed additional restructuring activities americas asiapacific corporate reduce costs reductionsinforce activities concluded also began various restructuring initiatives emea fourth quarter 2014 response current market conditions better align internal cost base external market environment please see note 4 notes consolidated financial statements detailed explanation restructuring activities addition restructuring initiatives implemented transformation program emea fourth quarter 2013 emea transformation program designed realign european operating strategy country specific pan european focused initiative begun 1 develop better sales capabilities improved product management enhanced product crossselling efforts 2 drive efficient sourcing logistics 3 enhance focus emerging market opportunities process aligning legal tax structure accordance business structure take advantage favorable tax rates possible expect project ongoing 2018 incurred nonrecurring deployment costs approximately 75 million 12 million 2014 2013 respectively nonrecurring costs consist primarily external consulting related costs exclusive restructuring expense anticipate total nonrecurring external deployment costs 55 million 2015 emea program total annual gross savings approximately 50 million achieved 2014 approximately 113 million expected 2015 forecasted annual savings 197 million anticipated 2018 acquisitions disposals december 1 2014 completed acquisition aerco international inc aerco share purchase transaction aggregate purchase price approximately 2722 million financed borrowing companys credit agreement purchase price includes estimated working capital adjustment 77 million subject final postclosing working capital adjustment aerco leading provider commercial highefficiency boilers water heaters heating solutions north america aerco based blauvelt new york products distributed commercial municipal use primarily north america aerco strengthens strategic vision expand heat source products strengthens solutions system offerings aercos annual revenues 2014 approximately 100 million 53 million included 2014 consolidated financial statements please see note 5 notes consolidated financial statements additional information regarding operating results aerco august 1 2013 company completed sale outstanding shares indirectly whollyowned subsidiary austroflex receiving net cash proceeds 79 million chose divest austroflex meet performance expectations loss tax disposal business approximately 22 million year ended december 31 2011 company wrote austroflexs longlived assets 148 million austroflexs results operations presented discontinued operations 2013 2012 please see note 3 notes consolidated financial statements additional information regarding operating results austroflex december 21 2012 disposed outstanding shares flomatic corporation flomatic third party cash transaction flomatic acquired part danfoss socla sas socla acquisition april 2011 flomatic specializes manufacturing various valves well water industry product line core business operating results flomatic classified discontinued operations net loss disposal approximately 38 million charged discontinued operations 2012 january 31 2012 completed acquisition tekmar control systems tekmar designer manufacturer control systems used heating ventilation air conditioning applications share purchase transaction initial purchase price paid approximately 178 million contingent liability 51 million recognized estimate acquisition date fair value earnout contingent liability increased 05 million 10 million 2014 2013 respectively based performance metrics achieved expected achieved portion contingent consideration paid 2014 2013 amount 22 million 12 million respectively remaining 2015 payment estimated 25 million cumulative effect foreign exchange 07 million favorable impact contingent liability december 31 2014 recent developments february 12 2015 declared quarterly dividend fifteen cents 015 per share outstanding share class common stock class b common stock february 17 2015 board directors company approved initial phase restructuring program relating transformation americas asiapacific businesses primarily involves product line rationalization efforts expected ultimately eliminate 175 million 200 million combined americas asiapacific net sales primarily within doityourself diy distribution channel program expected include pretax charge earnings approximately 40 million 50 million 25 million 30 million consist noncash charges fourth quarter year ended december 31 2014 recorded 152 million pretax charge relating program consisting goodwill impairment 129 million indefinitelived intangible asset impairment 05 million transformation deployment costs 18 million goodwill impairment charge based quantitative assessment asiapacific reporting unit goodwill performed result likely asiapacific reporting units third party intersegment net sales would significantly reduced result program estimated fair value reporting unit using expected present value future cash flows remaining total pretax charge program expected include costs severance benefits 8 million 10 million facility decommissioning cleanup related exit costs 3 million 4 million accelerated depreciation amortization longlived assets 8 million 10 million transformation deployment costs including inventory charges consulting fees associated costs 58 million 108 million total net aftertax charge program expected 30 million 40 million inclusive asiapacific charges expected tax benefit remaining costs program expected incurred 2015 expect generate approximately 50 million aftertax cash proceeds sale assets associated program end fiscal 2017 estimate consolidated operating margins increase approximately 10 percentage point result actions 2017 results operations year ended december 31 2014 compared year ended december 31 2013 net sales business reported three geographic segments americas emea asiapacific net sales segments years ended december 31 2014 2013 follows change net sales attributable following products sold wholesalers diy chains oems change organic net sales channel attributable following organic net sales americas wholesale diy oem markets increased 2014 compared 2013 increase driven growth principle products lines particular growth residential commercial flow product lines organic net sales emea wholesale market decreased compared 2013 primarily due softening france germany italy wholesale markets decreases diy channel primarily due decreases france diy market decreases oem channel primarily due decreases germany italy markets partially offset increases electronic controls drains businesses organic net sales asiapacific wholesale market increased compared 2013 primarily due increased sales residential valve heating products expansion east north regions china net decrease sales due foreign exchange primarily due depreciation canadian dollar us dollar cannot predict degree certainty whether foreign currencies appreciate depreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact net sales change net sales due acquisition relates acquisition aerco december 2014 gross profit gross profit gross profit percent net sales gross margin 2014 2013 follows americas gross margin remained consistent compared 2013 due primarily incremental wholesale volume pricing offset manufacturing inefficiencies foundry first half 2014 lower pricing diy channel emeas gross margin increased primarily due cost reductions production efficiencies driven ongoing restructuring initiatives offsetting lower overhead absorption related reduced manufacturing volumes selling general administrative expenses selling general administrative expenses sga expenses increased 13 million 03 2014 compared 2013 increase sga expenses attributable following organic decrease sga expenses primarily due decreased legal costs 185 million decrease product liability costs 35 million offset increased nonrecurring transformation deployment costs americas emea 81 million acquisition costs 45 million increased personnel costs 27 million increased commission freight costs 41 million lower depreciation amortization 07 million primary driver decrease legal cost relates agreement settle claims trabakoolas et al v watts water technologies inc et al matter net settlement charged operations amounted 136 million 2013 refer note 14 notes consolidated financial statements annual report form 10k detail nonrecurring americas emea deployment costs consist primarily external consulting related costs acquisition costs 45 million relate aerco acquisition decrease sga expenses foreign exchange primarily due depreciation canadian dollar us dollar 2014 acquired sga costs relate aerco acquisition total sga expenses percentage sales 269 2014 275 2013 restructuring charges 2014 recorded net charge 152 million primarily involuntary terminations costs incurred part emea restructuring initiatives reductioninforce americas corporate reductionsinforce asiapacific restructuring charges 2013 87 million detailed description current restructuring plans see note 4 notes consolidated financial statements annual report form 10k goodwill longlived asset impairment charges 2014 recorded impairment charges 142 million primarily relating 129 million goodwill impairment charge asiapacific reporting unit trade name impairment charges 05 million 08 million americas emea respectively compared 12 million 2013 see note 2 notes consolidated financial statements annual report form 10k additional information regarding impairments operating income operating income geographic segment 2014 2013 follows change operating income attributable following decrease consolidated operating income due primarily increase restructuring impairment charges offset increase gross profit increased sales volume cost containment initiatives increase americas organic operating income driven higher sales volume reduced sga expenses offset partially increased restructuring expenses emea organic operating income decrease primarily due lower sales volumes higher restructuring costs transformation deployment costs partially offset productivity efficiencies cost containment efforts asiapacifics organic operating income decreased primarily due impact gross margins reduced absorption driven lower intercompany sales higher sga expenses january 1 2014 began allocating certain expenses three operating segments previously recorded corporate expenses primarily include stock compensation legal expenses audit expenses directly attributable benefit three operating segments 2013 results retrospectively revised comparative purposes interest expense interest expense decreased 16 million 74 2014 compared 2013 primarily due retirement midmay 2013 75 million unsecured senior notes lower borrowing rates standby letters credit offset interest borrowings credit agreement see note 10 notes consolidated financial statements annual report form 10k additional information regarding financing arrangements expense income net expense income net increased 03 million 2014 compared 2013 primarily due higher foreign currency transaction losses canada income taxes effective tax rate continuing operations increased 395 2014 306 2013 increase rate primarily due 129 million goodwill impairment charge recorded asiapacific tax benefit addition increase also due audit settlements belgium germany recorded third quarter 2014 earnings mix us contributing larger portion worldwide earnings 2014 2013 net income continuing operations net income continuing operations 2014 503 million 142 per common share compared 609 million 171 per common share 2013 results 2014 include net aftertax charges 385 million 109 per common share including acquisitions impairment related costs 051 restructuring net charges 039 emea americas transformation deployment costs 019 results 2013 include net aftertax charges 183 million 051 per common share including legal settlement charges 026 restructuring net charges 017 goodwill longlived asset impairments 004 earnout adjustments 002 emea transformation deployment costs 002 loss discontinued operations loss discontinued operations 2013 23 million 007 per common share related operations loss disposal austroflex see note 3 notes consolidated financial statements results operations year ended december 31 2013 compared year ended december 31 2012 net sales business reported three geographic segments americas emea asiapacific net sales segments years ended december 31 2013 2012 follows change net sales attributable following products sold wholesalers diy chains oems change organic net sales channel attributable following organic net sales 2013 americas wholesale market increased compared 2012 mainly increased sales residential commercial flow product lines customers continuing transition lead free products organic sales americas diy market 2013 increased compared 2012 primarily due increased product sales 19 million residential commercial flow control products 12 million water quality products unit sales increases substantially offset competitive pricing diy market organic net sales emea wholesale market decreased compared 2012 primarily due economic market conditions france germany organic net sales emea oem market decreased compared 2012 primarily due slower hvac market germany fewer large project sales drains business offset increased sales electronics business net increase sales due foreign exchange primarily due appreciation euro us dollar cannot predict whether currencies appreciate depreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact net sales acquired net sales growth americas due tekmar gross profit gross profit gross profit percent net sales gross margin 2013 2012 follows americas gross margin decreased primarily due inefficiencies related lead free transition program retail pricing pressure offset partially product mix volume growth emea gross margin increased slightly compared 2012 primarily due production efficiencies driven ongoing restructuring programs offsetting lower overhead absorption related reduced manufacturing volumes selling general administrative expenses selling general administrative expenses sga expenses 2013 increased 247 million 65 compared 2012 increase sga expenses attributable following net organic increase sga primarily attributable increased legal costs 125 million increased product liability cost 45 million increased freight commission costs 41 million associated increased sales increased personnel costs 22 million offset lower depreciation amortization 16 million lower advertising costs 13 million incremental legal costs include impact settlement claims trabakoolas et al v watts water technologies inc et al matter united states district court northern district california net settlement charged operations amounted 136 million 2013 refer note 14 notes consolidated financial statements annual report form 10k detail increased product liability cost 45 million americas based thirdparty actuarial analysis incorporated higher reported claims 2013 offset extent impact trabakoolas settlement increased personnel costs primarily relate investments new positions increased stock incentive plan costs increase sga expenses foreign exchange primarily due appreciation euro us dollar acquired sga expenses related tekmar acquisition total sga expense percentage sales 275 2013 267 2012 restructuring charges 2013 recorded net charge 87 million primarily severance costs incurred part previously announced restructuring programs compared 42 million 2012 detailed description current restructuring plans see note 4 notes consolidated financial statements annual report form 10k goodwill longlived asset impairment charges 2013 recorded asset impairment charges 12 million primarily relating 03 million goodwill impairment charge brae trade name impairment charges 03 million 04 million americas emea respectively goodwill impairment based historical results expectations reduction expected future cash flows generated brae see note 2 notes consolidated financial statements annual report form 10k additional information regarding impairments operating income operating income geographic segment 2013 2012 follows change operating income attributable following decrease consolidated organic operating income due primarily increase sga expenses previously discussed acquired operating income relates tekmar acquisition increase restructuring impairment charges 2013 2012 primarily driven emea restructuring programs previously discussed net increase operating income foreign exchange primarily due appreciation euro us dollar cannot predict whether euro appreciate depreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact operating income january 1 2014 began allocating certain expenses three operating segments previously recorded corporate expenses primarily include stock compensation legal expenses audit expenses directly attributable benefit three operating segments 2013 2012 results retrospectively revised comparative purposes interest expense interest expense decreased 31 million 126 2013 compared 2012 primarily due retirement midmay 2013 75 million unsecured senior notes lower balance outstanding standby letters credit see note 10 notes consolidated financial statements annual report form 10k additional information regarding financing arrangements expense income net expense income net increased 36 million 2013 compared 2012 primarily due foreign currency transaction losses americas emea asiapacific result appreciation chinese yuan euro us dollar appreciation us dollar canadian dollar 2013 addition favorable customs settlement recorded 2012 repeat 2013 income taxes effective tax rate continuing operations increased 306 2013 297 2012 2013 rate slightly due change tax laws france limited intercompany interest deductions 2012 rate favorably impacted release tax reserve following completion european tax audit net income continuing operations net income continuing operations 2013 609 million 171 per common share compared 704 million 195 per common share 2012 results 2013 include net aftertax charges 183 million 051 per common share including legal settlement charges 026 restructuring net charges 017 goodwill longlived asset impairments 004 earnout adjustments 002 emea transformation deployment costs 002 results 2012 include net aftertax charges 81 million 022 per common share including restructuring net charges 007 goodwill longlived asset impairments 007 charge adjust twvc gain 004 retention costs former chief financial officer 003 net legalcustoms settlement charges 002 net credits 001 primarily related favorable tax adjustment due change 2012 italian tax rules appreciation primarily euro us dollar 2013 resulted positive impact operations 003 per common share compared 2012 cannot predict whether euro canadian dollar chinese yuan appreciate depreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact net income loss discontinued operations loss discontinued operations 2013 23 million 007 per common share related operations loss disposal austroflex see note 3 notes consolidated financial statements liquidity capital resources 2014 cash flows 2014 generated 1352 million cash operating activities compared 1183 million 2013 increase primarily due inventory reduction efforts mostly americas strong accounts receivable collections offset reductions accounts payable current year related prior year buildup lead free inventory late 2013 generated approximately 1119 million free cash flow nongaap financial measure reconcile defined net cash provided continuing operating activities minus capital expenditures plus proceeds sale assets compared free cash flow 921 million 2013 free cash flow percentage net income continuing operations 2225 2014 compared 1512 2013 2014 used 2955 million net cash investing activities including 2722 million purchase aerco 237 million cash capital equipment anticipate investing approximately 30 million 35 million capital equipment 2015 improve manufacturing capabilities 2014 generated 2208 million net cash financing activities cash provided financing activities primarily due 2750 million borrowings credit agreement fund aerco acquisition proceeds 118 million option exercises employee stock plans offset payments repurchase approximately 670000 shares class common stock cost 396 million payment dividends 205 million february 18 2014 terminated prior credit agreement entered new credit agreement credit agreement among company certain subsidiaries company become borrowers credit agreement jpmorgan chase bank na administrative agent swing line lender letter credit issuer lenders referred therein credit agreement provides 500 million fiveyear senior unsecured revolving credit facility may increased additional 500 million certain circumstances subject terms credit agreement credit agreement sublimit 100 million letters credit agreement matures february 18 2019 borrowings outstanding credit agreement bear interest fluctuating rate per annum equal applicable percentage equal 1 case eurocurrency rate loans british bankers association libor rate plus applicable percentage ranging 0975 145 determined reference companys consolidated leverage ratio 2 case base rate loans swing line loans highest federal funds rate plus 05 b rate interest effect day announced jpmorgan chase bank na prime rate c british bankers association libor rate plus 10 plus applicable percentage ranging 000 045 determined reference consolidated leverage ratio addition paying interest credit agreement also required pay certain fees connection credit facility including limited unused facility fee letter credit fees credit agreement required satisfy maintain specified financial ratios financial condition tests may repay loans outstanding credit agreement time without premium penalty customary breakage costs subject terms credit agreement pension plan terminated effective july 31 2014 plan termination must satisfy regulatory requirements prescribed internal revenue service irs pension benefit guaranty corporation expected occur second half 2015 requirements met distribution plan assets pursuant termination expected occur within four months serp terminated effective may 15 2014 settle liabilities serp accordance section 409a internal revenue code paying lump sums plan participants least twelve twenty four months following termination date board directors authorized us make contributions pension plan serp may necessary make plans sufficient settle plan liabilities presently expect distributions two plans completed december 31 2015 based thirdparty actuarys estimate using preliminary assumptions estimated cash outflow approximately 40 million 45 million upon liquidation plans accumulated comprehensive loss related plans termination date recognized consolidated statement operations consolidated statement comprehensive income accumulated comprehensive loss related plans december 31 2014 590 million 361 million net tax estimated cash outflow range impact consolidated statement operations consolidated statement comprehensive income subject change based distribution date fair value plan assets distribution market interest rates annuity purchase rates distribution demographic experience 2014 elected forms payment december 31 2014 held 3011 million cash equivalents ability fund operations cash equivalents could limited market liquidity well possible tax implications moving proceeds across jurisdictions amount approximately 2507 million cash equivalents held foreign subsidiaries us operations typically generate sufficient cash flows meet domestic obligations anticipate incremental expenditures 2015 including expected pension settlement payment cash costs related americas transformation program may borrow fund expected cash outlays reasonable interest rates utilizing uncommitted borrowings credit agreement however amounts held foreign subsidiaries needed fund operations united states could required accrue pay taxes repatriate funds charges may include federal tax 350 dividends received us potential state income taxes additional withholding tax payable foreign jurisdictions 100 however intent permanently reinvest undistributed earnings foreign subsidiaries current plans repatriate fund operations united states covenant compliance credit agreement required satisfy maintain specified financial ratios financial condition tests december 31 2014 financial ratios included consolidated interest coverage ratio based consolidated earnings income taxes interest expense depreciation amortization consolidated ebitda consolidated interest expense defined credit agreement credit agreement defined consolidated ebitda exclude unusual nonrecurring charges gains also required maintain consolidated leverage ratio consolidated funded debt consolidated ebitda consolidated funded debt defined credit agreement included long shortterm debt capital lease obligations trade letters credit outstanding december 31 2014 actual financial ratios calculated accordance credit agreement compared required levels credit agreement follows december 31 2014 compliance covenants related credit agreement 2014 million unused available credit agreement 236 million standby letters credit outstanding credit agreement company 2750 million borrowings outstanding credit agreement december 31 2014 several senior note agreements detailed note 10 notes consolidated financial statements senior note agreements require us maintain fixed charge coverage ratio consolidated ebitda plus consolidated rent expense period consolidated fixed charges consolidated fixed charges sum consolidated interest expense period consolidated rent expense december 31 2014 actual fixed charge coverage ratio calculated accordance senior note agreements compared required ratio therein follows addition financial ratios credit agreement senior note agreements contain affirmative negative covenants include limitations disposition sale assets prohibitions assuming incurring liens assets limited exceptions limitations making investments permitted agreements working capital defined current assets less current liabilities december 31 2014 5286 million compared 5302 million december 31 2013 decrease primarily due reclassification 400 million pension plan serp liabilities noncurrent current december 31 2014 offset increases cash equivalents 332 million ratio current assets current liabilities 25 1 december 31 2014 compared 26 1 december 31 2013 cash flows 2013 generated 1183 million cash operating activities compared 1303 million 2012 decrease primarily due lower net income cash used fund lead free inventory increase americas generated approximately 921 million free cash flow nongaap financial measure reconcile defined net cash provided continuing operating activities minus capital expenditures plus proceeds sale assets compared free cash flow 1030 million 2012 free cash flow percentage net income continuing operations 1512 2013 compared 1463 2012 2013 used 241 million net cash investing activities including 277 million cash capital equipment offset partially proceeds sale buildings equipment 15 million 2013 used 1095 million net cash financing activities significant cash outlays included repayment 750 million unsecured senior notes matured may 15 2013 payments repurchase approximately 454000 shares class common stock cost approximately 230 million payment dividends 177 million offset proceeds 119 million option exercises employee stock plans 2012 cash flows 2012 generated 1303 million cash operating activities compared 1261 million 2011 generated approximately 1030 million free cash flow nongaap financial measure reconcile defined net cash provided continuing operating activities minus capital expenditures plus proceeds sale assets compared free cash flow 1044 million 2011 free cash flow percentage net income continuing operations 1463 2012 compared 1352 2011 2012 used 429 million net cash investing activities including 175 million purchase tekmar 305 million cash capital equipment offset partially proceeds sale buildings equipment 32 million 2012 used 807 million net cash financing activities significant cash outlays included 658 million repurchase two million shares class common stock 160 million fund dividend payments repayments longterm debt related amounts borrowed prior credit agreement 2012 operating purposes repayments related 2011 borrowings purchase socla generated 32 million net cash operating activities discontinued operations 2012 related legal settlement regarding disposal former chinese subsidiary operating activities discontinued operations related austroflex generated 83 million net cash investing activities discontinued operations resulting primarily proceeds received upon disposal flomatic december 2012 nongaap financial measures believe free cash flow appropriate supplemental measure operating performance provides investors measure ability generate cash repay debt fund acquisitions companies may define free cash flow differently free cash flow represent cash generated operating activities accordance gaap therefore considered alternative net cash provided operations indication performance free cash flow also considered alternative net cash provided operations defined gaap cash conversion rate free cash flow net income continuing operations also measure performance cash flow generation reconciliation net cash provided continuing operations free cash flow calculation cash conversion rate provided net debt capitalization ratio nongaap financial measure used management increased 234 2014 38 2013 increase net debt capitalization ratio due increase net debt primarily driven increase debt outstanding relating aerco acquisition offset increase cash equivalents december 31 2014 management believes net debt capitalization ratio appropriate supplemental measure helps investors understand ability meet financing needs serves basis evaluate financial structure computation may comparable companies may define net debt capitalization ratios differently reconciliation longterm debt including current portion net debt net debt capitalization ratio provided reconciliation capitalization provided contractual obligations contractual obligations december 31 2014 presented following table aas recognized consolidated balance sheet bthe majority relates commodity capital commitments december 31 2014 maintain letters credit guarantee performance payment third parties accordance specified terms conditions amounts outstanding approximately 236 million december 31 2014 december 31 2013 letters credit primarily associated insurance coverage lesser extent foreign purchases generally expire within one year issuance instruments may exist expire without drawn therefore necessarily represent future cash flow obligations offbalance sheet arrangements except operating lease commitments offbalance sheet arrangements reasonably likely current future effect financial condition changes financial condition revenues expenses results operations liquidity capital expenditures capital resources material investors application critical accounting policies key estimates preparation consolidated financial statements accordance us gaap requires management make judgments assumptions estimates affect amounts reported critical accounting estimate assumption highly uncertain matters could material effect consolidated financial statements another also reasonable amount used change estimate reasonably likely period base assumptions historical experience estimates believe reasonable circumstances actual results could differ significantly estimates changes accounting policies significant changes accounting estimates 2014 periodically discuss development selection disclosure estimates audit committee management believes following critical accounting policies reflect significant estimates assumptions revenue recognition recognize revenue following criteria met 1 entered binding agreement 2 product shipped title passed 3 sales price customer fixed determinable 4 collectability reasonably assured recognize revenue based upon determination criteria revenue recognition met based majority shipping terms considered occurred upon shipment finished product shipping terms require goods received customer title passes instances revenues recognized customer received goods record estimated reductions revenue customer returns allowances customer programs provisions returns allowances made time sale derived historical trends form portion allowance doubtful accounts customer programs primarily annual volume incentive plans allow customers earn credit attaining agreed upon purchase targets us record estimated reductions revenue made time sale customer programs based estimated purchase targets allowance doubtful accounts allowance doubtful accounts established represent best estimate net realizable value outstanding accounts receivable development allowance doubtful accounts varies region general based review past due amounts historical writeoff experience well aging trends affecting specific accounts general operational factors affecting accounts addition factors developed certain regions utilizing historical trends sales returns allowances cash discount activities derive reserve returns allowances cash discounts uniformly consider current economic trends changes customer payment terms evaluating adequacy allowance doubtful accounts also aggressively monitor creditworthiness largest customers periodically review customer credit limits reduce risk circumstances relating specific customers change unanticipated changes occur general business environment estimates recoverability receivables could adjusted inventory valuation inventories stated lower cost market costs determined primarily firstin firstout basis utilize specific product identification historical product demand basis determining excess obsolete inventory reserve identify inventories exceed range one three years sales determined comparing current inventory balance unit sales trailing twelve months new products added inventory within past twelve months excluded analysis portion products contain recoverable materials therefore excess obsolete reserve established net recoverable amounts changes market conditions lowerthanexpected customer demand changes technology features could result additional obsolete inventory saleable could require additional inventory reserve provisions certain countries additional inventory reserves maintained potential shrinkage experienced manufacturing process reserve established based prior years inventory losses adjusted change gross inventory balance goodwill intangibles made numerous acquisitions years included recognition significant amount goodwill tested impairment annually frequently event circumstance indicates impairment loss may incurred application goodwill impairment test requires judgment including identification reporting units assignment assets liabilities reporting units determination fair value reporting unit estimate fair value reporting units using income approach based present value estimated future cash flows appropriate guideline public company guideline transaction market approaches accounting guidance allows us review goodwill impairment utilizing either qualitative quantitative analyses option first assess qualitative factors determine whether existence events circumstances leads determination likely fair value reporting unit less carrying amount assessing totality events circumstances determine likely fair value reporting unit greater carrying amount performing twostep quantitative impairment test unnecessary first identify reporting units believe could pass qualitative assessment determine whether impairment testing necessary reporting unit identified qualitative analysis includes 1a review recent fair value calculation identify extent cushion fair value carrying amount determine substantial cushion existed 2a review events circumstances occurred since recent fair value calculation determine events circumstances would affected previous fair value assessment items identified reviewed include macroeconomic conditions industry market changes cost factor changes events affect reporting unit financial performance expectations reporting units performance relative peers compile information make assessment whether likely fair value reporting unit less carrying amount determine likely quantitative analysis required eight reporting units including brae 2013 remaining balance brae goodwill written longer considered separate reporting unit 2014 year end assessment seven reporting units continuing operations one water quality goodwill acquisition aerco december 2014 eight reporting units december 31 2014 performed qualitative analysis emea residential commercial blücher dormont reporting units result qualitative analyses determined fair values reporting units greater carrying amounts emea reporting unit represents emea geographic segment excluding blücher reporting unit goodwill balance 1958 million december 31 2014 continue monitor emea reporting units performance considering current economic environment europe impact operating results growth expectations updated fair value assessment included evaluation certain key assumptions concluded fair value emea reporting unit continued exceed carrying value believe estimate future cash flows reasonable different assumptions continued economic downturn could significantly affect valuations result impairment future second analysis goodwill impairment involves quantitative twostep process 2014 performed quantitative impairment analysis us drains water reuse asiapacific reporting units performed quantitative analysis us drains water reuse reporting unit due operating performance meeting budgeted results length time since last quantitative test performed 2011 end fourth quarter 2014 management determined likely would exiting certain product lines 2015 manufactured asiapacific sold primarily americas doityourself diy distribution channel performed quantitative impairment analysis asiapacific reporting unit significant portion asiapacific reporting units third party intersegment net sales expected decline result initial phase americas asiapacific transformation restructuring program first step impairment test requires comparison fair value reporting units respective carrying value carrying value reporting unit less fair value indication impairment exists second step performed carrying amount reporting unit higher fair value indication impairment may exist second step must performed second step impairment computed comparing implied fair value reporting units goodwill carrying amount goodwill carrying amount reporting units goodwill greater implied fair value goodwill impairment loss must recognized excess charged operations inherent development fair value reporting unit assumptions estimates used income appropriate market approaches discounted cash flow method income approach calculates present value future cash flows projections based assumptions estimates derived review operating results business plans expected growth rates cost capital tax rates also make certain assumptions future economic conditions market data develop assumptions based historical results including sales growth operating profits working capital levels tax rates market approaches calculate estimated fair values based valuation multiples derived stock prices enterprise values publicly traded companies comparable company guideline public company method based valuation multiples derived actual transactions comparable public private companies guideline transaction method believe discounted cash flow model sensitive selected discount rate market approaches sensitive valuation multiples used use thirdparty valuation specialists help develop appropriate discount rate valuation multiples use standard valuation practices arrive weighted average cost capital based market guideline public companies higher discount rate lower discounted cash flows believe estimate future cash flows market approach valuations reasonable different assumptions could significantly affect valuations result impairments future fourth quarter 2014 2013 third quarter 2012 recognized pretax noncash goodwill impairment charge 129 million 03 million 10 million respectively charge 2014 related asiapacific reporting unit charges 2013 2012 related brae reporting unit within americas segment december 31 2014 goodwill asiapacific reporting unit fully impaired december 31 2013 goodwill brae fully impaired october 26 2014 testing date approximately 4903 million goodwill balance sheet results 2014 reporting units quantitative impairment analyses summarized table impairment testing indicated fair value us drains water reuse reporting unit exceeded carrying value thereby resulting impairment testing indicated carrying value asiapacific reporting unit exceeded fair value estimated fair value asiapacific reporting unit using present value expected future cash flows reflect impact certain product line rationalization efforts associated initial phase americas asiapacific transformation restructuring program including sale certain assets second step impairment test carrying value goodwill exceeded implied fair value goodwill resulting full impairment depending reporting unit underlying analyses supporting fair value assessment related comparable companies historical projected results current transaction values outlook business longterm performance included key assumptions appropriate revenue ebitda multiples discount rate longterm growth rate connection 2014 impairment tests utilized discount rates ranging 12 135 depending reporting unit growth rates beyond planning periods ranging 0 10 longterm terminal growth rate 3 future increases discount rates due changing interest rates declining economic environment different market multiples could impact assumptions value reporting units goodwill may risk impairment future intangible assets trademarks trade names generally recorded connection business acquisition values assigned intangible assets determined independent valuation firm based estimates judgments regarding expectations success life cycle products technology acquired 2014 2013 2012 recognized noncash pretax charges approximately 13 million 07 million 04 million respectively impairment certain indefinite lived intangible assets revised accounting guidance issued 2012 allows us perform qualitative impairment assessment indefinitelived intangible assets consistent goodwill guidance noted previously 2014 impairment assessment occurred october 26 2014 performed quantitative assessments indefinitelived intangible assets methodology employed relief royalty method subset income approach product liability workers compensation costs retention requirements associated insurance policies generally selfinsured potential product liability claims workers compensation costs associated workplace accidents subject variety potential liabilities connection product liability cases maintain highdeductible product liability insurance coverage believe generally accordance industry practices product liability cases us management establishes product liability accrual includes legal costs associated accrued claims utilizing thirdparty actuarial valuations incorporate historical trend factors specific claims experience derived loss reports provided thirdparty administrators product liability accrual established net applicable insurance coverage changes nature product liability claims legal costs actual settlement amounts could affect adequacy estimates require changes accrual liability estimate ultimate liability may less reported workers compensation liabilities us recognized claims incurred including claims incurred reported changes status individual case reserves time workers compensation claim filed liability estimated settle claim liability workers compensation claims determined based managements estimates nature severity claims based analysis provided thirdparty administrators various state statutes reserve requirements developed trend factors based specific claims experience discounted based riskfree interest rates employ thirdparty actuarial valuations help us estimate workers compensation accrual countries workers compensation costs applicable maintain insurance coverage limited deductible payments liability estimate ultimate liability may less reported subject changes discount rates determine trend factors product liability workers compensation liabilities based consultation outside actuaries maintain excess liability insurance outside insurance carriers minimize risks related claims excess selfinsured positions material change aforementioned factors could adverse impact operating results legal contingencies defendant numerous legal matters including involving environmental issues product liability discussed detail part item 1 businessproduct liability environmental litigation matters required gaap determine whether estimated loss contingency accrued assessing whether loss deemed probable loss amount reasonably estimated possible estimate reasonably possible loss range loss amount accrued estimate aggregated disclosed estimates potential outcomes contingencies often developed consultation outside counsel assessment based upon available information litigation inherently uncertain actual liability fully resolve litigation cannot predicted assurance accuracy event unfavorable outcome one legal matters ultimate liability may excess amounts currently accrued may material operating results cash flows particular quarterly annual period however based information currently known us management believes ultimate outcome legal contingencies resolved time likely material adverse effect financial condition though outcome could material operating results particular period depending part upon operating results period pension benefits account pension plans accordance gaap involves recording liability asset based projected benefit obligation fair value plan assets assumptions made regarding valuation benefit obligations performance plan assets primary assumptions follows • weighted average discount ratethis rate used estimate current value future benefits rate adjusted based movement longterm interest rates • expected longterm rate return assetsthis rate used estimate future growth investments investment earnings expected return based upon combination historical market performance anticipated future returns portfolio reflecting mix equity debt investments indicative plan assets determine assumptions based consultation outside actuaries investment advisors variance assumptions could significant impact future recognized pension costs assets liabilities april 28 2014 board directors voted terminate pension plan supplemental employees retirement plan terminations follow amendments pension plan serp cease freeze benefit accruals eligible employees plans effective december 31 2011 pension plan terminated effective july 31 2014 distribution plan assets pursuant termination made plan termination satisfies regulatory requirements prescribed internal revenue service pension benefit guaranty corporation expected occur late 2015 serp terminated effective may 15 2014 settle liabilities serp accordance section 409a internal revenue code paying lump sums plan participants least twelve twenty four months following termination date board directors authorized us make contributions pension plan serp may necessary make plans sufficient settle plan liabilities presently expect distributions two plans completed december 31 2015 based thirdparty actuarys estimate using preliminary assumptions estimated cash outflow approximately 40 million 45 million refer note 13 notes consolidated financial statements item details income taxes estimate use expected annual effective income tax rates accrue income taxes effective tax rates determined based budgeted earnings taxes including best estimate permanent items affect effective rate year management periodically reviews rates outside tax advisors changes made material variances expectations identified income taxes accounted asset liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax basis operating loss tax credit carry forwards deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized income period includes enactment date valuation allowance provided offset net deferred tax assets based upon available evidence likely deferred tax assets realized consider estimated future taxable income future reversals deferred tax liabilities assessing need valuation allowance new accounting standards january 2015 financial accounting standards board fasb issued accounting standards update asu 201501 income statementextraordinary unusual items simplifying income statement presentation eliminating concept extraordinary items asu 201501 eliminates us gaap concept extraordinary items part initiative reduce complexity accounting standards asu 201501 effective first quarter 2016 public companies calendar year ends early adoption permitted provided guidance applied beginning fiscal year adoption asu may applied prospectively retrospectively prior periods presented adoption guidance expected material impact companys financial statements june 2014 fasb issued asu 201412 compensationstock compensation accounting share based payments terms award provide performance target could achieved requisite service period asu 201412 clarifies performance targets could achieved requisite period treated performance conditions performance conditions would reflected estimating grant date fair value award instead would accounted achievement performance condition becomes probable asu 201412 effective first quarter 2016 public companies calendar year ends early adoption permitted adoption guidance expected material impact companys financial statements may 2014 fasb issued asu 201409 revenue contracts customers asu 201409 converges revenue recognition us gaap international financial reporting standards ifrs us gaap standard generally eliminates transaction industryspecific revenue recognition guidance includes current guidance longterm constructiontype contracts software arrangements real estate sales telecommunication arrangements franchise sales new standard revenue recognized based fivestep model asu 201409 effective first quarter 2017 public companies calendar year ends early adoption permitted public companies us gaap company assessing impact standard companys financial statements april 2014 fasb issued asu 201408 presentation financial statements property plant equipment reporting discontinued operations disclosures disposals components entity asu 201408 change definition discontinued operations limit discontinued operations presentation disposals components representing strategic shift major effect operations financial results issuer asu 201408 effective first quarter 2015 public companies calendar year ends early adoption permitted company early adopted asu 2014 adoption guidance material impact companys financial statements item 7aitem 7 management’s discussion analysis financial condition results operations overview leading supplier products solutions manage conserve flow fluids energy buildings residential commercial markets americas emea asiapacific 140 years designed produced valve systems safeguard regulate water systems energy efficient heating hydronic systems drainage systems water filtration technology helps conserve water earn revenue income almost exclusively sale products principal product lines include · residential commercial flow control productsincludes products typically sold plumbing hot water applications backflow preventers water pressure regulators temperature pressure relief valves thermostatic mixing valves · hvac gas productsincludes commercial highefficiency boilers water heaters heating solutions hydronic electric heating systems underfloor radiant applications custom heat hot water solutions hydronic pump groups boiler manufacturers alternative energy control packages flexible stainless steel connectors natural liquid propane gas commercial food service residential applications hvac acronym heating ventilation air conditioning · drainage water reuse productsincludes drainage products engineered rain water harvesting solutions commercial industrial marine residential applications · water quality productsincludes pointofuse pointofentry water filtration conditioning scale prevention systems commercial residential applications business reported three geographic segments americas emea asiapacific distribute products four primary distribution channels wholesale original equipment manufacturers oems specialty doityourself diy september 2015 divested substantial portion diy business americas reduced significance diy distribution channel products 2016 added specialty additional primary distribution channel since channel become prominent result acquisitions recent years specialty channel primarily includes independent representatives sell highefficiency boilers water heaters independent water filtration conditioning dealers specialty floor tile distributors food service distributors specialty channel distinct managed separately traditional plumbing wholesale channel specialty channel previously reported wholesale channel believe factors relating future growth include ability continue make selective acquisitions core markets well new complementary markets regulatory requirements relating quality conservation water safe use water increased demand clean water continued enforcement plumbing building codes healthy economic environment completed 11 acquisitions last decade acquisition strategy focuses businesses promote key macro themes around safety regulation energy efficiency water conservation target businesses provide us one following entry new markets andor new geographies improved channel access unique andor proprietary technologies advanced production capabilities complementary solution offerings strive invest product innovation meets needs customers end markets focus differentiated products provide greater opportunity distinguish market place providing system solutions customers rather supplying components continually look strategic opportunities invest new products markets divest existing product lines necessary order meet objectives products representing majority sales subject regulatory standards code enforcement typically require products meet stringent performance criteria together commissioned manufacturers’ representatives consistently advocated development enforcement plumbing codes focused maintaining stringent quality control testing procedures manufacturing facilities order manufacture products compliance code requirements take advantage resulting demand compliant products believe product development product testing capability investment plant equipment needed manufacture products compliance code requirements represent competitive advantage us 2016 made significant progress transformation programs discussed continued drive commercial excellence delivered operational excellence completed integration apex valves limited “apex” aerco korea co ltd “aerco korea” acquisitions added pvi industries llc “pvi” portfolio late year aerco korea renamed watts korea january 2017 financial performance 2016 mixed driven different economic business dynamics within region operate americas overall decline reported sales primarily driven exit noncore products 2015 well lower anticipated sales aerco products primarily attributable project timing aerco leading provider commercial highefficiency boilers water heaters heating solutions north americas decline partially offset growth drains business control valves specialty products emea growth electronics platform due new product introductions growth hvac market italy offset continued decline oem boiler market germany well declines uk primarily related challenging economic environment asiapacific growth 2016 primarily related increased sales valves outside china strong demand underfloor heating products residential applications china overall reported sales 2016 declined 47 693 million primarily due exit noncore products caused decrease 980 million year decrease partially offset increases sales acquired companies 240 million compared 2015 reported sales americas emea declined 79 07 respectively reported sales asiapacific grew 263 organic sales 2016 grew 10 131 million compared 2015 compared 2015 organic sales americas asiapacific grew 08 118 respectively organic sales emea essentially flat compared 2015 organic sales nongaap measure excludes impacts acquisitions divestitures foreign exchange yearoveryear comparisons divested sales includes exit noncore products sale discontinuation product lines management believes reporting organic sales growth provides useful information investors potential investors others allows complete understanding underlying sales trends providing sales growth consistent basis reconcile change organic sales reported sales region within results 2015 board directors approved program relating transformation americas asiapacific businesses first phase program primarily involved exit lowmargin noncore product lines global sourcing actions eliminated approximately 165 million combined americas asiapacific net sales primarily sold diy distribution channel discontinued selling remaining rationalized product lines end first quarter 2016 part rationalization exercise entered agreement sell operating subsidiary china dedicated exclusively manufacturing products rationalized completed sale second quarter 2016 recognized pretax gain 87 million received total proceeds sale 84 million pretax gain includes noncash accumulated currency translation adjustment 73 million second phase program involves consolidation manufacturing facilities distribution center network optimization americas together phase one transformation reduced americas net operating footprint approximately 30 second phase substantially complete designed improve utilization remaining facilities better leverage cost structure reduce working capital improve execution customer delivery requirements second phase expected completed 2017 combined basis total estimated pretax cost transformation program related americas asiapacific businesses approximately 65 million including restructuring costs 195 million goodwill intangible asset impairments 134 million transformation deployment costs approximately 32 million transformation deployment costs include consulting project management fees associated costs program expected incurred middle 2017 refer notes 3 4 notes consolidated financial statements annual report form 10k details acquisitions disposals november 2 2016 acquired 100 shares pvi riverside holdings inc parent company pvi aggregate purchase price recorded including estimated working capital adjustment approximately 792 million subject final postclosing working capital adjustments pvi leading manufacturer commercial stainless steel water heating equipment focused high capacity market north america based fort worth texas water heater product offering complements aerco’s boiler products allowing us address customers’ total heating hot water requirements february 26 2016 acquired additional 50 outstanding shares aerco korea aggregate purchase price approximately 4 million prior february 26 2016 held 40 interest aerco korea operated joint venture december 30 2016 acquired remaining 10 outstanding shares aerco korea 08 million acquisition expected expand aerco’s boiler market sale watts’ products asia september 22 2015 signed agreement sell operating subsidiary china dedicated production noncore products sale finalized second quarter 2016 received total proceeds approximately 84 million sale fourth quarter 2016 recognized pretax gain 87 million includes noncash accumulated currency translation adjustment 73 million net aftertax gain approximately 83 million november 30 2015 completed acquisition 80 outstanding shares apex valves limited “apex” new zealand company commitment purchase remaining 20 ownership within three years closing aggregate purchase price approximately 204 million recorded liability 55 million estimate acquisition date fair value contractual call option purchase remaining 20 apex manufactures highend valves new zealand market believe could introduced china market countries south east asia recent developments february 8 2017 declared quarterly dividend eighteen cents 018 per share outstanding share class common stock class b common stock payable march 16 2017 stockholders record march 2 2017 february 8 2017 board directors elected david dunbar jes munk hansen serve members board directors mr dunbar appointed member audit committee nominating corporate governance committee mr hansen appointed member compensation committee nominating corporate governance committee results operations year ended december 31 2016 compared year ended december 31 2015 net sales business reported three geographic segments americas emea asiapacific net sales segments years ended december 31 2016 december 31 2015 follows change net sales attributable following change organic net sales percentage consolidated net sales segment net sales americas asiapacific excludes divested sales periods presented products sold wholesalers oems diy chains various specialty channels change organic net sales channel attributable following change organic net sales channel americas asiapacific excludes divested sales periods presented organic net sales americas increased 77 million compared 2015 primarily due growth wholesale markets oem channels particularly relating backflow valve drainage products organic net sales emea increased slightly compared 2015 mainly due improved demand certain key markets like italy new product introductions electronics platform increases partially offset declines oem boiler market germany sales declines france project delays drains business partly driven impact economic political uncertainty uk organic net sales asiapacific wholesale market increased compared 2015 primarily due strong demand underfloor heating products residential applications well water plumbing products outside china net decrease sales due foreign exchange primarily due depreciation euro chinese yuan canadian dollar us dollar 2016 cannot predict whether foreign currencies appreciate depreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact net sales decrease total net sales due divested products 980 million result exit low margin noncore products beginning first quarter 2015 americas asiapacific segments divested sales includes exit noncore products sale discontinuation product lines increase net sales acquisitions asiapacific related fourth quarter 2015 acquisition apex first quarter 2016 acquisition aerco korea increase net sales acquisitions americas related acquisition pvi fourth quarter 2016 gross profit gross profit gross profit percent net sales gross margin 2016 2015 follows americas’ gross margin percentage increased compared 2015 due primarily favorable product mix including 2015 exit lowmargin noncore product lines well manufacturing efficiencies commodity cost savings emea’s gross margin percentage increased marginally due manufacturing productivity restructuring savings commodity cost savings compared 2015 asiapacific’s gross margin percentage increased compared 2015 primarily due increased trade sales product mix offset decreased intercompany activity selling general administrative expenses selling general administrative sga expenses decreased 672 million 137 2016 compared 2015 decrease sga expenses attributable following organic decrease sga expenses primarily due 2015 settlement certain longterm obligations including pension plan supplemental employee retirement plan obligations 647 million 60 million charge incurred 2015 settle legacy product liability claims product liability expense decreased 28 million 2016 compared 2015 due reduction frequency reported claims decreases partially offset increase stock compensation expense 25 million 2016 compared 2015 mainly due change timing 2016 grants granted earlier 2016 2015 sga expenses acquisitions relate apex aerco korea pvi acquisitions total sga expenses percentage sales 303 2016 compared 335 2015 restructuring 2016 recorded net charge 47 million primarily transformation americas asiapacific businesses involuntary terminations costs incurred part emea restructuring plans compared 214 million 2015 detailed description current restructuring plans see note 3 notes consolidated financial statements annual report form 10k goodwill longlived asset impairment charges 2016 recorded impairment charges 05 million primarily related indefinite lived tradename emea reporting unit 2015 recorded impairment charges 1305 million primarily relating 1297 million goodwill impairment charge emea reporting unit see note 2 notes consolidated financial statements annual report form 10k additional information regarding impairments gain disposition second quarter 2016 recorded pretax gain 87 million related sale china subsidiary dedicated production noncore products part transformation americas asiapacific businesses pretax gain includes noncash accumulated currency translation adjustment 73 million operating income loss operating income loss geographic segment 2016 2015 follows increase decrease operating income loss attributable following operating income 2016 1450 million increased 2351 million compared 2015 increase primarily related 1297 million goodwill impairment charge emea reporting unit 2015 settlement charge 647 million certain longterm obligations including pension plan supplemental employee retirement plan 167 million less restructuring costs recognized 2016 compared 2015 well 60 million charge settle legacy product liability claims 2015 also recognized gain 87 million second quarter 2016 disposition subsidiary china remaining 93 million increase due favorable sales mix favorable sourcing productivity interest expense interest expense decreased 17 million 7 2016 compared 2015 primarily due retirement april 2016 225 million higher interest bearing private placement note replaced 230 million drawn line credit refer note 10 notes consolidated financial statements annual report form 10k details income net income net increased 20 million income balance 44 million 2016 compared 2015 primarily due 17 million noncash gain recognized acquisition aerco korea first quarter 2016 refer note 5 notes consolidated financial statements annual report form 10k details acquisition remaining increase due net foreign currency transaction gains 2016 result depreciation euro canadian dollar us dollar 2016 compared 2015 income taxes effective income tax rate changed 341 2016 17 2015 significant change tax rate due impact nondeductible income tax reserve items loss income taxes reported 2015 primarily related goodwill impairment charge settlement pension plan supplemental employee retirement plan obligations net income loss net income 842 million 245 per common share compared net loss 1129 million 324 per common share 2015 results 2016 include aftertax benefits 83 million 024 per common share gain disposition 10 million 003 per common share gain acquisition aerco korea offset aftertax charge 88 million 026 per common share emea americas transformation deployment costs 32 million 009 per common share restructuring charges 13 million 004 per common share purchase accounting adjustments related acquisitions 2016 12 million 003 per common share acquisition costs 2016 26 million 008 per common share items primarily related tax charges related transformation results 2015 include aftertax charge 1268 million 363 per common share goodwill longlived asset impairment charges 446 million 128 per common share longterm obligation settlements including pension obligations 139 million 040 per common share restructuring 90 million 026 per common share emea americas transformation deployment costs 37 million 011 per common share legal settlements 09 million 003 per common share acquisition related costs results operations year ended december 31 2015 compared year ended december 31 2014 net sales business reported three geographic segments americas emea asiapacific net sales segments years ended december 31 2015 2014 follows change net sales attributable following products sold wholesalers diy chains oems change organic net sales channel attributable following organic net sales americas increased 197 million compared 2014 due growth wholesale markets particularly relating commercial boilers backflow valve product sales drainage products weather issues northeast midwest south central us first half 2015 partially offset sales increases year organic net sales emea wholesale diy oem markets decreased compared 2014 primarily due struggling endmarkets france germany russia decreases partially offset increased sales middle east uk markets electronics business organic net sales asiapacific wholesale market increased compared 2014 primarily due increased sales residential valve heating products sold expanded geographic regions within china outside china also increased sales australia year net decrease sales due foreign exchange primarily due depreciation euro canadian dollar us dollar 2015 cannot predict whether foreign currencies appreciate depreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact net sales change net sales due acquireddivested relates acquisition aerco december 2014 contributed 1042 million net sales first eleven months 2015 acquisition apex november 30 2015 contributed 09 million last month 2015 offset divestiture noncore product lines americas asiapacific reduced net sales 640 million compared 2014 gross profit gross profit gross profit percent net sales gross margin 2015 2014 follows americas’ gross margin increased compared 2014 due primarily product mix price realization material cost savings increase product mix largely due aerco acquisition positive impact divested products material cost savings improved part due lower copper prices americas lead free foundry operated efficiently prior year emea’s gross margin decreased primarily due lower overhead absorption related volume declines unfavorable product mix offset transformation production efficiencies asiapacific’s gross margin increased primarily due productivity initiatives increased thirdparty sales offset partially reduced intercompany activity selling general administrative expenses selling general administrative sga expenses increased 843 million 207 2015 compared 2014 increase sga expenses attributable following organic increase sga expenses primarily related settlement certain longterm obligations including pension obligations 647 million increased personnel costs 93 million increased legal costs 35 million increased product liability costs 81 million offset decreased acquisition related costs 44 million reduced commission freight costs 35 million increased personnel costs primarily relate increased compensation costs 44 million increased stockbased compensation costs 25 million partially due benefit recognized prior year related former ceo’s forfeiture unvested equity awards increased pension costs 17 million increased employee related costs 07 million partially offset reduced relocation costs 10 million incremental legal costs include impact settlement principle relating two class action lawsuits regarding legacy products net settlement charged operations amounted 35 million 2015 refer note 14 notes consolidated financial statements annual report form 10k detail increased product liability cost americas 81 million driven recent increase reported claims majority relate divested discontinued products 25 million charge related resolution certain legacy claims noncore products exited decrease sga expenses foreign exchange primarily due depreciation euro canadian dollar us dollar 2015 acquired sga costs relate aerco apex acquisitions total sga expenses percentage sales 335 2015 269 2014 restructuring 2015 recorded net charge 214 million primarily transformation americas asiapacific businesses involuntary terminations corporate involuntary terminations costs incurred part emea restructuring plans compared 152 million 2014 detailed description current restructuring plans see note 3 notes consolidated financial statements annual report form 10k goodwill longlived asset impairment charges 2015 recorded impairment charges 1305 million primarily relating 1297 million goodwill impairment charge emea reporting unit trade name impairment charges 05 million 01 million americas emea respectively compared 142 million 2014 see note 2 notes consolidated financial statements annual report form 10k additional information regarding impairments operating loss income operating loss income geographic segment 2015 2014 follows change operating income attributable following decrease consolidated operating income largely due noncash goodwill impairment charge recorded emea 1297 million settlement certain longterm obligations including pension obligations 647 million corporate increase restructuring charges factors contributing decrease included increase sga unfavorable foreign exchange offset partially contribution aerco acquisition americas organic operating income decrease primarily due increased sga expenses related product liability costs 81 million transformationrelated costs 71 million emea organic operating income decrease primarily due volume decline interest expense interest expense increased 44 million 221 2015 compared 2014 primarily due interest borrowings used purchase aerco december 2014 income expense net income expense net fluctuated 55 million income balance 24 million 2015 compared 2014 primarily due net foreign currency transaction gains 2015 compared losses 2014 result depreciation euro chinese yuan canadian dollar us dollar depreciation canadian dollar euro 2015 income taxes effective income tax rate changed 17 2015 395 2014 significant change tax rate due impact nondeductible income tax reserve items loss income taxes reported 2015 compared 2014 primarily related goodwill impairment charge settlement pension plan supplemental employee retirement plan obligations net loss income net loss 2015 1129 million 324 per common share compared net income 503 million 142 per common share 2014 results 2015 include aftertax charge 1268 million 363 per common share goodwill longlived asset impairment charge 446 million 128 per common share longterm obligation settlements including pension obligations 139 million 040 per common share restructuring 90 million 026 per common share emea americas transformation deployment costs 37 million 011 per common share legal settlements 09 million 003 per common share acquisition related costs results 2014 include net aftertax charges 385 million 109 per common share including acquisitions impairment related costs 051 restructuring charges 039 emea americas transformation deployment costs 019 liquidity capital resources 2016 cash flows 2016 generated 1381 million cash operating activities compared 1094 million 2015 cash flows operating activities 2015 included 492 million settlement certain longterm obligations including pension obligations generated approximately 1022 million free cash flow nongaap financial measure reconcile defined net cash provided operating activities minus capital expenditures plus proceeds sale assets compared free cash flow 818 million 2015 2016 used 1140 million net cash investing activities compared 173 million 2015 used 676 million cash 2016 2015 relating acquisitions pvi aerco korea also increased purchases capital equipment 2016 83 million 2015 received approximately 208 million cash proceeds sale assets primarily relating sale noncore product lines americas anticipate investing approximately 36 million 40 million capital equipment 2017 improve manufacturing capabilities 2016 generated 277 million net cash financing activities compared 709 million net cash used 2015 increase cash generated primarily due net proceeds longterm borrowings 744 million 178 million less stock repurchases 2016 also received additional 57 million cash proceeds share transactions employee stock plans 2016 compared 2015 february 12 2016 terminated prior credit agreement entered new credit agreement “credit agreement” among company certain subsidiaries company became borrowers credit agreement jpmorgan chase bank na administrative agent swing line lender letter credit issuer lenders referred therein credit agreement provides 500 million fiveyear senior unsecured revolving credit facility “revolving credit facility” sublimit 100 million letters credit agreement also provided 300 million fiveyear term loan facility “term loan facility” available us single draw credit agreement matures february 12 2021 subject extension certain circumstances subject terms credit agreement december 31 2016 300 million borrowings outstanding term loan 162 million drawn line credit agreement december 31 2016 compliance covenants related credit agreement 3124 million unused available credit agreement 256 million standby letters credit outstanding credit agreement borrowings outstanding revolving credit facility bear interest fluctuating rate per annum equal applicable percentage defined case eurocurrency rate loans ice benchmark administration libor rate plus applicable percentage ranging 0975 145 determined reference consolidated leverage ratio ii case base rate loans swing line loans highest federal funds rate plus 05 b rate interest effect day announced jpmorgan chase bank na “prime rate” c ice benchmark administration libor rate plus 10 plus applicable percentage ranging 000 045 determined reference company’s consolidated leverage ratio borrowings outstanding term loan facility bear interest fluctuating rate per annum equal applicable percentage defined ice benchmark administration libor rate plus applicable percentage ranging 1125 175 determined reference company’s consolidated leverage ratio loan term loan facility amortizes follows 0 per annum first year 75 second third years 10 fourth fifth years remaining unpaid balance paid full maturity date payments due made ratably year quarterly installments addition paying interest credit agreement also required pay certain fees connection credit facility including limited unused facility fee letter credit fees may repay loans outstanding credit agreement time without premium penalty customary breakage costs subject terms credit agreement december 16 2016 watts international holdings limited “watts international” wholly owned subsidiary entered facility agreement “facility agreement” among watts international original borrower original guarantor watts water technologies emea bv wholly owned subsidiary “watts emea” original guarantor jpmorgan chase bank na sole bookrunner sole lead arranger “jp morgan chase bank” jp morgan europe limited agent financial parties lenders referred therein facility agreement provides €110 million 364 day term loan facility single draw december 20 2016 watts international borrowed full amount available borrowing facility agreement loan bears interest rate per annum equal euro interbank offered rate euribor provided rate less zero euribor shall deemed zero plus ii margin 1875 provided event default continuing watts international’s consolidated leverage ratio specified level margin shall decrease 150 accrued interest loan payable last day interest period first interest period set one month may changed subsequently period one two three months period agreed lenders loan facility agreement required repaid following schedule €15000000 june 30 2017 €15000000 september 29 2017 remaining balance december 19 2017 substantially proceeds borrowings made december 20 2016 facility agreement used pay 113 million previously outstanding revolving credit facility december 31 2016 held 3384 million cash equivalents ability fund operations cash equivalents could limited market liquidity well possible tax implications moving proceeds across jurisdictions amount approximately 3090 million cash equivalents held foreign subsidiaries us operations typically generate sufficient cash flows meet domestic obligations may borrow fund expected cash outlay reasonable interest rates utilizing uncommitted borrowings credit agreement however amounts held foreign subsidiaries needed fund operations united states could required accrue pay taxes repatriate funds charges may include federal tax 350 dividends received us potential state income taxes additional withholding tax payable foreign jurisdictions 100 however intent permanently reinvest undistributed earnings foreign subsidiaries current plans repatriate fund operations united states covenant compliance credit agreement required satisfy maintain specified financial ratios financial condition tests december 31 2016 financial ratios included consolidated interest coverage ratio based consolidated earnings income taxes interest expense depreciation amortization consolidated ebitda consolidated interest expense defined credit agreement credit agreement defined consolidated ebitda exclude unusual nonrecurring charges gains also required maintain consolidated leverage ratio consolidated funded debt consolidated ebitda consolidated funded debt defined credit agreement included long shortterm debt capital lease obligations trade letters credit outstanding less cash balance sheet exceeded 50 million december 31 2016 actual financial ratios calculated accordance credit agreement compared required levels credit agreement follows december 31 2016 compliance covenants related credit agreement one senior note agreement detailed note 10 notes consolidated financial statements annual report form 10k senior note agreement requires us maintain fixed charge coverage ratio consolidated ebitda plus consolidated rent expense period consolidated fixed charges consolidated fixed charges sum consolidated interest expense period consolidated rent expense december 31 2016 actual fixed charge coverage ratio calculated accordance senior note agreements compared required ratio therein follows facility agreement required satisfy maintain specified financial ratios financial condition tests december 31 2016 financial ratios relate accounts watts international whollyowned subsidiaries includes consolidated leverage ratio calculated consolidated total gross debt consolidated ebitda consolidated total gross debt defined facility agreement includes long shortterm debt capital lease obligations trade letters credit outstanding consolidated ebitda defined facility agreement includes consolidated earnings income taxes interest expense depreciation amortization excludes unusual nonrecurring charges gains watts international also required maintain minimum consolidated cash balance ratio defined cash balance held company consolidated total gross debt cash balance defined includes cash equivalents december 31 2016 compliance covenants related facility agreement addition financial ratios credit agreement facility agreement senior note agreement contain affirmative negative covenants include limitations disposition sale assets prohibitions assuming incurring liens assets limited exceptions limitations making investments permitted agreements working capital defined current assets less current liabilities december 31 2016 4328 million compared 5140 million december 31 2015 ratio current assets current liabilities 20 1 december 31 2016 compared 27 1 december 31 2015 decrease working capital primarily related shortterm facility agreement entered 2016 2015 cash flows 2015 generated 1094 million cash operating activities compared 1352 million 2014 decrease primarily due 492 million settlement certain longterm obligations including pension plan offset inventory reduction efforts stronger accounts receivable collections generated approximately 818 million free cash flow nongaap financial measure reconcile defined net cash provided continuing operating activities minus capital expenditures plus proceeds sale assets compared free cash flow 1119 million 2014 2015 used 173 million net cash investing activities including 204 million purchase apex 277 million cash capital equipment offset cash proceeds approximately 331 million sale certain assets relating divested product lines americas 2015 used 709 million net cash financing activities including 446 million used repurchase approximately 813000 shares class common stock 231 million used pay dividends 2014 cash flows 2014 generated 1352 million cash operating activities generated approximately 1119 million free cash flow nongaap financial measure reconcile defined net cash provided continuing operating activities minus capital expenditures plus proceeds sale assets free cash flow percentage net income continuing operations 2225 2014 used 2955 million net cash investing activities including 2722 million purchase aerco 237 million cash capital equipment 2014 generated 2208 million net cash financing activities cash provided financing activities primarily due 2750 million borrowings prior credit agreement fund aerco acquisition proceeds 118 million option exercises employee stock plans offset payments repurchase approximately 670000 shares class common stock cost 396 million payment dividends 205 million nongaap financial measures accordance secs regulation g item 10e regulation sk following provides definitions nongaap measures used management believe measures provide complete perspective underlying business results trends nongaap measures intended considered user place related gaap measure rather supplemental information fully understand business results nongaap measures may similar measures used companies due possible differences method items events adjusted organic sales growth nongaap measure sales growth excludes impacts acquisitions divestitures foreign exchange periodoverperiod comparisons reconciliation closely related usgaap measure net sales included discussion within “results operations” organic net sales considered addition replacement superior measure net sales management believes reporting organic sales growth provides useful information investors potential investors others facilitating easier comparisons revenue performance prior future periods adjusted operating income adjusted operating margins adjusted net income adjusted earnings per share nongaap measures exclude certain expenses relate primarily global restructuring programs deployment costs acquisition related costs purchase accounting adjustments gains acquisition disposition goodwill longlived asset impairments defined benefit plans settlement certain costs related income tax impacts items tax adjustments management believes reporting financial measures provides useful information investors potential investors others facilitating easier comparisons performance prior future periods reconciliation us gaap results adjusted nongaap measures provided free cash flow nongaap measure represent cash generated operating activities accordance us gaap therefore considered alternative net cash provided operating activities indication performance cash conversion rate free cash flow net income also measure performance cash flow generation believe free cash flow appropriate supplemental measure operating performance provides investors measure ability generate cash repay debt pay dividends repurchase stock fund acquisitions reconciliation net cash provided operating activities free cash flow calculation cash conversion rate provided free cash flow adjusted decreased 2016 compared free cash flow adjusted 2015 primarily due increase cash used capital investments made 2016 well impact paying certain legal settlements 2016 net debt capitalization ratio nongaap financial measure used management increased 298 2016 285 2015 increase driven increase debt outstanding december 31 2016 used primarily fund pvi acquisition management believes net debt capitalization ratio appropriate supplemental measure helps investors understand ability meet financing needs serves basis evaluate financial structure computation may comparable companies may define net debt capitalization ratios differently reconciliation longterm debt including current portion net debt net debt capitalization ratio provided reconciliation capitalization provided contractual obligations contractual obligations december 31 2016 presented following table recognized consolidated balance sheet b majority relates commodity capital commitments december 31 2016 c payment less one year represents first year amortization term loan credit agreement well retirement 364 day term loan facility entered december 16 2016 see note 10 notes consolidated financial statements annual report form 10k details financing arrangements maintain letters credit guarantee performance payment third parties accordance specified terms conditions amounts outstanding approximately 256 million december 31 2016 248 million december 31 2015 letters credit primarily associated insurance coverage lesser extent foreign purchases generally expire within one year issuance instruments may exist expire without drawn therefore necessarily represent future cash flow obligations offbalance sheet arrangements except operating lease commitments offbalance sheet arrangements reasonably likely current future effect financial condition changes financial condition revenues expenses results operations liquidity capital expenditures capital resources material investors application critical accounting policies key estimates preparation consolidated financial statements accordance us gaap requires management make judgments assumptions estimates affect amounts reported critical accounting estimate assumption highly uncertain matters could material effect consolidated financial statements another also reasonable amount used change estimate reasonably likely period base assumptions historical experience estimates believe reasonable circumstances actual results could differ significantly estimates 2016 removed workers compensation costs pension benefits critical accounting policies longer considered critical significant changes accounting policies significant changes accounting estimates 2016 periodically discuss development selection disclosure estimates audit committee management believes following critical accounting policies reflect significant estimates assumptions revenue recognition recognize revenue following criteria met 1 entered binding agreement 2 product shipped title passed 3 sales price customer fixed determinable 4 collectability reasonably assured recognize revenue based upon determination criteria revenue recognition met based majority shipping terms considered occurred upon shipment finished product shipping terms require goods received customer title passes instances revenues recognized customer received goods record estimated reductions revenue customer returns allowances customer programs provisions returns allowances made time sale derived historical trends form portion allowance doubtful accounts customer programs primarily annual volume incentive plans allow customers earn credit attaining agreed upon purchase targets us record estimated reductions revenue made time sale customer programs based estimated purchase targets allowance doubtful accounts allowance doubtful accounts established represent best estimate net realizable value outstanding accounts receivable development allowance doubtful accounts varies region general based review past due amounts historical writeoff experience well aging trends affecting specific accounts general operational factors affecting accounts addition factors developed certain regions utilizing historical trends sales returns allowances cash discount activities derive reserve returns allowances cash discounts uniformly consider current economic trends changes customer payment terms evaluating adequacy allowance doubtful accounts also aggressively monitor creditworthiness largest customers periodically review customer credit limits reduce risk circumstances relating specific customers change unanticipated changes occur general business environment estimates recoverability receivables could adjusted inventory valuation inventories stated lower cost market costs determined primarily firstin firstout basis utilize specific product identification historical product demand basis determining excess obsolete inventory reserve identify inventories exceed range one three years sales determined comparing current inventory balance unit sales trailing twelve months new products added inventory within past twelve months excluded analysis portion products contain recoverable materials therefore excess obsolete reserve established net recoverable amounts changes market conditions lowerthan expected customer demand changes technology features could result additional obsolete inventory saleable could require additional inventory reserve provisions certain countries additional inventory reserves maintained potential shrinkage experienced manufacturing process reserve established based prior year’s inventory losses adjusted change gross inventory balance goodwill intangibles made numerous acquisitions years recognized significant amount goodwill tested impairment annually frequently event circumstance indicates impairment loss may incurred application goodwill impairment test requires judgment including identification reporting units assignment assets liabilities reporting units determination fair value reporting unit estimate fair value reporting units using income approach based present value estimated future cash flows appropriate guideline public company guideline transaction market approaches accounting guidance allows us review goodwill impairment utilizing either qualitative quantitative analyses option first assess qualitative factors determine whether existence events circumstances leads determination likely fair value reporting unit less carrying amount assessing totality events circumstances determine likely fair value reporting unit greater carrying amount performing twostep quantitative impairment test unnecessary first identify reporting units believe could pass qualitative assessment determine whether impairment testing necessary reporting unit identified qualitative analysis includes 1 review recent fair value calculation identify extent cushion fair value carrying amount determine substantial cushion existed 2 review events circumstances occurred since recent fair value calculation determine events circumstances would affected previous fair value assessment items identified reviewed include macroeconomic conditions industry market changes cost factor changes events affect reporting unit financial performance expectations reporting unit’s performance relative peers compile information make assessment whether likely fair value reporting unit less carrying amount determine likely quantitative analysis required 2016 eight reporting units one reporting units water quality goodwill performed qualitative analysis remaining reporting units include blücher dormont us drains aerco emea residential commercial asiapacific october 30 2016 testing date approximately 4934 million goodwill balance sheet result qualitative analyses determined fair values reporting units likely greater carrying amounts 2016 need proceed beyond qualitative analysis goodwill impairments recorded 2015 recognized pretax impairment charge 1297 million emea reporting unit remaining goodwill balance december 31 2015 reporting unit 464 million fourth quarter 2014 recognized pretax noncash goodwill impairment charge 129 million charge 2014 related asiapacific reporting unit december 31 2014 goodwill asiapacific reporting unit fully impaired intangible assets trademarks trade names generally recorded connection business acquisition values assigned intangible assets determined independent valuation firm based estimates judgments regarding expectations success life cycle products technology acquired accounting guidance allows us perform qualitative impairment assessment indefinitelived intangible assets consistent goodwill guidance noted previously 2016 impairment assessment occurred october 30 2016 performed quantitative assessments indefinitelived intangible assets methodology employed relief royalty method subset income approach 2016 recognized noncash pretax charge approximately 04 million related indefinite lived tradename emea reporting unit 2015 2014 recognized noncash pretax impairment charges 06 million 13 million respectively impairment certain indefinitelived intangible assets product liability retention requirements associated insurance policies generally selfinsured potential product liability claims subject variety potential liabilities connection product liability cases maintain high selfinsured retention limit within product liability general liability coverage believe generally accordance industry practices product liability cases us management establishes product liability accrual includes legal costs associated accrued claims utilizing thirdparty actuarial valuations incorporate historical trend factors specific claims experience derived loss reports provided thirdparty administrators product liability accrual established considering applicable insurance coverage changes nature product liability claims legal costs actual settlement amounts could affect adequacy estimates require changes accrual liability estimate ultimate liability may less reported determine trend factors product liability based consultation outside actuaries maintain excess liability insurance minimize risks related claims excess primary insurance policies material change aforementioned factors could adverse impact operating results legal contingencies defendant numerous legal matters including involving environmental issues product liability discussed detail part item 1 “businessproduct liability environmental litigation matters” required gaap determine whether estimated loss contingency accrued assessing whether loss deemed probable loss amount reasonably estimated possible estimate reasonably possible loss range loss amount accrued estimate aggregated disclosed estimates potential outcomes contingencies often developed consultation outside counsel assessment based upon available information litigation inherently uncertain actual liability fully resolve litigation cannot predicted assurance accuracy event unfavorable outcome one legal matters ultimate liability may excess amounts currently accrued may material operating results cash flows particular quarterly annual period however based information currently known us management believes ultimate outcome legal contingencies resolved time likely material adverse effect financial condition though outcome could material operating results particular period depending part upon operating results period income taxes estimate use expected annual effective income tax rates accrue income taxes effective tax rates determined based budgeted earnings taxes including best estimate permanent items affect effective rate year management periodically reviews rates outside tax advisors changes made material variances expectations identified income taxes accounted asset liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax basis operating loss tax credit carry forwards deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized income period includes enactment date valuation allowance provided offset net deferred tax assets based upon available evidence likely deferred tax assets realized consider estimated future taxable income future reversals deferred tax liabilities assessing need valuation allowance new accounting standards discussion recent accounting pronouncements included note 2 notes consolidated financial statements annual report form 10k item 7aitem 7 management’s discussion analysis financial condition results operations overview leading supplier products solutions conserve water manage flow fluids energy buildings residential commercial markets americas europe apmea 140 years designed produced valve systems safeguard regulate water systems energy efficient heating hydronic systems drainage systems water filtration technology helps conserve water earn revenue income almost exclusively sale products principal product lines include · residential commercial flow control productsincludes products typically sold plumbing hot water applications backflow preventers water pressure regulators temperature pressure relief valves thermostatic mixing valves · hvac gas productsincludes commercial highefficiency boilers water heaters heating solutions hydronic electric heating systems underfloor radiant applications custom heat hot water solutions hydronic pump groups boiler manufacturers alternative energy control packages flexible stainless steel connectors natural liquid propane gas commercial food service residential applications hvac acronym heating ventilation air conditioning · drainage water reuse productsincludes drainage products engineered rain water harvesting solutions commercial industrial marine residential applications · water quality productsincludes pointofuse pointofentry water filtration conditioning scale prevention systems commercial residential applications business reported three geographic segments americas europe apmea distribute products four primary distribution channels wholesale original equipment manufacturers oems specialty doityourself diy september 2015 divested substantial portion diy business americas reduced significance diy distribution channel products 2017 2016 prior 2017 europe segment formerly referred emea europe middle east africa apmea segment formerly referred asiapacific january 1 2017 began reporting results watts industries middle east indirect wholly owned subsidiary within apmea segment align internal operating changes results previously reported within former emea segment change affect reportable segments represents change composition better aligns structure internal organization 2016 2015 results segment retrospectively revised comparative purposes believe factors relating future growth include continued product innovation meets needs customers end markets ability make selective acquisitions core markets well new complementary markets regulatory requirements relating quality conservation water safe use water increased demand clean water continued enforcement plumbing building codes healthy economic environment completed 10 acquisitions last decade acquisition strategy focuses businesses promote key macro themes around safety regulation energy efficiency water conservation target businesses provide us one following entry new markets andor new geographies improved channel access unique andor proprietary technologies advanced production capabilities complementary solution offerings innovation strategy focused differentiated products provide greater opportunity distinguish market place conversely want migrate away commoditized products cannot add value goal solutions provider merely components supplier continually look strategic opportunities invest new products markets divest existing product lines necessary order meet objectives products representing majority sales subject regulatory standards code enforcement typically require products meet stringent performance criteria together commissioned manufacturers’ representatives consistently advocated development enforcement plumbing codes focused maintaining stringent quality control testing procedures manufacturing facilities order manufacture products compliance code requirements take advantage resulting demand compliant products believe product development product testing capability investment plant equipment needed manufacture products compliance code requirements represent competitive advantage us 2017 successfully completed transformation programs realized benefits product portfolio rationalization footprint optimization global sourcing initiatives simultaneously reinvesting business continued drive commercial operational excellence completed integration pvi industries llc “pvi” portfolio year continued streamline product portfolio across regions focus core product lines rationalize certain lowmargin noncore products financial performance 2017 solid driven growth americas europe segments realization productivity transformation savings 2017 tax act resulted significant changes us corporate income tax system enacted december 22 2017 changes include federal statutory rate reduction 35 21 effective january 1 2018 elimination reduction certain domestic deductions credits limitations deductibility interest expense executive compensation 2017 tax act transitions international taxation worldwide system modified territorial system includes base erosion prevention measures nonus earnings 2017 tax act also includes onetime mandatory deemed repatriation tax accumulated foreign subsidiaries previously untaxed foreign earnings “toll tax” changes tax rates tax laws accounted period enactment deferred tax assets liabilities measured enacted tax rate therefore year ended december 31 2017 recorded charge totaling 251 million related current estimate provisions 2017 tax act including estimated 233 million expense toll tax toll tax paid eightyear period starting 2018 accrue interest provisions 2017 tax act allows us flexibility deploying global cash resources continue drive balanced capital allocation strategy expect 2017 tax act positive effect income tax rate 2018 overall reported sales 2017 increased 42 583 million primarily related increase acquired sales 470 million 33 relating acquisitions pvi watts korea increase organic sales 70 million 05 increase sales due foreign exchange 78 million 07this increase partially offset decrease sales 35 million related product lines divested first quarter 2016 americas segment part americas transformation program compared 2016 reported sales percentage segment sales americas europe increased 56 21 respectively reported sales apmea declined 26 percentage segment sales organic sales americas europe increased 08 06 respectively organic sales apmea declined 46 compared 2016 increase organic sales americas primarily driven increased sales valve hvac drainage products partially offset declines tankless water heater condensing boiler products europe increase primarily driven drains electronics products offset decline plumbing products due impact product rationalization decline apmea sales primarily related impact product rationalization partially offset increased demand underfloor heating products commercial valves growth korea operating income 1623 million increased 173 million 119 compared 2016 increase driven incremental transformation productivity savings lower transformation costs acquisition pvi higher sales volume organic sales nongaap measure excludes impacts acquisitions divestitures foreign exchange yearoveryear comparisons divested sales includes exit noncore products sale discontinuation product lines management believes reporting organic sales growth provides useful information investors potential investors others allows complete understanding underlying sales trends providing sales growth consistent basis reconcile change organic sales reported sales region within results december 2017 concluded transformation program relating americas apmea businesses primarily involved exit discontinuation lowmargin noncore product lines enhancing global sourcing capabilities reduction square footage americas facilities transformation program approved board directors 2015 course program eliminated approximately 165 million combined americas apmea net sales primarily within doityourself diy distribution channel part exit noncore product lines entered agreement sell operating subsidiary china dedicated exclusively manufacturing products discontinued sale finalized second quarter 2016 recognized pretax gain 87 million received proceeds sale 84 million program also involved consolidation manufacturing facilities distribution center network optimization reducing square footage americas facilities net operating footprint approximately 30 footprint focus program designed improve utilization remaining facilities better leverage cost structure reduce working capital improve execution customer delivery requirements total pretax cost transformation program related americas apmea businesses 598 million including restructuring costs 181 million goodwill intangible asset impairments 135 million transformation deployment costs approximately 283 million transformation deployment costs included consulting project management fees inventory writeoffs associated costs program originally included estimated pretax charges totaling approximately 65 million third quarter 2017 total expected costs planned actions reduced approximately 60 million primarily related reduced expected facility exit costs reduced transformation deployment costs associated americas apmea transformation program incurred december 31 2017 refer note 3 note 4 notes consolidated financial statements annual report form 10k details acquisitions disposals november 2 2016 acquired 100 shares pvi riverside holdings inc parent company pvi aggregate purchase price including final working capital adjustment approximately 791 million pvi leading manufacturer commercial stainless steel water heating equipment focused high capacity market north america based fort worth texas pvi’s water heater product offering complements aerco’s boiler products allowing us address customers’ heating hot water requirements february 26 2016 acquired additional 50 outstanding shares watts korea aggregate purchase price approximately 4 million prior february 26 2016 company held 40 interest watts korea operated joint venture acquired remaining 10 ownership fourth quarter 2016 100 watts korea watts korea strengthens strategic vision expand solutions sales korean market accounted transaction step acquisition within business combination recognized 17 million pretax gain previously held 40 ownership interest first quarter 2016 september 22 2015 signed agreement sell operating subsidiary china dedicated production noncore products sale finalized second quarter 2016 received total proceeds approximately 84 million sale fourth quarter 2016 recognized pretax gain 87 million includes noncash accumulated currency translation adjustment 73 million net aftertax gain approximately 83 million november 30 2015 acquired 80 outstanding shares apex valves limited “apex” apex specializes design manufacturing control valves low high pressure hot water filtration systems apex also produces extensive range float reservoir valves agricultural industry aggregate purchase price approximately 204 million recorded longterm liability 55 million estimate acquisition date fair value contractual call option purchase remaining 20 within three years closing apex manufactures highend valves new zealand market believe could introduced china market countries south east asia acquired additional 10 ownership first quarter 2017 approximately 29 million 90 outstanding shares apex maintain current liability approximately 29 million estimated fair value remaining 10 contractual call option expected exercised 2018 recent developments february 8 2018 declared quarterly dividend nineteen cents 019 per share outstanding share class common stock class b common stock payable march 16 2018 stockholders record march 2 2018 results operations year ended december 31 2017 compared year ended december 31 2016 net sales business reported three geographic segments americas europe apmea net sales segments years ended december 31 2017 december 31 2016 follows change net sales attributable following change organic net sales percentage consolidated net sales segment net sales americas excludes divested sales periods presented products sold wholesalers oems various specialty channels diy chains change organic net sales channel attributable following organic sales increase 70 million partially muted 151 million impact ongoing product rationalization efforts across regions continue focus core product lines product rationalization mainly affected diy oem channels organic net sales americas increased 74 million mainly growth wholesale channel driven valve hvac drainage products increase partially offset declines specialty channels experienced weakness tankless water heater condensing boiler products also decrease diy channel due product rationalization discussed organic net sales europe increased 25 million primarily due growth wholesale channel increased sales drains products increase also due higher demand electronics products germany increases partially offset product rationalization reduced demand hvac products italy organic net sales apmea decreased 29 million driven primarily impact product rationalization decrease offset partly higher demand china residential underfloor heating products commercial valves products well growth south korea expanded product offering net increase sales due foreign exchange primarily due appreciation euro canadian dollar us dollar 2017 cannot predict whether foreign currencies appreciate depreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact net sales decrease total net sales due divested products 35 million relates discontinuation product lines divested end first quarter 2016 americas segment part americas transformation program increase net sales acquisitions americas apmea segments related fourth quarter 2016 acquisition pvi first quarter 2016 acquisition watts korea respectively gross profit gross profit gross profit percent net sales gross margin 2017 2016 follows increase gross margin percentage attributable increased volume manufacturing productivity changes product mix incremental savings transformation restructuring programs primarily within americas europe selling general administrative expenses selling general administrative sga expenses increased 82 million 19 2017 compared 2016 increase sga expenses attributable following sga expenses increased primarily result 2016 acquisitions pvi watts korea well increases foreign exchange primarily appreciation euro canadian dollar us dollar compared 2016 organically sga expenses decreased 73 million compared 2016 primarily related decline product liability costs 94 million lower transformation costs 81 million completed transformation program 2017 lower property tax charges 11 million decline product liability costs primarily due resolution class action lawsuits related certain legacy claims undifferentiated products exited associated reduction reported claims organic decrease partially offset 82 million investments strategic initiatives includes 25 million research development costs and42 million higher distribution freight costs total sga expenses percentage sales 297 2017 compared 303 2016 restructuring 2017 recorded net charge 68 million primarily transformation americas business involuntary terminations costs incurred part restructuring initiatives compared net charge 47 million 2016 detailed description current restructuring plans see note 3 notes consolidated financial statements annual report form 10k goodwill longlived asset impairment charges 2017 recorded impairment 10 million primarily related technology asset americas operating segment 2016 recorded impairment charges 05 million primarily related indefinite lived tradename europe operating segment see note 6 notes consolidated financial statements annual report form 10k additional information regarding impairments gain disposition second quarter 2016 recorded pretax gain 87 million related sale china subsidiary dedicated production noncore products part transformation americas apmea businesses pretax gain included noncash accumulated currency translation adjustment 73 million operating income loss operating income loss geographic segment 2017 2016 follows increase decrease operating income loss attributable following increase consolidated operating income primarily driven increased volume gross margin improvements americas well savings restructuring initiatives europe increase operating income also driven reduced transformation costs compared 2016 americas apmea transformation program completed 2017 contributing increase consolidated operating income 29 million acquisition pvi included operating income 2016 87 million gain disposition china subsidiary interest expense interest expense decreased 35 million 155 2017 2016 repaid 150 million outstanding debt 2017 weighted average interest rate decreased marginally year retired higher cost private placement debt middle 2016 replaced lower cost revolver debt replaced certain us based revolver debt lower cost euro denominated debt late 2016 refer note 11 notes consolidated financial statements annual report form 10k details expense income net expense income net decreased 55 million net expense balance 11 million 2017 compared net income balance 44 million 2016 included income 2016 17 million noncash gain recognized acquisition watts korea remaining decrease primarily due net foreign currency transaction losses 2017 income taxes effective income tax rate changed 489 2017 341 2016 tax rate increased primarily due impact 2017 tax act enacted december 22 2017 resulted significant changes us corporate income tax system changes include lowering corporate tax rate 35 21 2018 implementing territorial tax system imposing onetime deemed repatriation toll tax cumulative undistributed foreign earnings changes tax rates tax laws accounted period enactment deferred tax assets liabilities measured enacted tax rate therefore year ended december 31 2017 recorded provisional charge 251 million related current estimate provisions 2017 tax act including estimated 233 million expense toll tax toll tax paid eightyear period starting 2018 accrue interest net income loss net income 2017 731 million 212 per common share compared 842 million 244 per common share 2016 results 2017 include charge 251 million within income tax expense 073 per common share related impact 2017 tax act 19 million 006 per common share europe americas transformation costs 47 million 014 per common share restructuring charges 06 million 002 per common share longlived asset impairment charges partially offset 16 million 005 per common share tax benefits results 2016 include aftertax benefits 83 million 024 per common share gain disposition 10 million 003 per common share gain acquisition watts korea offset aftertax charge 88 million 026 per common share europe americas transformation deployment costs 32 million 009 per common share restructuring charges 13 million 004 per common share purchase accounting adjustments related acquisitions 2016 12 million 003 per common share acquisition costs 2016 26 million 008 per common share items primarily related tax charges related transformation results operations year ended december 31 2016 compared year ended december 31 2015 net sales business reported three geographic segments americas europe apmea net sales segments years ended december 31 2016 2015 follows change net sales attributable following change organic net sales percentage consolidated net sales segment net sales americas apmea excluded divested sales periods presented products sold wholesalers oems various specialty channels diy chains change organic net sales channel attributable following change organic net sales channel americas apmea excluded divested sales periods presented organic net sales americas increased 77 million compared 2015 primarily due growth wholesale markets oem channels particularly relating backflow valve drainage products organic net sales europe increased slightly compared 2015 mainly due improved demand certain key markets italy new product introductions electronics platform increases partially offset declines oem boiler market germany sales declines france project delays drains business partly driven impact economic political uncertainty uk organic net sales apmea wholesale market increased compared 2015 primarily due strong demand underfloor heating products residential applications well water plumbing products outside china net decrease sales due foreign exchange primarily due depreciation euro chinese yuan canadian dollar us dollar 2016 cannot predict whether foreign currencies appreciate depreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact net sales decrease total net sales due divested products 980 million result exit low margin noncore products beginning first quarter 2015 americas apmea segments divested sales included exit noncore products sale discontinuation product lines increase net sales acquisitions apmea related fourth quarter 2015 acquisition apex first quarter 2016 acquisition watts korea increase net sales acquisitions americas related acquisition pvi fourth quarter 2016 gross profit gross profit gross profit percent net sales gross margin 2016 2015 follows americas’ gross margin percentage increased compared 2015 due primarily favorable product mix including 2015 exit lowmargin noncore product lines well manufacturing efficiencies commodity cost savings europe’s gross margin percentage increased marginally due manufacturing productivity restructuring savings commodity cost savings compared 2015 apmea’s gross margin percentage increased compared 2015 primarily due increased trade sales product mix offset decreased intercompany activity selling general administrative expenses selling general administrative sga expenses decreased 672 million 137 2016 compared 2015 decrease sga expenses attributable following organic decrease sga expenses primarily due 2015 settlement certain longterm obligations including pension plan supplemental employee retirement plan obligations 647 million 60 million charge incurred 2015 settle legacy product liability claims product liability expense decreased 28 million 2016 compared 2015 due reduction frequency reported claims decreases partially offset increase stock compensation expense 25 million 2016 compared 2015 mainly due change timing 2016 grants granted earlier 2016 2015 sga expenses acquisitions related apex watts korea pvi acquisitions total sga expenses percentage sales 303 2016 compared 335 2015 restructuring 2016 recorded net charge 47 million primarily transformation americas apmea businesses involuntary terminations costs incurred part europe restructuring plans compared 214 million 2015 detailed description current restructuring plans see note 3 notes consolidated financial statements annual report form 10k goodwill longlived asset impairment charges 2016 recorded impairment charges 05 million primarily related indefinite lived tradename europe reporting unit 2015 recorded impairment charges 1305 million primarily relating 1297 million goodwill impairment charge europe reporting unit see note 2 notes consolidated financial statements annual report form 10k additional information regarding impairments gain disposition second quarter 2016 recorded pretax gain 87 million related sale china subsidiary dedicated production noncore products part transformation americas apmea businesses pretax gain included noncash accumulated currency translation adjustment 73 million operating income loss operating income loss geographic segment 2016 2015 follows change operating income attributable following operating income 2016 1450 million increased 2351 million compared 2015 increase primarily related 1297 million goodwill impairment charge europe reporting unit 2015 settlement charge 647 million certain longterm obligations including pension plan supplemental employee retirement plan 167 million less restructuring costs recognized 2016 compared 2015 well 60 million charge settle legacy product liability claims 2015 also recognized gain 87 million second quarter 2016 disposition subsidiary china remaining 93 million increase due favorable sales mix favorable sourcing productivity interest expense interest expense decreased 17 million 7 2016 compared 2015 primarily due retirement april 2016 225 million higher interest bearing private placement note replaced 230 million drawn line credit refer note 11 notes consolidated financial statements annual report form 10k details income net income net increased 20 million income balance 44 million 2016 compared 2015 primarily due 17 million noncash gain recognized acquisition watts korea first quarter 2016 refer note 5 notes consolidated financial statements annual report form 10k details acquisition remaining increase due net foreign currency transaction gains 2016 result depreciation euro canadian dollar us dollar 2016 compared 2015 income taxes effective income tax rate changed 341 2016 17 2015 significant change tax rate due impact nondeductible income tax reserve items loss income taxes reported 2015 primarily related goodwill impairment charge settlement pension plan supplemental employee retirement plan obligations net income loss net income 842 million 245 per common share compared net loss 1129 million 324 per common share 2015 results 2016 include aftertax benefits gain disposition 83 million 024 per common share 10 million 003 per common share gain acquisition watts korea offset aftertax charge 88 million 026 per common share europe americas transformation deployment costs 32 million 009 per common share restructuring charges 13 million 004 per common share purchase accounting adjustments related acquisitions 2016 12 million 003 per common share acquisition costs 2016 26 million 008 per common share items primarily related tax charges related transformation results 2015 include aftertax charge 1268 million 363 per common share goodwill longlived asset impairment charges 446 million 128 per common share longterm obligation settlements including pension obligations 139 million 040 per common share restructuring 90 million 026 per common share europe americas transformation deployment costs 37 million 011 per common share legal settlements 09 million 003 per common share acquisition related costs liquidity capital resources 2017 cash flows generated 1559 million net cash operating activities 2017 compared 1381 million net cash generated operating activities 2016 increase primarily related higher net income excluding noncash effect 2017 tax act impact noncash adjustments partially offset timing working capital fluctuations compared 2016 generated 1269 million free cash flow nongaap financial measure reconcile defined net cash provided operating activities minus capital expenditures plus proceeds sale assets compared free cash flow 1022 million 2016 used 273 million net cash investing activities 2017 compared 1140 million 2016 used 881 million less cash 2017 acquisitions 2016 included acquisition pvi watts korea used 66 million less cash purchases capital equipment compared 2016 decrease cash used investing activities partially offset 15 million purchase additional intangible assets 68 million less cash generated sale assets 2017 anticipate investing 36 million 40 million capital equipment 2018 improve manufacturing capabilities used 2053 million net cash financing activities 2017 primarily due payments longterm debt 1780 million dividend payments 259 million payments repurchase approximately 278000 shares class common stock cost 182 million partially offset proceeds additional draw line credit 200 million 2017 february 12 2016 terminated prior credit agreement entered new credit agreement “credit agreement” among company certain subsidiaries company became borrowers credit agreement jpmorgan chase bank na administrative agent swing line lender letter credit issuer lenders referred therein credit agreement provides 500 million fiveyear senior unsecured revolving credit facility “revolving credit facility” sublimit 100 million letters credit agreement also provided 300 million fiveyear term loan facility “term loan facility” available us single draw credit agreement matures february 12 2021 subject extension certain circumstances subject terms credit agreement december 31 2017 2775 million borrowings outstanding term loan 1470 million drawn revolving credit facility 257 million standby letters credit outstanding 3273 million unused available credit revolving credit facility december 31 2017 compliance covenants related credit agreement december 16 2016 watts international holdings limited “watts international” wholly owned subsidiary company entered facility agreement “facility agreement” among watts international original borrower original guarantor watts water technologies emea bv wholly owned subsidiary company “watts emea” original guarantor jpmorgan chase bank na sole bookrunner sole lead arranger “jp morgan chase bank” jp morgan europe limited agent financial parties lenders referred therein facility agreement provides €110 million 364 day term loan facility available company single draw december 20 2016 watts international borrowed full amount available borrowing facility agreement loan made december 20 2016 bears interest rate per annum equal euro interbank offered rate euribor provided rate less zero euribor shall deemed zero plus ii margin 1875 provided event default continuing watts international’s consolidated leverage ratio specified level margin shall decrease 150 accrued interest loan payable last day interest period first interest period set one month may changed subsequently period one two three months period agreed lenders substantially proceeds borrowings made december 20 2016 facility agreement used pay 113 million outstanding revolving credit facility third quarter 2017 company repaid full facility agreement historically financed operating capital needs primarily cash flows generated operations expect continue funding future operating requirements principally cash flows operations addition existing cash resources believe existing funds combined cash generated operations ability access additional financing resources needed sufficient satisfy operating working capital strategic initiatives capital expenditure debt service requirements foreseeable future addition may choose opportunistically return cash shareholders pursue business initiatives including acquisition activities may time also seek additional funding combination equity debt financings identify significant new opportunity december 31 2017 held 2802 million cash equivalents amount 2593 million held foreign subsidiaries december 31 2017 considered none earnings permanently reinvested outside us previously earnings foreign subsidiaries subject us income tax upon repatriation us however 2017 tax act requires us pay onetime deemed repatriation toll charge cumulative undistributed foreign earnings previously provided us taxes cumulative earnings form cash equivalents defined 2017 tax act taxed rate 155 earnings taxed rate 80 estimate obligation associated onetime deemed repatriation toll charge 233 million paid installments eight years repatriate cumulative undistributed foreign earnings back us needed recorded provisional charges 146 million year ended december 31 2017 related future repatriation earnings next twelve months expect repatriate approximately 125 million cash back us currently evaluating potential uses cash us debt reduction expected priority covenant compliance credit agreement required satisfy maintain specified financial ratios financial condition tests december 31 2017 financial ratios included consolidated interest coverage ratio based consolidated earnings income taxes interest expense depreciation amortization consolidated ebitda consolidated interest expense defined credit agreement credit agreement defined consolidated ebitda exclude unusual nonrecurring charges gains also required maintain consolidated leverage ratio consolidated funded debt consolidated ebitda consolidated funded debt defined credit agreement included long shortterm debt capital lease obligations trade letters credit outstanding less cash balance sheet exceeded 50 million december 31 2017 actual financial ratios calculated accordance credit agreement compared required levels credit agreement follows december 31 2017 compliance covenants related credit agreement one senior note agreement detailed note 11 notes consolidated financial statements annual report form 10k senior note agreement requires us maintain fixed charge coverage ratio consolidated ebitda plus consolidated rent expense period consolidated fixed charges consolidated fixed charges sum consolidated interest expense period consolidated rent expense december 31 2017 actual fixed charge coverage ratio calculated accordance senior note agreements compared required ratio therein follows addition financial ratios credit agreement senior note agreement contain affirmative negative covenants include limitations disposition sale assets prohibitions assuming incurring liens assets limited exceptions limitations making investments permitted agreements working capital defined current assets less current liabilities december 31 2017 4562 million compared 3939 million december 31 2016 ratio current assets current liabilities 24 1 december 31 2017 compared 19 1 december 31 2016 increase working capital primarily related cash generated operations well less cash used purchases capital equipment repurchases common stock 2017 2016 cash flows 2016 generated 1381 million cash operating activities compared 1094 million 2015 cash flows operating activities 2015 included 492 million settlement certain longterm obligations including pension obligations generated approximately 1022 million free cash flow nongaap financial measure reconcile defined net cash provided operating activities minus capital expenditures plus proceeds sale assets compared free cash flow 818 million 2015 2016 used 1140 million net cash investing activities compared 173 million 2015 used 676 million cash 2016 2015 relating acquisitions pvi watts korea also increased purchases capital equipment 2016 83 million 2015 received approximately 208 million cash proceeds sale assets primarily relating sale noncore product lines americas 2016 generated 277 million net cash financing activities compared 709 million net cash used 2015 increase cash generated primarily due net proceeds longterm borrowings 744 million 178 million less stock repurchases 2016 also received additional 57 million cash proceeds share transactions employee stock plans 2016 compared 2015 cash flows 2015 generated 1094 million cash operating activities compared 1352 million 2014 decrease primarily due 492 million settlement certain longterm obligations including pension plan offset inventory reduction efforts stronger accounts receivable collections generated approximately 818 million free cash flow nongaap financial measure reconcile defined net cash provided continuing operating activities minus capital expenditures plus proceeds sale assets 2015 used 173 million net cash investing activities including 204 million purchase apex 277 million cash capital equipment offset cash proceeds approximately 331 million sale certain assets relating divested product lines americas 2015 used 709 million net cash financing activities including 446 million used repurchase approximately 813000 shares class common stock 231 million used pay dividends nongaap financial measures accordance secs regulation g item 10e regulation sk following provides definitions nongaap measures used management believe measures provide complete perspective underlying business results trends nongaap measures intended considered user place related gaap measure rather supplemental information fully understand business results nongaap measures may similar measures used companies due possible differences method items events adjusted organic sales growth nongaap measure sales growth excludes impacts acquisitions divestitures foreign exchange periodoverperiod comparisons reconciliation closely related usgaap measure net sales included discussion within “results operations” organic net sales considered addition replacement superior measure net sales management believes reporting organic sales growth provides useful information investors potential investors others facilitating easier comparisons revenue performance prior future periods adjusted operating income adjusted operating margins adjusted net income adjusted earnings per share nongaap measures exclude certain expenses relate primarily global restructuring programs deployment costs acquisition related costs purchase accounting adjustments gains acquisition disposition goodwill longlived asset impairments certain costs related income tax impacts items tax adjustments including impact 2017 tax act management believes reporting financial measures provides useful information investors potential investors others facilitating easier comparisons performance prior future periods reconciliation us gaap results adjusted nongaap measures provided free cash flow nongaap measure represent cash generated operating activities accordance us gaap therefore considered alternative net cash provided operating activities indication performance cash conversion rate free cash flow net income also measure performance cash flow generation believe free cash flow appropriate supplemental measure operating performance provides investors measure ability generate cash repay debt pay dividends repurchase stock fund acquisitions reconciliation net cash provided operating activities free cash flow calculation cash conversion rate provided free cash flow increased 2017 compared free cash flow 2016 primarily due increase cash flows provided operations lower capital investment spending 2017 partially offset timing working capital fluctuations compared 2016 net debt capitalization ratio nongaap financial measure used management decreased 207 2017 298 2016 decrease driven decrease net debt outstanding december 31 2017 primarily due full repayment facility agreement third quarter 2017 management believes net debt capitalization ratio appropriate supplemental measure helps investors understand ability meet financing needs serves basis evaluate financial structure computation may comparable companies may define net debt capitalization ratios differently reconciliation longterm debt including current portion net debt net debt capitalization ratio provided reconciliation capitalization provided contractual obligations contractual obligations december 31 2017 presented following table recognized consolidated balance sheet b majority relates commodity capital commitments december 31 2017 c payment less one year represents second year amortization term loan credit agreement see note 11 notes consolidated financial statements annual report form 10k details financing arrangements maintain letters credit guarantee performance payment third parties accordance specified terms conditions amounts outstanding approximately 257 million december 31 2017 256 million december 31 2016 letters credit primarily associated insurance coverage lesser extent foreign purchases generally expire within one year issuance instruments may exist expire without drawn therefore necessarily represent future cash flow obligations included table offbalance sheet arrangements except operating lease commitments offbalance sheet arrangements reasonably likely current future effect financial condition changes financial condition revenues expenses results operations liquidity capital expenditures capital resources material investors application critical accounting policies key estimates preparation consolidated financial statements accordance us gaap requires management make judgments assumptions estimates affect amounts reported critical accounting estimate assumption highly uncertain matters could material effect consolidated financial statements another also reasonable amount used change estimate reasonably likely period base assumptions historical experience estimates believe reasonable circumstances actual results could differ significantly estimates significant changes accounting policies significant changes accounting estimates 2017 periodically discuss development selection disclosure estimates audit committee management believes following critical accounting policies reflect significant estimates assumptions revenue recognition recognize revenue following criteria met 1 entered binding agreement 2 product shipped title passed 3 sales price customer fixed determinable 4 collectability reasonably assured recognize revenue based upon determination criteria revenue recognition met based majority shipping terms considered occurred upon shipment finished product shipping terms require goods received customer title passes instances revenues recognized customer received goods record estimated reductions revenue corresponding asset customer returns allowances customer programs provisions returns allowances made time sale derived historical trends form portion allowance doubtful accounts customer programs primarily annual volume incentive plans allow customers earn credit attaining agreed upon purchase targets us record estimated reductions revenue made time sale customer programs based estimated purchase targets inventory valuation inventories stated lower cost net realizable value costs determined primarily firstin firstout basis utilize specific product identification historical product demand basis determining excess obsolete inventory reserve identify inventories exceed range one three years sales determined comparing current inventory balance unit sales trailing twelve months new products added inventory within past twelve months excluded analysis portion products contain recoverable materials therefore excess obsolete reserve established net recoverable amounts changes market conditions lowerthan expected customer demand changes technology features could result additional obsolete inventory saleable could require additional inventory reserve provisions certain countries additional inventory reserves maintained potential shrinkage experienced manufacturing process reserve established based prior year’s inventory losses adjusted change gross inventory balance goodwill intangibles made numerous acquisitions years recognized significant amount goodwill tested impairment annually frequently event circumstance indicates impairment loss may incurred application goodwill impairment test requires judgment including identification reporting units assignment assets liabilities reporting units determination fair value reporting unit estimate fair value reporting units using income approach based present value estimated future cash flows appropriate guideline public company guideline transaction market approaches accounting guidance allows us review goodwill impairment utilizing either qualitative quantitative analyses option first assess qualitative factors determine whether existence events circumstances leads determination likely fair value reporting unit less carrying amount assessing totality events circumstances determine likely fair value reporting unit greater carrying amount performing quantitative impairment test unnecessary first identify reporting units believe could pass qualitative assessment determine whether impairment testing necessary reporting unit identified qualitative analysis includes 1 review recent fair value calculation identify extent cushion fair value carrying amount determine substantial cushion existed 2 review events circumstances occurred since recent fair value calculation determine events circumstances would affected previous fair value assessment items identified reviewed include macroeconomic conditions industry market changes cost factor changes events affect reporting unit financial performance expectations reporting unit’s performance relative peers compile information make assessment whether likely fair value reporting unit less carrying amount determine likely quantitative analysis required 2017 eight reporting units one reporting units water quality goodwill performed qualitative analysis six remaining seven reporting units include blücher dormont us drains europe residential commercial apmea one reporting unit heating hot water solutions “hhws” performed quantitative analysis october 29 2017 testing date 5475 million goodwill balance sheet result qualitative analyses determined fair values six reporting units noted likely greater carrying amounts performed quantitative impairment analysis hhws reporting unit connection annual strategic plan due underperformance budget primarily caused continuing softness condensing boiler market weakness tankless water heater products competitive pricing pressure estimated fair value reporting unit using weighted calculation income approach market approach inherent development fair value reporting unit assumptions estimates used income appropriate market approaches income approach calculates present value future cash flow projections based assumptions estimates derived review operating results business plans expected growth rates appropriate revenue ebitda multiples discount rates also made certain assumptions future economic conditions market data developed assumptions based historical results including sales growth operating profits working capital levels income tax rates market approach calculates estimated fair value based valuation multiples derived stock prices enterprise values publicly traded companies comparable reporting unit based valuation multiples derived actual transactions comparable public companies appropriate believe income approach sensitive selected discount rate market approach sensitive valuation multiples used use thirdparty valuation specialists help develop appropriate discount rate valuation multiples use standard valuation practices arrive weighted average cost capital “wacc” based market guideline public companies higher discount rate lower discounted cash flows believe estimate future cash flows market approach valuations reasonable different assumptions could significantly affect valuation result impairments future expected cash flows discounted present value using wacc key assumptions used determine appropriate wacc rates utilized income approach hhws reporting unit follows · risk free rate based 20year us treasury bonds assessment date · market risk premium determined part published historical studies adjusted business risk index reporting unit business risk index derived comparable companies measures estimated stock price volatility · comparable company market interest rate information used determine cost debt appropriate longterm capital structure order weight cost debt cost equity overall wacc · small stock premium based size reporting unit hhws reporting unit underlying analyses supporting fair value assessment related comparable companies historical projected results current transaction values outlook business longterm performance included key assumptions appropriate revenue ebitda multiples discount rate longterm growth rate connection hhws impairment assessment utilized discount rate 9 growth rates beyond planning periods ranging 5 7 longterm terminal growth rate 3 future increases discount rates due changing interest rates declining economic environment different market multiples could impact assumptions value reporting units however taking consideration various elements 2017 tax act would result net increase discounted cash flows generated reporting unit strategic plan would increase fair value reporting unit estimated fair value reporting unit 3970 million exceeded carrying value 3738 million approximately 232 million 6 2017 therefore impairment recorded 2015 recognized pretax impairment charge 1297 million europe reporting unit remaining goodwill balance december 31 2015 reporting unit 464 million intangible assets trademarks trade names generally recorded connection business acquisition values assigned intangible assets determined independent valuation firm based estimates judgments regarding expectations success life cycle products technology acquired accounting guidance allows us perform qualitative impairment assessment indefinitelived intangible assets consistent goodwill guidance noted previously 2017 impairment assessment occurred october 29 2017 performed quantitative assessments indefinitelived intangible assets methodology employed relief royalty method subset income approach 2017 impairment recognized indefinitelived intangible assets 2016 recognized noncash pretax charge approximately 04 million related indefinite lived tradename europe reporting unit 2015 recognized noncash pretax impairment charge 06 million certain indefinitelived intangible assets product liability retention requirements associated insurance policies generally selfinsured potential product liability claims subject variety potential liabilities connection product liability cases maintain high selfinsured retention limit within product liability general liability coverage believe generally accordance industry practices product liability cases us management establishes product liability accrual includes legal costs associated accrued claims utilizing thirdparty actuarial valuations incorporate historical trend factors specific claims experience derived loss reports provided thirdparty administrators product liability accrual established considering applicable insurance coverage changes nature product liability claims legal costs actual settlement amounts could affect adequacy estimates require changes accrual liability estimate ultimate liability may less reported determine trend factors product liability based consultation outside actuaries maintain excess liability insurance minimize risks related claims excess primary insurance policies material change aforementioned factors could adverse impact operating results legal contingencies defendant numerous legal matters including involving environmental issues product liability discussed detail part item 1 “businessproduct liability environmental litigation matters” required gaap determine whether estimated loss contingency accrued assessing whether loss deemed probable loss amount reasonably estimated possible estimate reasonably possible loss range loss amount accrued estimate aggregated disclosed estimates potential outcomes contingencies often developed consultation outside counsel assessment based upon available information litigation inherently uncertain actual liability fully resolve litigation cannot predicted assurance accuracy event unfavorable outcome one legal matters ultimate liability may excess amounts currently accrued may material operating results cash flows particular quarterly annual period however based information currently known us management believes ultimate outcome legal contingencies resolved time likely material adverse effect financial condition though outcome could material operating results particular period depending part upon operating results period income taxes subject income taxes us federal state foreign jurisdictions significant judgment required evaluating uncertain tax positions determining provision income taxes evaluating impact 2017 tax act estimate use expected annual effective income tax rates accrue income taxes effective tax rates determined based budgeted earnings taxes including best estimate permanent items affect effective rate year management periodically reviews rates outside tax advisors changes made material variances expectations identified income taxes accounted asset liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax basis operating loss tax credit carry forwards deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized income period includes enactment date valuation allowance provided offset net deferred tax assets based upon available evidence likely deferred tax assets realized consider estimated future taxable income future reversals deferred tax liabilities assessing need valuation allowance 2017 tax act enacted december 22 2017 introduces significant changes us income tax law effective 2018 2017 tax act reduces us statutory tax rate 35 21 creates new taxes certain foreignsourced earnings certain relatedparty payments referred global intangible lowtaxed income tax base erosion tax respectively addition 2017 subject toll tax onetime transition tax accumulated foreign subsidiary earnings previously subject us income tax accounting income tax effects 2017 tax act requires significant judgments estimates interpretation calculations provisions 2017 tax act required recognize effect tax law changes period enactment determining toll tax remeasuring us deferred tax assets liabilities well reassessing net realizability deferred tax assets liabilities due timing enactment complexity involved applying provisions 2017 tax act made reasonable estimates effects recorded provisional amounts financial statements year ended december 31 2017 december 2017 sec staff issued staff accounting bulletin 118 income tax accounting implications tax cuts jobs act sab 118 allows us record provisional amounts measurement period extend beyond one year enactment date collect prepare necessary data interpret additional guidance issued us treasury department irs standardsetting bodies may make adjustments provisional amounts adjustments may materially impact provision income taxes effective tax rate period periods adjustments made accounting tax effects enactment 2017 tax act completed 2018 new accounting standards discussion recent accounting pronouncements included note 2 notes consolidated financial statements annual report form 10k item 7aitem 7 management’s discussion analysis financial condition results operations overview leading supplier products solutions conserve water manage flow fluids energy buildings commercial residential markets americas europe apmea 140 years designed produced valve systems safeguard regulate water systems energy efficient heating hydronic systems drainage systems water filtration technology helps purify conserve water earn revenue income almost exclusively sale products principal product lines include · residential commercial flow control productsincludes products typically sold plumbing hot water applications backflow preventers water pressure regulators temperature pressure relief valves thermostatic mixing valves · hvac gas productsincludes commercial highefficiency boilers water heaters heating solutions hydronic electric heating systems underfloor radiant applications custom heat hot water solutions hydronic pump groups boiler manufacturers alternative energy control packages flexible stainless steel connectors natural liquid propane gas commercial food service residential applications hvac acronym heating ventilation air conditioning · drainage water reuse productsincludes drainage products engineered rain water harvesting solutions commercial industrial marine residential applications · water quality productsincludes pointofuse pointofentry water filtration conditioning scale prevention systems commercial residential applications business reported three geographic segments americas europe apmea distribute products four primary distribution channels wholesale original equipment manufacturers oems specialty doityourself diy believe factors relating future growth include continued product innovation meets needs customers end markets including smart connected products solutions ability make selective acquisitions core markets well new complementary markets regulatory requirements relating quality conservation water safe use water increased demand clean water continued enforcement plumbing building codes healthy economic environment completed 11 acquisitions last decade acquisition strategy focuses businesses promote key macro themes around safety regulation energy efficiency water conservation target businesses provide us one following entry new markets andor new geographies improved channel access unique andor proprietary technologies advanced production capabilities complementary solution offerings innovation strategy focused differentiated products solutions provide greater opportunity distinguish market place conversely continue migrate away commoditized products cannot add value goal solutions provider merely components supplier continually look strategic opportunities invest new products markets divest existing product lines necessary order meet objectives products representing majority sales subject regulatory standards code enforcement typically require products meet stringent performance criteria consistently advocated development enforcement plumbing codes focused maintaining stringent quality control testing procedures manufacturing facilities order manufacture products compliance code requirements take advantage resulting demand compliant products believe product development product testing capability investment plant equipment needed manufacture products compliance code requirements represent competitive advantage us 2018 financial performance driven strong organic sales growth americas modest growth europe apmea continued drive margin expansion higher sales price volume productivity initiatives restructuring savings simultaneously reinvesting business continued drive commercial operational excellence invest product innovation strive meet needs customers overall reported sales 2018 increased 74 1082 million driven strong organic sales growth 61 889 million primarily within americas foreign exchange contributed 193 million 13 sales growth primarily related appreciation euro us dollar year reported sales region americas europe apmea increased 84 61 20 respectively compared 2017 organic sales region americas europe apmea increased 84 18 16 respectively compared 2017 increase organic sales due higher sales volume increased price across regions operating income 1884 million increased 261 million 161 compared 2017 increase driven increased price higher sales volume productivity initiatives partially offset higher material costs investments strategic growth initiatives general inflation organic sales nongaap measure excludes impacts acquisitions divestitures foreign exchange yearoveryear comparisons divested sales includes exit noncore products sale discontinuation product lines management believes reporting organic sales growth provides useful information investors potential investors others allows complete understanding underlying sales trends providing sales growth consistent basis reconcile change organic sales reported sales region within results 2017 tax act resulted significant changes us corporate income tax system enacted december 22 2017 changes include federal statutory rate reduction 35 21 effective january 1 2018 elimination reduction certain domestic deductions credits limitations deductibility interest expense executive compensation 2017 tax act transitions international taxation worldwide system modified territorial system includes base erosion prevention measures nonus earnings 2017 tax act also includes onetime mandatory deemed repatriation tax accumulated foreign subsidiaries previously untaxed foreign earnings “toll tax” changes tax rates tax laws accounted period enactment deferred tax assets liabilities measured enacted tax rate therefore year ended december 31 2017 recorded charge totaling 251 million related estimate provisions 2017 tax act including estimated 233 million expense toll tax year ended december 31 2018 finalized impact 2017 tax act recorded benefit 37 million reducing net impact 214 million increasing toll tax 335 million toll tax paid eightyear period starting 2018 accrue interest recent developments february 6 2019 declared quarterly dividend twentyone cents 021 per share outstanding share class common stock class b common stock payable march 15 2019 stockholders record march 1 2019 february 6 2019 board directors authorized stock repurchase program 150 million class common stock purchased time open market privately negotiated transactions timing number shares repurchased determined management based evaluation market conditions factors results operations year ended december 31 2018 compared year ended december 31 2017 net sales business reported three geographic segments americas europe apmea net sales segments years ended december 31 2018 december 31 2017 follows change net sales attributable following products sold wholesalers oems diy chains various specialty channels change organic net sales channel attributable following increase americas organic net sales primarily due higher sales volume increased pricing valve drainage water quality products sold primarily wholesale oem diys channels higher volume heating hot water products sold specialty channel organic net sales europe increased 77 million primarily due higher volume increased pricing higher sales volume driven marinebased drains electronics products certain water plumbing products sold wholesale channel partially offset ongoing product rationalization especially diy channel continue focus core product lines organic net sales apmea increased 10 million primarily due increased sales middle east australia new zealand increases partially offset softness china korea product rationalization oem channel net increase sales due foreign exchange mainly due appreciation euro us dollar 2018 cannot predict whether foreign currencies appreciate depreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact net sales gross profit gross profit gross profit percent net sales gross margin 2018 2017 follows gross profit gross margin percentage increased compared 2017 due increased pricing higher sales volume productivity initiatives restructuring savings partially offset higher material costs mainly due increased copper stainless steel commodity costs well higher inbound transportation costs general inflation selling general administrative expenses selling general administrative sga expenses increased 324 million 75 2018 compared 2017 increase sga expenses attributable following organic increase primarily related investments strategic growth initiatives 167 million including investments research development new product initiatives commercial excellence technology information systems organic increase also due higher variable costs related increased sales volume totaling 122 million inflation 44 million primarily related transportation costs increases partially offset restructuring savings within americas europe 36 million well decrease amortization costs 32 million certain intangible assets reached end useful lives increase foreign exchange mainly due appreciation euro us dollar total sga expenses percentage sales 297 2018 2017 restructuring 2018 recorded net charge 34 million primarily related restructuring actions associated european headquarters cost savings initiatives within certain manufacturing facilities europe compared net charge 68 million 2017 detailed description current restructuring plans see note 3 notes consolidated financial statements annual report form 10k longlived asset impairment charges 2017 recorded impairment 10 million primarily related technology asset americas operating segment see note 7 notes consolidated financial statements annual report form 10k additional information regarding impairment operating income loss operating income loss geographic segment 2018 2017 follows increase decrease operating income loss attributable following organic operating income increased 199 million 2018 compared 2017 mainly due increased pricing higher sales volume productivity initiatives operating savings restructuring actions reduced transformation restructuring costs increase operating income partially offset higher material costs due increases price copper stainless steel investments strategic growth initiatives general inflation interest expense interest expense decreased 28 million 147 2018 compared 2017 due reduction principal balance debt outstanding result 2017 tax act repatriated approximately 127 million undistributed foreign earnings used majority cash reduce outstanding debt impact lower outstanding principal balance partially offset increased interest rates 2018 compared 2017 refer note 12 notes consolidated financial statements annual report form 10k details income expense net income expense increased 28 million net income balance 17 million compared 2017 increase primarily due net foreign currency gains income taxes effective income tax rate changed 267 2018 489 2017 tax rate decreased primarily due finalizing impact 2017 tax act fourth quarter 2018 enacted december 22 2017 resulted significant changes us corporate income tax system changes include lowering corporate tax rate 35 21 2018 implementing territorial tax system imposing onetime deemed repatriation toll tax cumulative undistributed foreign earnings year ended december 31 2017 recorded provisional charge 251 million related current estimate provisions 2017 tax act including estimated 233 million expense toll tax year ended december 31 2018 finalized impact 2017 tax act recorded benefit 37 million reducing net impact 2017 tax act 214 million increasing toll tax 335 million net income net income 2018 1280 million 373 per common share compared 731 million 212 per common share 2017 results 2018 include 37 million 011 per common share tax benefit related finalization 2017 tax act partially offset aftertax charge 25 million 007 per common share restructuring tax adjustments 15 million 004 per common share results 2017 include charge 251 million within income tax expense 073 per common share related estimated impact 2017 tax act 19 million 006 per common share europe americas transformation costs 47 million 014 per common share restructuring charges 06 million 002 per common share longlived asset impairment charges partially offset 16 million 005 per common share tax benefits year ended december 31 2017 compared year ended december 31 2016 prior 2017 europe segment formerly referred emea europe middle east africa apmea segment formerly referred asiapacific january 1 2017 began reporting results watts industries middle east indirect wholly owned subsidiary within apmea segment align internal operating changes results previously reported within former emea segment change affect reportable segments represented change composition better aligned structure internal organization 2016 results segment retrospectively revised comparative purposes net sales business reported three geographic segments americas europe apmea net sales segments years ended december 31 2017 2016 follows change net sales attributable following change organic net sales percentage consolidated net sales segment net sales americas excludes divested sales periods presented products sold wholesalers oems diy chains various specialty channels change organic net sales channel attributable following organic sales increase 70 million partially muted 151 million impact ongoing product rationalization efforts across regions continue focus core product lines product rationalization mainly affected diy oem channels organic net sales americas increased 74 million mainly growth wholesale channel driven valve hvac drainage products increase partially offset declines specialty channels experienced weakness tankless water heater condensing boiler products also decrease diy channel due product rationalization discussed organic net sales europe increased 25 million primarily due growth wholesale channel increased sales drains products increase also due higher demand electronics products germany increases partially offset product rationalization reduced demand hvac products italy organic net sales apmea decreased 29 million driven primarily impact product rationalization decrease offset partly higher demand china residential underfloor heating products commercial valves products well growth south korea expanded product offering net increase sales due foreign exchange primarily due appreciation euro canadian dollar us dollar 2017 cannot predict whether foreign currencies appreciate depreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact net sales decrease total net sales due divested products 35 million relates discontinuation product lines divested end first quarter 2016 americas segment part americas transformation program increase net sales acquisitions americas apmea segments related fourth quarter 2016 acquisition pvi first quarter 2016 acquisition watts korea respectively gross profit gross profit gross profit percent net sales gross margin 2017 2016 follows increase gross margin percentage attributable increased volume manufacturing productivity changes product mix incremental savings transformation restructuring programs primarily within americas europe selling general administrative expenses selling general administrative sga expenses increased 82 million 19 2017 compared 2016 increase sga expenses attributable following sga expenses increased primarily result 2016 acquisitions pvi watts korea well increases foreign exchange primarily appreciation euro canadian dollar us dollar compared 2016 organically sga expenses decreased 73 million compared 2016 primarily related decline product liability costs 94 million lower transformation costs 81 million completed transformation program 2017 lower property tax charges 11 million decline product liability costs primarily due resolution class action lawsuits related certain legacy claims undifferentiated products exited associated reduction reported claims organic decrease partially offset 82 million investments strategic initiatives includes 25 million research development costs 42 million higher distribution freight costs total sga expenses percentage sales 297 2017 compared 303 2016 restructuring 2017 recorded net charge 68 million primarily transformation americas business involuntary terminations costs incurred part restructuring initiatives compared net charge 47 million 2016 detailed description current restructuring plans see note 3 notes consolidated financial statements annual report form 10k longlived asset impairment charges 2017 recorded impairment 10 million primarily related technology asset americas operating segment 2016 recorded impairment charges 05 million primarily related indefinite lived tradename europe operating segment see note 7 notes consolidated financial statements annual report form 10k additional information regarding impairments gain disposition second quarter 2016 recorded pretax gain 87 million related sale china subsidiary dedicated production noncore products part transformation americas apmea businesses pretax gain included noncash accumulated currency translation adjustment 73 million operating income loss operating income loss geographic segment 2017 2016 follows increase decrease operating income loss attributable following increase consolidated operating income primarily driven increased volume gross margin improvements americas well savings restructuring initiatives europe increase operating income also driven reduced transformation costs compared 2016 americas apmea transformation program completed 2017 contributing increase consolidated operating income 29 million acquisition pvi included operating income 2016 87 million gain disposition china subsidiary interest expense interest expense decreased 35 million 155 2017 2016 repaid 150 million outstanding debt 2017 weighted average interest rate decreased marginally year retired higher cost private placement debt middle 2016 replaced lower cost revolver debt also replaced certain us based revolver debt lower cost euro denominated debt late 2016 refer note 12 notes consolidated financial statements annual report form 10k details expense income net expense income net decreased 55 million net expense balance 11 million 2017 compared net income balance 44 million 2016 included income 2016 17 million noncash gain recognized acquisition watts korea remaining decrease primarily due net foreign currency transaction losses 2017 income taxes effective income tax rate changed 489 2017 341 2016 tax rate increased primarily due impact 2017 tax act enacted december 22 2017 resulted significant changes us corporate income tax system changes include lowering corporate tax rate 35 21 2018 implementing territorial tax system imposing onetime deemed repatriation toll tax cumulative undistributed foreign earnings net income net income 2017 731 million 212 per common share compared 842 million 244 per common share 2016 results 2017 include charge 251 million within income tax expense 073 per common share related impact 2017 tax act 19 million 006 per common share europe americas transformation costs 47 million 014 per common share restructuring charges 06 million 002 per common share longlived asset impairment charges partially offset 16 million 005 per common share tax benefits results 2016 include aftertax benefits 83 million 024 per common share gain disposition 10 million 003 per common share gain acquisition watts korea offset aftertax charge 88 million 026 per common share europe americas transformation deployment costs 32 million 009 per common share restructuring charges 13 million 004 per common share purchase accounting adjustments related acquisitions 2016 12 million 003 per common share acquisition costs 2016 26 million 008 per common share items primarily related tax charges related transformation liquidity capital resources 2018 cash flows generated 1694 million net cash operating activities 2018 compared 1559 million net cash generated operating activities 2017 increase primarily related higher net income partially offset timing working capital fluctuations additional tax payments including payments made toll tax withholdings repatriated cash result 2017 tax act used 359 million net cash investing activities 2018 compared 273 million 2017 used 65 million cash 2018 purchase capital equipment used 16 million immaterial acquisitions investments received 11 million less cash proceeds sale assets property plant equipment compared 2017 anticipate investing 35 million 40 million capital equipment 2019 improve manufacturing capabilities used 2029 million net cash financing activities 2018 primarily due payments longterm debt 1945 million dividend payments 283 million payments repurchase approximately 340000 shares class common stock cost 260 million partially offset proceeds additional drawdowns line credit 500 million 2018 february 12 2016 entered credit agreement among company certain subsidiaries company become borrowers credit agreement jpmorgan chase bank na administrative agent swing line lender letter credit issuer lenders referred therein credit agreement provides 500 million fiveyear senior unsecured revolving credit facility “revolving credit facility” sublimit 100 million letters credit agreement also provided 300 million fiveyear term loan facility “term loan facility” available us single draw credit agreement matures february 12 2021 subject extension certain circumstances subject terms credit agreement december 31 2018 2550 million borrowings outstanding term loan facility 250 million drawn revolving credit facility 258 million standby letters credit outstanding 4492 million unused available credit revolving credit facility historically financed operating capital needs primarily cash flows generated operations expect continue funding future operating requirements principally cash flows operations addition existing cash resources believe existing funds combined cash generated operations ability access additional financing resources needed sufficient satisfy operating working capital strategic initiatives capital expenditure debt service requirements foreseeable future addition may choose opportunistically return cash shareholders pursue business initiatives including acquisition activities may time also seek additional funding combination equity debt financings identify significant new opportunity december 31 2018 held 2041 million cash equivalents amount 1644 million cash equivalents held foreign subsidiaries 2017 tax act requires us pay onetime deemed repatriation toll charge cumulative undistributed foreign earnings december 31 2017 previously recorded us taxes cumulative earnings form cash equivalents defined 2017 tax act taxed rate 155 earnings taxed rate 80 obligation associated onetime deemed repatriation toll charge 335 million paid installments eight years starting 2018 accrue interest paid 146 million toll tax december 31 2018 repatriated approximately 127 million cash back us cumulative undistributed foreign earnings december 31 2017 used majority cash reduce outstanding debt us operations typically generate sufficient cash flows meet domestic obligations however borrow fund expected cash outlay reasonable interest rates utilizing uncommitted borrowings revolving credit facility subsequent recording toll tax intent permanently reinvest undistributed earnings foreign subsidiaries current plans repatriate foreign earnings fund operations united states however amounts held foreign subsidiaries needed fund operations united states could required accrue pay taxes repatriate funds charges may include potential state income taxes tax charges covenant compliance credit agreement required satisfy maintain specified financial ratios financial condition tests december 31 2018 financial ratios included consolidated interest coverage ratio based consolidated earnings income taxes interest expense depreciation amortization consolidated ebitda consolidated interest expense defined credit agreement credit agreement defined consolidated ebitda exclude unusual nonrecurring charges gains also required maintain consolidated leverage ratio consolidated funded debt consolidated ebitda consolidated funded debt defined credit agreement included long shortterm debt capital lease obligations trade letters credit outstanding less cash balance sheet exceeded 50 million december 31 2018 actual financial ratios calculated accordance credit agreement compared required levels credit agreement follows december 31 2018 compliance covenants related credit agreement one senior note agreement detailed note 12 notes consolidated financial statements annual report form 10k senior note agreement requires us maintain fixed charge coverage ratio consolidated ebitda plus consolidated rent expense period consolidated fixed charges consolidated fixed charges sum consolidated interest expense period consolidated rent expense december 31 2018 actual fixed charge coverage ratio calculated accordance senior note agreements compared required ratio therein follows addition financial ratios credit agreement senior note agreement contain affirmative negative covenants include limitations disposition sale assets prohibitions assuming incurring liens assets limited exceptions limitations making investments permitted agreements working capital defined current assets less current liabilities december 31 2018 3726 million compared 4562 million december 31 2017 ratio current assets current liabilities 21 1 december 31 2018 compared 24 1 december 31 2017 decrease working capital primarily related reduction cash equivalents result using repatriated cash reduce outstanding debt 2017 cash flows generated 1559 million net cash operating activities 2017 compared 1381 million net cash generated operating activities 2016 increase primarily related higher net income excluding noncash effect 2017 tax act impact noncash adjustments partially offset timing working capital fluctuations compared 2016 generated 1269 million free cash flow nongaap financial measure reconcile defined net cash provided operating activities minus capital expenditures plus proceeds sale assets compared free cash flow 1022 million 2016 used 273 million net cash investing activities 2017 compared 1140 million 2016 used 881 million less cash 2017 acquisitions 2016 included acquisition pvi watts korea used 66 million less cash purchases capital equipment compared 2016 decrease cash used investing activities partially offset 15 million purchase additional intangible assets 68 million less cash generated sale assets 2017 used 2053 million net cash financing activities 2017 primarily due payments longterm debt 1780 million dividend payments 259 million payments repurchase approximately 278000 shares class common stock cost 182 million partially offset proceeds additional draw line credit 200 million 2017 2016 generated 277 million net cash financing activities primarily due net proceeds longterm borrowings 744 million offset dividend payments 245 million payments repurchase class common stock cost 268 million december 16 2016 watts international holdings limited “watts international” wholly owned subsidiary company entered facility agreement “facility agreement” among watts international original borrower original guarantor watts water technologies emea bv wholly owned subsidiary company “watts emea” original guarantor jpmorgan chase bank na sole bookrunner sole lead arranger “jp morgan chase bank” jp morgan europe limited agent financial parties lenders referred therein facility agreement provided €110 million 364 day term loan facility available company single draw december 20 2016 watts international borrowed full amount available borrowing facility agreement loan included interest rate per annum equal euro interbank offered rate euribor provided rate less zero euribor shall deemed zero plus ii margin 1875 provided event default continuing watts international’s consolidated leverage ratio specified level margin shall decrease 150substantially proceeds borrowings made december 20 2016 facility agreement used pay 113 million outstanding revolving credit facility third quarter 2017 repaid full facility agreement nongaap financial measures accordance secs regulation g item 10e regulation sk following provides definitions nongaap measures used management believe measures provide complete perspective underlying business results trends nongaap measures intended considered user place related gaap measure rather supplemental information fully understand business results nongaap measures may similar measures used companies due possible differences method items events adjusted organic sales growth nongaap measure sales growth excludes impacts acquisitions divestitures foreign exchange periodoverperiod comparisons reconciliation closely related usgaap measure net sales included discussion within “results operations” organic net sales considered addition replacement superior measure net sales management believes reporting organic sales growth provides useful information investors potential investors others facilitating easier comparisons revenue performance prior future periods adjusted operating income adjusted operating margins adjusted net income adjusted earnings per share nongaap measures exclude certain benefits expenses relate primarily global restructuring programs transformation costs acquisition related costs gain acquisitions longlived asset impairments related income tax impacts items tax adjustments including impact 2017 tax act management believes reporting financial measures provides useful information investors potential investors others facilitating easier comparisons performance prior future periods reconciliation us gaap results adjusted nongaap measures provided free cash flow nongaap measure represent cash generated operating activities accordance us gaap therefore considered alternative net cash provided operating activities indication performance cash conversion rate free cash flow net income also measure performance cash flow generation believe free cash flow appropriate supplemental measure operating performance provides investors measure ability generate cash repay debt pay dividends repurchase stock fund acquisitions reconciliation net cash provided operating activities free cash flow calculation cash conversion rate provided free cash flow increased 2018 compared 2017 primarily due increase cash flows provided operations partially offset higher net capital investment spending 2018 net debt capitalization ratio nongaap financial measure used management decreased 143 2018 207 2017 decrease driven decrease net debt outstanding december 31 2018 primarily due paying approximately 120 million revolving credit facility well approximately 22 million outstanding term loan facility decreases net debt partially offset 500 million additional drawdowns revolving credit facility management believes net debt capitalization ratio appropriate supplemental measure helps investors understand ability meet financing needs serves basis evaluate financial structure computation may comparable companies may define net debt capitalization ratios differently reconciliation longterm debt including current portion net debt net debt capitalization ratio provided reconciliation capitalization provided contractual obligations contractual obligations december 31 2018 presented following table recognized consolidated balance sheet b majority relates commodity capital commitments december 31 2018 c payment less one year represents third year amortization term loan credit agreement see note 12 notes consolidated financial statements annual report form 10k details financing arrangements maintain letters credit guarantee performance payment third parties accordance specified terms conditions amounts outstanding approximately 258 million december 31 2018 257 million december 31 2017 letters credit primarily associated insurance coverage lesser extent foreign purchases generally expire within one year issuance instruments may exist expire without drawn therefore necessarily represent future cash flow obligations included table offbalance sheet arrangements except operating lease commitments offbalance sheet arrangements reasonably likely current future effect financial condition changes financial condition revenues expenses results operations liquidity capital expenditures capital resources material investors application critical accounting policies key estimates preparation consolidated financial statements accordance us gaap requires management make judgments assumptions estimates affect amounts reported critical accounting estimate assumption highly uncertain matters could material effect consolidated financial statements another also reasonable amount used change estimate reasonably likely period base assumptions historical experience estimates believe reasonable circumstances actual results could differ significantly estimates significant changes accounting policies significant changes accounting estimates 2018 exception change revenue recognition accounting policy resulting adoption asc 606 described note 4 notes consolidated financial statements annual report form 10k periodically discuss development selection disclosure estimates audit committee management believes following critical accounting policies reflect significant estimates assumptions revenue recognition recognize revenue core principle depict transfer control customers amount reflecting consideration expect entitled order achieve core principle apply following fivestep approach 1 identify contract customer 2 identify performance obligations contract 3 determine transaction price 4 allocate transaction price performance obligations contract 5 recognize revenue performance obligation satisfied revenue product sales recognized point time model point control transfers customer generally products shipped company’s manufacturing distribution facilities delivered customer’s named location sales tax valueadded tax taxes collected concurrent revenue producing activities excluded revenue freight costs billed customers shipping handling activities included revenue related cost included selling general administrative expenses see note 4 disclosures detail regarding revenue recognition inventory valuation inventories stated lower cost net realizable value costs determined primarily firstin firstout basis utilize specific product identification historical product demand basis determining excess obsolete inventory reserve identify inventories exceed range one three years sales determined comparing current inventory balance unit sales trailing twelve months new products added inventory within past twelve months excluded analysis portion products contain recoverable materials therefore excess obsolete reserve established net recoverable amounts changes market conditions lowerthan expected customer demand changes technology features could result additional obsolete inventory saleable could require additional inventory reserve provisions certain countries additional inventory reserves maintained potential shrinkage experienced manufacturing process reserve established based prior year’s inventory losses adjusted change gross inventory balance goodwill intangibles made numerous acquisitions years recognized significant amount goodwill tested impairment annually frequently event circumstance indicates impairment loss may incurred application goodwill impairment test requires judgment including identification reporting units assignment assets liabilities reporting units determination fair value reporting unit estimate fair value reporting units using income approach based present value estimated future cash flows appropriate guideline public company guideline transaction market approaches accounting guidance allows us review goodwill impairment utilizing either qualitative quantitative analyses option first assess qualitative factors determine whether existence events circumstances leads determination likely fair value reporting unit less carrying amount assessing totality events circumstances determine likely fair value reporting unit greater carrying amount performing quantitative impairment test unnecessary first identify reporting units believe could pass qualitative assessment determine whether impairment testing necessary reporting unit identified qualitative analysis includes 1 review recent fair value calculation identify extent cushion fair value carrying amount determine substantial cushion existed 2 review events circumstances occurred since recent fair value calculation determine events circumstances would affected previous fair value assessment items identified reviewed include macroeconomic conditions industry market changes cost factor changes events affect reporting unit financial performance expectations reporting unit’s performance relative peers compile information make assessment whether likely fair value reporting unit less carrying amount determine likely quantitative analysis required 2018 eight reporting units one reporting units water quality goodwill performed qualitative analysis seven remaining reporting units include blücher dormont us drains europe residential commercial heating hot water solutions “hhws” apmea october 28 2018 testing date 5443 million goodwill balance sheet result qualitative analyses determined fair values seven reporting units noted likely greater carrying amounts 2018 need proceed beyond qualitative analysis goodwill impairments recorded 2017 performed quantitative impairment analysis hhws reporting unit connection annual strategic plan due underperformance budget primarily caused continuing softness condensing boiler market weakness tankless water heater products competitive pricing pressure estimated fair value reporting unit using weighted calculation income approach market approach inherent development fair value reporting unit assumptions estimates used income appropriate market approaches income approach calculates present value future cash flow projections based assumptions estimates derived review operating results business plans expected growth rates appropriate revenue ebitda multiples discount rates also made certain assumptions future economic conditions market data developed assumptions based historical results including sales growth operating profits working capital levels income tax rates market approach calculates estimated fair value based valuation multiples derived stock prices enterprise values publicly traded companies comparable reporting unit based valuation multiples derived actual transactions comparable public companies appropriate estimated fair value reporting unit exceeded carrying value 2017 therefore impairment recorded intangible assets trademarks trade names generally recorded connection business acquisition values assigned intangible assets determined independent valuation firm based estimates judgments regarding expectations success life cycle products technology acquired accounting guidance allows us perform qualitative impairment assessment indefinitelived intangible assets consistent goodwill guidance noted previously 2018 impairment assessment occurred october 28 2018 performed quantitative assessments indefinitelived intangible assets methodology employed relief royalty method subset income approach 2018 2017 impairment recognized indefinitelived intangible assets 2016 recognized noncash pretax charge approximately 04 million related indefinite lived tradename europe reporting unit product liability retention requirements associated insurance policies generally selfinsured potential product liability claims subject variety potential liabilities connection product liability cases maintain high selfinsured retention limit within product liability general liability coverage believe generally accordance industry practices management establishes product liability accrual includes legal costs associated accrued claims utilizing thirdparty actuarial valuations incorporate historical trend factors specific claims experience derived loss reports provided thirdparty administrators maintain excess liability insurance minimize risks related claims excess primary insurance policies product liability accrual established considering applicable insurance coverage remainder operations maintain insurance calculate potential product liability accruals includes legal costs associated accrued claims case basis changes nature product liability claims legal costs actual settlement amounts could affect adequacy estimates require changes accrual liability estimate ultimate liability may less reported determine trend factors product liability based consultation outside actuaries material change aforementioned factors could adverse impact operating results legal contingencies defendant numerous legal matters including involving environmental issues product liability discussed detail part item 1 “businessproduct liability environmental litigation matters” note 16 required gaap determine whether estimated loss contingency accrued assessing whether loss deemed probable loss amount reasonably estimated possible estimate reasonably possible loss range loss amount accrued estimate aggregated disclosed estimates potential outcomes contingencies often developed consultation outside counsel assessment based upon available information litigation inherently uncertain actual liability fully resolve litigation cannot predicted assurance accuracy event unfavorable outcome one legal matters ultimate liability may excess amounts currently accrued may material operating results cash flows particular quarterly annual period however based information currently known us management believes ultimate outcome legal contingencies resolved time likely material adverse effect financial condition though outcome could material operating results particular period depending part upon operating results period income taxes subject income taxes us federal state foreign jurisdictions significant judgment required evaluating uncertain tax positions determining provision income taxes evaluating impact 2017 tax act estimate use expected annual effective income tax rates accrue income taxes effective tax rates determined based budgeted earnings taxes including best estimate permanent items affect effective rate year management periodically reviews rates outside tax advisors changes made material variances expectations identified income taxes accounted asset liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax basis operating loss tax credit carry forwards deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized income period includes enactment date valuation allowance provided offset net deferred tax assets based upon available evidence likely deferred tax assets realized consider estimated future taxable income future reversals deferred tax liabilities assessing need valuation allowance 2017 tax act enacted december 22 2017 introduced significant changes us income tax law effective 2018 2017 tax act reduced us statutory tax rate 35 21 created new taxes certain foreignsourced earnings certain relatedparty payments referred global intangible lowtaxed income tax base erosion tax respectively addition 2017 subject toll tax onetime transition tax accumulated foreign subsidiary earnings previously subject us income tax accounting income tax effects 2017 tax act december 31 2017 required significant judgments estimates interpretation calculations provisions 2017 tax act required recognize effect tax law changes period enactment determining toll tax remeasuring us deferred tax assets liabilities well reassessing net realizability deferred tax assets liabilities due timing enactment complexity involved applying provisions 2017 tax act made reasonable estimates effects recorded provisional amounts financial statements year ended december 31 2017 december 2017 sec staff issued staff accounting bulletin 118 income tax accounting implications tax cuts jobs act sab 118 allows us record provisional amounts measurement period extend beyond one year enactment date december 22 2018 marked end measurement period purposes sab 118 completed analysis based legislative updates relating act currently available resulted additional tax benefit 37 million fourth quarter 2018 final total tax charge 214 million related implementation 2017 tax act new accounting standards discussion recent accounting pronouncements included note 2 notes consolidated financial statements annual report form 10k item 7aitem 7 management’s discussion analysis financial condition results operations overview leading supplier products solutions systems manage conserve flow fluids energy buildings commercial residential markets americas europe apmea 140 years designed produced valve systems safeguard regulate water systems energy efficient heating hydronic systems drainage systems water filtration technology helps purify conserve water earn revenue income almost exclusively sale products principal product lines include ●residential commercial flow control productsincludes products typically sold plumbing hot water applications backflow preventers water pressure regulators temperature pressure relief valves thermostatic mixing valves ●hvac gas productsincludes commercial highefficiency boilers water heaters heating solutions hydronic electric heating systems underfloor radiant applications custom heat hot water solutions hydronic pump groups boiler manufacturers alternative energy control packages flexible stainless steel connectors natural liquid propane gas commercial food service residential applications hvac acronym heating ventilation air conditioning ●drainage water reuse productsincludes drainage products engineered rain water harvesting solutions commercial industrial marine residential applications ●water quality productsincludes pointofuse pointofentry water filtration conditioning scale prevention systems monitoring metering products commercial marine residential applications business reported three geographic segments americas europe apmea distribute products four primary distribution channels wholesale original equipment manufacturers oems specialty doityourself diy believe factors relating future growth include continued product innovation including smart connected products solutions meet needs customers end markets ability make selective acquisitions core markets well new complementary markets regulatory requirements relating quality conservation water safe use water increased demand clean water continued enforcement plumbing building codes completed 12 acquisitions last decade acquisition strategy focuses businesses promote key macro themes around safety regulation energy efficiency water conservation target businesses provide us one following entry new markets andor new geographies improved channel access unique andor proprietary technologies advanced production capabilities complementary solution offerings innovation strategy focused differentiated products solutions provide greater opportunity distinguish marketplace conversely continue migrate away commoditized products difficult add value goal solutions provider merely components supplier continually look strategic opportunities invest new products markets divest existing product lines necessary order meet objectives products representing majority sales subject regulatory standards code enforcement typically require products meet stringent performance criteria consistently advocated development enforcement plumbing codes focused maintaining stringent quality control testing procedures manufacturing facilities order manufacture products compliance code requirements take advantage resulting demand compliant products believe product development product testing capability investment plant equipment needed manufacture products compliance code requirements represent competitive advantage us 2019 financial performance driven strong organic sales growth americas modest growth europe apmea achieved margin expansion price volume savings productivity initiatives simultaneously reinvesting business continued drive commercial operational excellence invest product innovation including smart connected products solutions strive meet needs customers overall sales 2019 increased 23 356 million compared 2018 increase included organic sales growth 40 628 million experienced growth across segments partially offset decrease foreign exchange 18 294 million primarily driven weaker euro organic sales nongaap measure excludes impacts acquisitions divestitures foreign exchange yearoveryear comparisons management believes reporting organic sales growth provides useful information investors potential investors others allows complete understanding underlying sales trends providing sales growth consistent basis reconcile change organic sales reported sales region within results operating income 1971 million increased 87 million 46 compared 2018 increase primarily driven price volume savings productivity initiatives including savings restructuring actions partially offset higher general inflation including tariffs strategic investments increased corporate expenses management’s discussion analysis financial condition results operations cash flows year ended december 31 2017 found item 7 part ii “management’s discussion analysis financial condition results operations” annual report form 10k year ended december 31 2018 acquisitions third quarter 2019 purchased substantially assets backflow direct llc based rancho cordova california backflow direct specializes design manufacture backflow prevention valves used primarily fire protection applications recent developments february 6 2020 declared quarterly dividend twentythree cents 023 per share outstanding share class common stock class b common stock payable march 13 2020 stockholders record february 28 2020 new coronavirus first detected hubei province china spread rapidly many parts china growing number international locations virus resulted travel restrictions china temporary closure stores facilities operated multinational corporations china significantly reduced production capacity many factories china including factory ningbo china reduction production capacity factories china may reduce even halt supply finished goods necessary components many products could result product shortages increase inventory unfinished products may logistics issues including ability supply chain’s ability quickly ramp production transportation demands may cause delays management team working mitigate risks limit impact business presently estimating sales may reduced 10 million 20 million first quarter 2020 due impact covid19 outbreak assumes china production supply chain logistics return normal early march given matter’s complexity recent timing closely monitoring situation evolves updated full year 2020 outlook expected impact covid19 outbreak assumes returning normal business operations early march continue assess full year impact matter progresses results operations year ended december 31 2019 compared year ended december 31 2018 net sales business reported three geographic segments americas europe apmea net sales segments years ended december 31 2019 december 31 2018 follows change net sales attributable following products sold wholesalers oems diy chains various specialty channels change organic net sales channel attributable following increase americas organic net sales primarily due combination price volume across valve drainage water quality products sold channels heating hot water products sold specialty channel organic net sales europe increased primarily due price volume increase wholesale sales driven drainage valve products increase oem sales mainly due increases certain hvac electronics products organic net sales apmea increased primarily due increased commercial valve underfloor heating sales china partially offset softness within korea australia net decrease sales due foreign exchange primarily due depreciation euro chinese yuan canadian dollar us dollar 2019 compared 2018 cannot predict whether foreign currencies appreciate depreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact net sales gross profit gross profit gross profit percent net sales gross margin 2019 2018 follows gross profit gross margin percentage increased compared 2018 due price volume savings productivity initiatives partially offset higher general inflation costs including tariffs selling general administrative expenses selling general administrative sga expenses increased 114 million 24 2019 compared 2018 increase sga expenses attributable following organic increase related strategic investments 126 million including investments research development new products well smart connected products commercial excellence technology information systems increase also due general inflation 53 million higher variable costs 35 million related increased sales also increase corporate expenses including higher professional fees 31 million acquisition related costs 09 million well increased stock compensation expense 36 million due change expected attainment performance goals related performance stock units increases partially offset 38 million decrease amortization costs certain intangible assets reached end useful lives incremental european restructuring savings 28 million reduction certain selling marketing costs 23 million compared 2018 decrease foreign exchange mainly due depreciation euro us dollar total sga expenses percentage sales 297 2019 2018 restructuring 2019 recorded net charge 43 million compared 34 million 2018 additional severance benefits costcutting actions related european restructuring plan initiated third quarter 2018 detailed description current restructuring plans see note 3 notes consolidated financial statements annual report form 10k operating income loss operating income loss geographic segment 2019 2018 follows increase decrease operating income loss attributable following organic operating income increased 131 million 2019 compared 2018 mainly due price volume savings productivity initiatives including savings restructuring actions increase operating income partially offset higher general inflation including impact tariffs strategic investments corporate professional fees acquisition related costs interest expense interest expense decreased 22 million 135 2019 compared 2018 due reduction principal balance debt outstanding result 2017 tax act repatriated approximately 127 million undistributed foreign earnings 2018 approximately 43 million 2019 using majority cash reduce outstanding debt refer note 11 notes consolidated financial statements annual report form 10k details income decreased 12 million compared 2018 decrease primarily due lower net foreign currency gains income taxes effective income tax rate increased 285 2019 267 2018 tax rate increased primarily due 2018 rate including onetime benefit result finalizing impact 2017 tax act fourth quarter 2018 net income net income 2019 1315 million 385 per common share diluted basis compared 1280 million 373 per common share diluted basis 2018 results 2019 include aftertax charge 31 million 009 per common share corporate professional fees 32 million 009 per common share restructuring charges 07 million 002 per common share acquisition related costs 06 million 002 per common share footprint optimization results 2018 include 37 million 010 per common share tax benefit related finalization 2017 tax act offset aftertax charge 25 million 007 per common share restructuring tax adjustments 15 million 004 per common share liquidity capital resources 2019 cash flows generated 1940 million net cash operating activities 2019 compared 1694 million net cash generated operating activities 2018 increase primarily related inventory reductions higher net income compared 2018 additionally 2018 made higher tax payments including withholding taxes repatriated cash used 718 million net cash investing activities 2019 compared 359 million 2018 increase cash used investing activities primarily due 427 million cash used immaterial acquisition americas segment third quarter 2019 used 67 million less cash capital expenditures 2019 compared 2018 anticipate investing 35 million 40 million capital equipment 2020 improve manufacturing capabilities used 1056 million net cash financing activities 2019 primarily due payments longterm debt 1270 million dividend payments 314 million payments repurchase approximately 228000 shares class common stock cost 195 million outflows partially offset proceeds additional drawdowns revolving credit facility 820 million february 2016 entered credit agreement among company certain subsidiaries company become borrowers credit agreement jpmorgan chase bank na administrative agent swing line lender letter credit issuer lenders referred therein credit agreement provides 500 million fiveyear senior unsecured revolving credit facility “revolving credit facility” sublimit 100 million letters credit december 31 2019 drawn 100 million revolving credit facility credit agreement also provides 300 million fiveyear term loan facility “term loan facility” available company single draw entire 300 million drawn february 2016 2250 million borrowings outstanding term loan facility december 31 2019 paid total installments term loan facility 300 million 2019 258 million standby letters credit outstanding 4642 million unused available credit revolving credit facility historically financed operating capital needs primarily cash flows generated operations expect continue funding future operating requirements principally cash flows operations addition existing cash resources believe existing funds combined cash generated operations ability access additional financing resources needed sufficient satisfy operating working capital strategic investments capital expenditure debt service requirements foreseeable future including repayment 75 million senior notes due june 2020 addition may choose opportunistically return cash shareholders pursue business initiatives including acquisition activities may time also seek additional funding combination equity debt financings identify significant new opportunity december 31 2019 held 2197 million cash equivalents amount 1684 million held foreign subsidiaries us operations typically generate sufficient cash flows meet domestic obligations however borrow fund expected cash outlay reasonable interest rates utilizing uncommitted borrowings revolving credit facility subsequent recording toll tax part tax cuts jobs act 2017 intent permanently reinvest undistributed earnings foreign subsidiaries current plans repatriate foreign earnings fund operations united states however amounts held foreign subsidiaries needed fund operations united states could required accrue pay taxes repatriate funds charges may include potential state income taxes tax charges covenant compliance credit agreement required satisfy maintain specified financial ratios financial condition tests december 31 2019 financial ratios include consolidated interest coverage ratio based consolidated earnings income taxes interest expense depreciation amortization consolidated ebitda consolidated interest expense defined credit agreement credit agreement defines consolidated ebitda exclude unusual nonrecurring charges gains also required maintain consolidated leverage ratio consolidated funded debt consolidated ebitda consolidated funded debt defined credit agreement includes long shortterm debt capital lease obligations trade letters credit outstanding less cash balance sheet exceeded 50 million december 31 2019 actual financial ratios calculated accordance credit agreement compared required levels credit agreement follows december 31 2019 compliance covenants related credit agreement one senior note agreement detailed note 11 notes consolidated financial statements annual report form 10k senior note agreement requires us maintain fixed charge coverage ratio consolidated ebitda plus consolidated rent expense period consolidated fixed charges consolidated fixed charges sum consolidated interest expense period consolidated rent expense december 31 2019 actual fixed charge coverage ratio calculated accordance senior note agreement compared required ratio therein follows addition financial ratios credit agreement senior note agreement contain affirmative negative covenants include limitations disposition sale assets prohibitions assuming incurring liens assets limited exceptions limitations making investments permitted agreements working capital defined current assets less current liabilities december 31 2019 3156 million compared 3726 million december 31 2018 ratio current assets current liabilities 18 1 december 31 2019 compared 21 1 december 31 2018 decrease working capital primarily related increase current portion longterm debt due reclassification senior note longterm debt current portion longterm debt senior note described note 11 notes consolidated financial statements annual report 10k due june 2020 nongaap financial measures accordance secs regulation g item 10e regulation sk following provides definitions nongaap measures used management believe measures enhance overall understanding underlying business results trends nongaap measures intended considered user place related gaap measure rather supplemental information fully understand business results nongaap measures may similar measures used companies due possible differences method items events adjusted organic sales growth nongaap measure sales growth excludes impacts acquisitions divestitures foreign exchange periodoverperiod comparisons reconciliation closely related us gaap measure net sales included discussion within “results operations” organic net sales considered addition replacement superior measure net sales management believes reporting organic sales growth provides useful information investors potential investors others facilitating easier comparisons revenue performance prior future periods adjusted operating income adjusted operating margins adjusted net income adjusted earnings per share nongaap measures exclude certain expenses incurred benefits recognized periods presented relate primarily global restructuring programs professional fees incurred optimize simplify european legal structure gain deeper understanding productcustomer profitability end market acquisition related costs footprint optimization related income tax impacts items tax adjustments including impact 2017 tax act management believes reporting financial measures provides useful information investors potential investors others facilitating easier comparisons performance prior future periods reconciliation us gaap results adjusted nongaap measures provided free cash flow nongaap measure represent cash generated operating activities accordance us gaap therefore considered alternative net cash provided operating activities indication performance cash conversion rate free cash flow net income also measure performance cash flow generation believe free cash flow appropriate supplemental measure operating performance provides investors measure ability generate cash repay debt pay dividends repurchase stock fund acquisitions reconciliation net cash provided operating activities free cash flow calculation cash conversion rate provided free cash flow increased 2019 compared 2018 primarily inventory reductions higher net income lower capital expenditures 2019 additionally 2018 made higher tax payments including withholding taxes repatriated cash net debt capitalization ratio nongaap financial measure used management decreased 84 2019 143 2018 decrease driven decrease net debt outstanding december 31 2019 primarily due paying approximately 30 million outstanding term loan facility well approximately 15 million revolving credit facility decrease net debt also due increase cash equivalents 156 million management believes net debt capitalization ratio appropriate supplemental measure helps investors understand ability meet financing needs serves basis evaluate financial structure computation may comparable companies may define net debt capitalization ratios differently reconciliation longterm debt including current portion net debt net debt capitalization ratio provided reconciliation capitalization provided contractual obligations contractual obligations december 31 2019 presented following table aas recognized consolidated balance sheet bthe majority relates commodity capital commitments december 31 2019 cthe payment less one year represents fourth year amortization term loan credit agreement also payment principal balance note purchase agreement see note 11 notes consolidated financial statements annual report form 10k details financing arrangements dincludes obligations recognized consolidated balance sheet well operating lease commitments commencement date december 31 2019 maintain letters credit guarantee performance payment third parties accordance specified terms conditions amounts outstanding approximately 258 million december 31 2019 december 31 2018 letters credit primarily associated insurance coverage lesser extent foreign purchases generally expire within one year issuance instruments may exist expire without drawn therefore necessarily represent future cash flow obligations included table offbalance sheet arrangements offbalance sheet arrangements reasonably likely current future effect financial condition changes financial condition revenues expenses results operations liquidity capital expenditures capital resources material investors application critical accounting policies key estimates preparation consolidated financial statements accordance us gaap requires management make judgments assumptions estimates affect amounts reported critical accounting estimate assumption highly uncertain matters could material effect consolidated financial statements another also reasonable amount used change estimate reasonably likely period base assumptions historical experience estimates believe reasonable circumstances actual results could differ significantly estimates significant changes accounting policies significant changes accounting estimates 2019 exception change lease accounting policy resulting adoption asc 842 described note 5 notes consolidated financial statements annual report form 10k periodically discuss development selection disclosure estimates audit committee management believes following critical accounting policies reflect significant estimates assumptions revenue recognition recognize revenue core principle depict transfer control customers amount reflecting consideration expect entitled order achieve core principle apply following fivestep approach 1 identify contract customer 2 identify performance obligations contract 3 determine transaction price 4 allocate transaction price performance obligations contract 5 recognize revenue performance obligation satisfied revenue product sales recognized point time model point control transfers customer generally products shipped company’s manufacturing distribution facilities delivered customer’s named location sales tax valueadded tax taxes collected concurrent revenue producing activities excluded revenue freight costs billed customers shipping handling activities included revenue related cost included selling general administrative expenses see note 4 disclosures detail regarding revenue recognition inventory valuation inventories stated lower cost net realizable value costs determined primarily firstin firstout basis utilize specific product identification historical product demand basis determining excess obsolete inventory reserve identify inventories exceed range one three years sales determined comparing current inventory balance unit sales trailing twelve months new products added inventory within past twelve months excluded analysis portion products contain recoverable materials therefore excess obsolete reserve established net recoverable amounts changes market conditions lowerthan expected customer demand changes technology features could result additional obsolete inventory saleable could require additional inventory reserve provisions certain countries additional inventory reserves maintained potential shrinkage experienced manufacturing process reserve established based prior year’s inventory losses adjusted change gross inventory balance goodwill intangibles made numerous acquisitions years recognized significant amount goodwill tested impairment annually frequently event circumstance indicates impairment loss may incurred application goodwill impairment test requires judgment including identification reporting units assignment assets liabilities reporting units determination fair value reporting unit estimate fair value reporting units using income approach based present value estimated future cash flows appropriate guideline public company guideline transaction market approaches accounting guidance allows us review goodwill impairment utilizing either qualitative quantitative analyses option first assess qualitative factors determine whether existence events circumstances leads determination likely fair value reporting unit less carrying amount assessing totality events circumstances determine likely fair value reporting unit greater carrying amount performing quantitative impairment test unnecessary first identify reporting units believe could pass qualitative assessment determine whether impairment testing necessary reporting unit identified qualitative analysis includes 1a review recent fair value calculation identify extent cushion fair value carrying amount determine substantial cushion existed 2a review events circumstances occurred since recent fair value calculation determine events circumstances would affected previous fair value assessment items identified reviewed include macroeconomic conditions industry market changes cost factor changes events affect reporting unit financial performance expectations reporting unit’s performance relative peers compile information make assessment whether likely fair value reporting unit less carrying amount determine likely quantitative analysis required 2019 seven reporting units one reporting units water quality goodwill performed qualitative analysis six remaining reporting units include blücher us drains fluid solutionseurope fluid solutionsamericas heating hot water solutions “hhws” apmea october 27 2019 testing date 5794 million goodwill balance sheet result qualitative analyses determined fair values six reporting units noted likely greater carrying amounts 2019 need proceed beyond qualitative analysis goodwill impairments recorded intangible assets trademarks trade names generally recorded connection business acquisition values assigned intangible assets typically determined independent valuation firm based estimates judgments regarding expectations success life cycle products technology acquired accounting guidance allows us perform qualitative impairment assessment indefinitelived intangible assets consistent goodwill guidance noted previously 2019 impairment assessment occurred october 27 2019 performed qualitative assessment certain tradenames fair value significantly exceeded carrying value 2018 quantitative assessment sales growth 2019 indicators impairment present remaining tradenames 2019 company performed quantitative assessment methodology employed quantitative assessments relief royalty method subset income approach 2019 2018 2017 impairment recognized indefinitelived intangible assets product liability retention requirements associated insurance policies generally selfinsured potential product liability claims subject variety potential liabilities connection product liability cases significant volume liability matters maintain high selfinsured retention limit within product liability general liability coverage believe generally accordance industry practices maintain excess liability insurance minimize risks related claims excess primary insurance policies product liability accrual established considering applicable insurance coverage product liability cases us establish product liability accrual includes legal costs associated accrued claims significant volume liability matters utilize thirdparty actuarial valuations incorporate historical trend factors specific claims experience derived loss reports provided thirdparty claims administrators establish product liability accrual remainder product liability accrual utilize thirdparty actuarial valuations maintain insurance calculate potential product liability accruals includes legal costs associated accrued claims case basis changes nature product liability claims legal costs actual settlement amounts could affect adequacy estimates require changes accrual liability estimate ultimate liability may less reported material change aforementioned factors could adverse impact operating results legal contingencies defendant numerous legal matters including involving environmental issues product liability discussed detail part item 1 “businessproduct liability environmental litigation matters” note 15 required gaap determine whether estimated loss contingency accrued assessing whether loss deemed probable loss amount reasonably estimated possible estimate reasonably possible loss range loss amount accrued estimate aggregated disclosed estimates potential outcomes contingencies often developed consultation outside counsel assessment based upon available information litigation inherently uncertain actual liability fully resolve litigation cannot predicted assurance accuracy event unfavorable outcome one legal matters ultimate liability may excess amounts currently accrued may material operating results cash flows particular quarterly annual period however based information currently known us management believes ultimate outcome legal contingencies resolved time likely material adverse effect financial condition though outcome could material operating results particular period depending part upon operating results period income taxes subject income taxes us federal state foreign jurisdictions significant judgment required evaluating uncertain tax positions determining provision income taxes estimate use expected annual effective income tax rates accrue income taxes effective tax rates determined based budgeted earnings taxes including best estimate permanent items affect effective rate year management periodically reviews rates outside tax advisors changes made material variances expectations identified income taxes accounted asset liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax basis operating loss tax credit carry forwards deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized income period includes enactment date valuation allowance provided offset net deferred tax assets based upon available evidence likely deferred tax assets realized consider estimated future taxable income future reversals deferred tax liabilities assessing need valuation allowance 2017 tax act enacted december 22 2017 introduced significant changes us income tax law effective 2018 2017 tax act reduced us statutory tax rate 35 21 created new taxes certain foreignsourced earnings certain relatedparty payments referred global intangible lowtaxed income tax base erosion tax respectively addition 2017 subject toll tax onetime transition tax accumulated foreign subsidiary earnings previously subject us income tax accounting income tax effects 2017 tax act december 31 2017 required significant judgments estimates interpretation calculations provisions 2017 tax act required recognize effect tax law changes period enactment determining toll tax remeasuring us deferred tax assets liabilities well reassessing net realizability deferred tax assets liabilities due timing enactment complexity involved applying provisions 2017 tax act made reasonable estimates effects recorded provisional amounts financial statements year ended december 31 2017 december 2017 sec staff issued staff accounting bulletin 118 income tax accounting implications tax cuts jobs act sab 118 allowed us record provisional amounts measurement period extend beyond one year enactment date december 22 2018 marked end measurement period purposes sab 118 completed analysis based legislative updates relating act currently available resulted additional tax benefit 37 million fourth quarter 2018 final total tax charge 214 million related implementation 2017 tax act new accounting standards discussion recent accounting pronouncements included note 2 notes consolidated financial statements annual report form 10k item 7aitem 7 management’s discussion analysis financial condition results operations overview leading supplier products solutions systems manage conserve flow fluids energy buildings commercial residential markets americas europe apmea 140 years designed produced valve systems safeguard regulate water systems energy efficient heating hydronic systems drainage systems water filtration technology helps purify conserve water earn revenue income almost exclusively sale products principal product lines include ●residential commercial flow control productsincludes products typically sold plumbing hot water applications backflow preventers water pressure regulators temperature pressure relief valves thermostatic mixing valves ●hvac gas productsincludes commercial highefficiency boilers water heaters custom heat hot water solutions hydronic electric heating systems underfloor radiant applications hydronic pump groups boiler manufacturers alternative energy control packages flexible stainless steel connectors natural liquid propane gas commercial food service residential applications hvac acronym heating ventilation air conditioning ●drainage water reuse productsincludes drainage products engineered rain water harvesting solutions commercial industrial marine residential applications ●water quality productsincludes pointofuse pointofentry water filtration conditioning scale prevention systems monitoring metering products commercial marine residential applications business reported three geographic segments americas europe apmea distribute products four primary distribution channels wholesale original equipment manufacturers oems specialty doityourself diy believe factors relating future growth include continued product innovation meets needs customers end markets ability make selective acquisitions core markets well complementary markets regulatory requirements relating quality conservation water safe use water increased demand clean water continued enforcement plumbing building codes completed 12 acquisitions last decade acquisition strategy focuses businesses promote key macro themes around safety regulation energy efficiency water conservation target businesses provide us one following entry new markets andor new geographies improved channel access unique andor proprietary technologies advanced production capabilities complementary solution offerings innovation strategy focused differentiated products solutions provide greater opportunity distinguish marketplace conversely continue migrate away commoditized products difficult add value goal solutions provider merely components supplier continually look strategic opportunities invest new products markets divest existing product lines necessary order meet objectives internet things allowed companies transform components smart connected devices last years building smart connected foundation expanding internal capabilities making strategic acquisitions strategy deliver superior customer value smart connected products solutions strategy focuses three dimensions connect control conserve intend introduce products connect customers smart systems control systems optimal performance conserve critical resources increasing operability efficiency safety products representing majority sales subject regulatory standards code enforcement typically require products meet stringent performance criteria consistently advocated development enforcement plumbing codes focused maintaining stringent quality control testing procedures manufacturing facilities order manufacture products compliance code requirements take advantage resulting demand compliant products believe product development product testing capability investment plant equipment needed manufacture products compliance code requirements represent competitive advantage us covid19 pandemic unprecedented global covid19 pandemic presents significant risks company continues cause challenges uncertainties ability fully predict impact business throughout course pandemic demonstrated strength resiliency strategy meaningful role play markets channels value bring customers revenues year ended december 31 2020 adversely impacted result covid19 demand products decreased compared 2019 pandemic continued various governmental measures imposed combat spread virus fourth quarter net sales improved compared third quarter 2020 quarteroverquarter order rates exact timing pace recovery remain uncertain impacted different markets experiencing resurgence covid19 cases future sales expansion contraction dependent duration severity covid19 pandemic including time takes normal economic operating conditions resume easing construction lending markets improvements overall investments capital spending building services construction markets additional governmental actions may taken numerous uncertainties including time administer inoculate sufficient population recently approved vaccines introduction new therapeutic treatments continue concerned far reaching impacts pandemic business operations financial results conditions directly indirectly including without limitation impacts health employees manufacturing capabilities supply chains distribution networks sales opportunities customer consumer behaviors overall economy scope nature potential impacts pervasive many impacts beyond control continue evolve many products qualify “essential products” local state national guidelines orders remain focused protecting health safety employees communities operate maintaining continuity business operations created covid19 task force develop implement coordinated response protect employees maintaining production capabilities implemented social distancing guidelines temperature monitoring provided personal protective equipment established covid19 website employees includes latest cdc government protocols promoted workfromhome practical communication customers suppliers established covid19 customer hotline us support critical infrastructure projects worked suppliers ensure could obtain “essential” product classification various government organizations response business impact covid19 pandemic undertook several cost management actions order reduce costs including merit deferrals compensation reductions furloughs reduced discretionary spending factory overhead cost reductions reductionsinforce exit activities initiated second third quarters 2020 addition cost actions noted also implemented various measures conserve cash ensure availability entered amended restated credit agreement april 24 2020 temporarily suspended stock repurchase program second quarter reinstated june 29 2020 maintained flat dividend rate deferred employer payroll tax payments permitted coronavirus aid relief economic security act “cares act” also implemented additional procedures manage risks related working capital specifically collectability trade accounts receivable monitoring financial stability credit rating payment terms credit limits credit customers due circumstances described generally form 10k results operations year ended december 31 2020 necessarily indicative future results management cannot predict full impact covid19 pandemic sales supply chain manufacturing distribution economic conditions generally including effects customer spending extent effects covid19 pandemic us remain uncertain depend future developments effects could exist extended period time even pandemic ends information regarding impact covid19 us see item 1a “risk factors” financial overview net sales 2020 decreased 57 919 million reported basis 68 1090 million organic basis compared 2019 primarily due impact covid19 pandemic across operating segments reported decline partially offset increase sales favorable foreign exchange movements 05 72 million primarily driven stronger euro net increase acquireddivested sales 99 million organic sales nongaap financial measure excludes impacts acquisitions divestitures foreign exchange yearoveryear comparisons management believes reporting organic sales growth provides useful information investors potential investors others allows additional insight underlying sales trends providing sales growth consistent basis reconcile change organic sales reported sales region within results operating income 1811 million decreased 160 million 81 2020 compared 2019 decrease primarily driven lower sales volume result covid19 pandemic higher general inflation including tariffs strategic investments incremental restructuring costs partially offset benefits productivity initiatives reduced longterm incentive costs lower corporaterelated professional fees benefits cost reduction actions response covid19 pandemic despite challenges presented covid19 pandemic 2020 continued drive commercial operational excellence invest business increased capital expenditures acquisitions discussed section invest product innovation including smart connected products solutions strove meet needs customers management’s discussion analysis financial condition results operations cash flows year ended december 31 2018 found item 7 part ii “management’s discussion analysis financial condition results operations” annual report form 10k year ended december 31 2019 acquisitions third quarter 2020 completed acquisition 100 shares australian valve group pty ltd “avg” allcash transaction avg based perth australia specializes design marketing distribution heating control valves used australian residential commercial end markets acquisition avg aligns strategy expand geographically countries mature enforced plumbing codes avg enhance product offering channel access australian marketplace acquisition avg deemed material consolidated financial statements fourth quarter 2020 completed acquisition 100 shares detection group inc “tdg” allcash transaction tdg based sunnyvale california specializes design marketing distribution wireless leak detection systems commercial buildings acquisition tdg aligns smart connected strategy acquisition tdg deemed material consolidated financial statements recent developments february 8 2021 declared quarterly dividend twentythree cents 023 per share outstanding share class common stock class b common stock payable march 15 2021 stockholders record march 1 2021 results operations year ended december 31 2020 compared year ended december 31 2019 net sales business reported three geographic segments americas europe apmea net sales segments years ended december 31 2020 december 31 2019 follows change net sales attributable following products sold wholesalers oems diy chains various specialty channels change organic net sales channel attributable following organic net sales americas decreased due decline volume majority product lines primarily impact covid19 pandemic decrease partially offset higher volume within diy channel many diy customers worked residential projects pandemic organic net sales europe decreased primarily due lost volume related covid19 pandemic within major regions across product lines partially offset selected price increases organic net sales apmea decreased primarily due decline volume related covid19 pandemic regions net increase sales due foreign exchange primarily due appreciation euro partially offset depreciation canadian dollar us dollar 2020 compared 2019 cannot predict whether foreign currencies appreciate depreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact net sales change net sales due acquireddivested relates three immaterial acquisitions one apmea segment third quarter 2020 one americas segment fourth quarter 2020 one americas segment third quarter 2019 partially offset immaterial divestiture apmea segment third quarter 2020 gross profit gross profit gross profit percent net sales gross margin 2020 2019 follows gross profit gross margin declined primarily lower sales volume absorption result covid19 pandemic partially offset benefits price productivity initiatives government subsidies within europe apmea cost reduction actions response pandemic selling general administrative expenses selling general administrative sga expenses decreased 437 million 92 2020 compared 2019 decrease sga expenses attributable following organic decrease related cost reduction actions response covid19 pandemic 314 million decreased variable costs due sales volume declines 95 million restructuring savings 101 million decreased stock compensation expense 42 million primarily due adjustments expected attainment levels performance goals related performance stock units reduction corporaterelated professional fees 31 million decreases partially offset strategic investments 88 million including investments research development new products commercial excellence technology information systems well general inflation 54 million compared 2019 increase foreign exchange mainly due appreciation euro us dollar acquireddivested net sga costs related three immaterial acquisitions partially offset sga costs related immaterial divestiture previously mentioned total sga expenses percentage net sales 287 2020 compared 297 2019 restructuring 2020 recorded net charge 99 million compared net charge 43 million 2019 charge 2020 primarily severance benefits due reductions force programs initiated second third quarters 2020 response economic challenges related covid19 pandemic detailed description current restructuring plans see note 3 notes consolidated financial statements annual report form 10k longlived asset impairment charges 2020 recorded impairment charges 14 million americas segment primarily relating 10 million longlived asset impairment charge 04 million related technology intangible asset market value expectations indicated carrying amounts assets excess fair value loss disposition 2020 recorded pretax loss disposition 06 million apmea segment related immaterial divestiture operating income loss operating income loss geographic segment 2020 2019 follows decrease increase operating income loss attributable following decrease organic operating income due lower sales volume absorption result covid19 pandemic higher general inflation including tariffs strategic investments partially offset benefits cost reduction actions including restructuring initiated response covid19 pandemic price productivity initiatives reduced variable costs due sales volume decline reduced longterm incentive costs reduction corporaterelated professional fees interest expense interest expense decreased 08 million 57 2020 compared 2019 primarily due decline interest rates reduction principal balance debt outstanding refer note 11 notes consolidated financial statements annual report form10k details expense income net expense income decreased 15 million expense balance 10 million compared 2019 decrease primarily due higher net foreign currency transaction losses income taxes effective income tax rate increased 316 2020 285 2019 tax rate increased primarily increase valuation allowance result recently issued final tax regulations reduced realizability foreign tax credits net income net income 2020 1143 million 336 per common share diluted basis compared 1315 million 385 per common share diluted basis 2019 results 2020 include aftertax charge 74 million 022 per common share restructuring 97 million 028 per common share changes tax regulations 10 million 003 per common share longlived asset impairment charges 10 million 003 per common share acquisition related costs 08 million 002 per common share footprint optimization partially offset 15 million benefit 004 per share elimination earnout prior immaterial acquisition americas segment 07 million 002 per common share net gain disposal results 2019 include aftertax charge 31 million 009 per common share corporate professional fees 32 million 009 per common share restructuring charges 07 million 002 per common share acquisition related costs 06 million 002 per common share footprint optimization liquidity capital resources 2020 cash flows generated 2288 million net cash operating activities 2020 compared 1940 million 2019 increase cash generated primarily driven favorable changes working capital including reductions accounts receivable offset lower net income used 548 million net cash investing activities 2020 compared 718 million used 2019 spent 275 million less acquisitions 146 million capital expenditures 2020 compared 2019 received 22 million cash proceeds sale property plant equipment received 20 million proceeds disposal business 2020 anticipate investing 35 million 40 million capital equipment 2021 improve manufacturing capabilities investment commercial operational excellence initiatives used 1819 million net cash financing activities 2020 primarily due longterm debt repayments 5175 million dividend payments 314 million tax withholding payments vested stock awards 78 million payments 289 million repurchase approximately 332000 shares class common stock debt repayments include termination term loan facility prior credit agreement payments made revolving credit facility prior revolving credit facility payment 75 million retire notes issued 2010 note purchase agreement payments partially offset proceeds drawdowns prior current revolving credit facilities totaling 4075 million february 2016 entered credit agreement “prior credit agreement” among company certain subsidiaries company become borrowers prior credit agreement jpmorgan chase bank na administrative agent swing line lender letter credit issuer lenders referred therein prior credit agreement provided 500 million fiveyear senior unsecured revolving credit facility “prior revolving credit facility” sublimit 100 million letters credit prior credit agreement also provided 300 million fiveyear term loan facility “term loan facility” available us single draw entire 300 million drawn february 2016 april 24 2020 entered amended restated credit agreement new credit agreement among company certain subsidiaries company become borrowers thereunder jpmorgan chase bank na administrative agent swing line lender letter credit issuer lenders referred therein new credit agreement amended restated prior credit agreement entirety increasing amount revolving credit available 500 million 800 million extending maturity one additional year february 2022 senior unsecured revolving credit facility revolving credit facility also includes sublimits 100 million letters credit 15 million swing line loans december 31 2020 drawn 2000 million line credit 162 million letters credit outstanding resulted 5838 million unused available credit revolving credit facility term loan facility prior credit agreement terminated paid effective april 24 2020 funds revolving credit facility borrowings outstanding revolving credit facility bear interest fluctuating rate per annum equal applicable percentage defined case eurocurrency rate loans adjusted british bankers association libor rate times less 100 plus applicable percentage ranging 150 210 determined reference consolidated leverage ratio ii case alternate base rate loans swing line loans interest times less 200 greatest prime rate effect day b frbny rate effect day plus 05 c adjusted libor rate plus 10 one month interest period dollars addition paying interest new credit agreement also required pay certain fees connection revolving credit facility including limited unused facility fee letter credit fees new credit agreement matures february 12 2022 subject extension certain circumstances subject terms new credit agreement may repay loans outstanding new credit agreement time without premium penalty customary breakage costs subject terms new credit agreement june 18 2010 entered note purchase agreement certain institutional investors 2010 note purchase agreement pursuant 2010 note purchase agreement issued senior notes 750 million principal due june 18 2020 june 18 2020 borrowed 400 million revolving credit facility used 350 million available cash pay amounts outstanding 2010 note purchase agreement historically financed operating capital needs primarily cash flows generated operations expect continue funding future operating requirements principally cash flows operations addition existing cash resources believe existing funds combined cash generated operations ability access additional financing resources needed sufficient satisfy operating working capital strategic investments capital expenditure debt service requirements foreseeable future addition may choose opportunistically return cash shareholders pursue business initiatives including acquisition activities may time also seek additional funding combination equity debt financings identify significant new opportunity december 31 2020 held 2189 million cash equivalents amount 1756 million held foreign subsidiaries us operations typically generate sufficient cash flows meet domestic obligations however borrow fund expected cash outlays reasonable interest rates utilizing undrawn borrowings revolving credit facility believe financial resources allow us manage anticipated impacts covid19 pandemic business operations foreseeable future include reductions revenues potential delays payments customers anticipate impacts covid19 continue evolve rapidly result continue evaluate financial position additional information becomes available particularly relating covid19 subsequent recording toll tax part tax cuts jobs act 2017 intent permanently reinvest undistributed earnings foreign subsidiaries current plans repatriate posttoll tax foreign earnings generated subsequent december 31 2017 fund operations united states however amounts held foreign subsidiaries needed fund operations united states could required accrue pay taxes repatriate funds charges may include potential state income taxes tax charges covenant compliance new credit agreement required satisfy maintain specified financial ratios financial condition tests december 31 2020 financial ratios include consolidated interest coverage ratio based consolidated earnings income taxes interest expense depreciation amortization consolidated ebitda consolidated interest expense defined new credit agreement new credit agreement defines consolidated ebitda exclude unusual nonrecurring charges gains also required maintain consolidated leverage ratio consolidated funded debt consolidated ebitda consolidated funded debt defined new credit agreement includes long shortterm debt capital lease obligations trade letters credit outstanding less cash equivalents balance sheet december 31 2020 actual financial ratios calculated accordance new credit agreement compared required levels new credit agreement follows december 31 2020 compliance covenants related new credit agreement addition financial ratios new credit agreement contains affirmative negative covenants include limitations disposition sale assets prohibitions assuming incurring liens assets limited exceptions limitations making investments permitted agreement working capital defined current assets less current liabilities december 31 2020 3967 million compared 3156 million december 31 2019 ratio current assets current liabilities 23 1 december 31 2020 compared 18 1 december 31 2019 increase working capital primarily related decrease current portion longterm debt due payment senior note current portion term loan facility prior credit agreement 2020 senior note described note 11 notes consolidated financial statements annual report 10k paid june 2020 nongaap financial measures accordance secs regulation g item 10e regulation sk following provides definitions nongaap measures used management believe measures enhance overall understanding underlying business results trends nongaap measures intended considered user place related gaap measure rather supplemental information fully understand business results nongaap measures may similar measures used companies due possible differences method items events adjusted organic net sales growth nongaap measure net sales growth excludes impacts acquisitions divestitures foreign exchange periodoverperiod comparisons reconciliation closely related us gaap measure net sales included discussion within “results operations” organic net sales considered addition replacement superior measure net sales management believes reporting organic sales growth provides useful information investors potential investors others facilitating easier comparisons revenue performance prior future periods adjusted operating income adjusted operating margins adjusted net income adjusted earnings per share nongaap measures exclude certain expenses incurred benefits recognized periods presented relate primarily global restructuring programs longlived asset impairment charges professional fees acquisition related costs footprint optimization costs earnout adjustment loss disposal related income tax impacts items tax adjustments management believes reporting financial measures provides useful information investors potential investors others facilitating easier comparisons performance prior future periods reconciliation us gaap results adjusted nongaap measures provided dollars millions except per share amounts free cash flow nongaap measure represent cash generated operating activities accordance us gaap therefore considered alternative net cash provided operating activities indication performance cash conversion rate free cash flow net income also measure performance cash flow generation believe free cash flow appropriate supplemental measure operating performance provides investors measure ability generate cash repay debt pay dividends repurchase stock fund acquisitions reconciliation net cash provided operating activities free cash flow calculation cash conversion rate provided free cash flow improved 2020 compared 2019 primarily driven favorable changes working capital including reductions accounts receivable offset lower net income higher capital expenditures net cash debt capitalization ratio nongaap financial measure used management december 31 2020 2 2020 compared 84 2019 decrease driven decrease net debt outstanding december 31 2020 1102 million primarily due payments senior note current portion term loan facility prior credit agreement 2020 management believes net cash debt capitalization ratio appropriate supplemental measure helps investors understand ability meet financing needs serves basis evaluate financial structure computation may comparable companies may define net cash debt capitalization ratios differently reconciliation longterm debt including current portion net cash debt net cash debt capitalization ratio provided reconciliation capitalization provided contractual obligations contractual obligations december 31 2020 presented following table aas recognized consolidated balance sheet bthe majority relates commodity capital commitments december 31 2020 cincludes obligations recognized consolidated balance sheet maintain letters credit guarantee performance payment third parties accordance specified terms conditions amounts outstanding approximately 162 million december 31 2020 258 million december 31 2019 letters credit primarily associated insurance coverage lesser extent foreign purchases generally expire within one year issuance instruments may exist expire without drawn therefore necessarily represent future cash flow obligations included table offbalance sheet arrangements offbalance sheet arrangements reasonably likely current future effect financial condition changes financial condition revenues expenses results operations liquidity capital expenditures capital resources material investors application critical accounting policies key estimates preparation consolidated financial statements accordance us gaap requires management make judgments assumptions estimates affect amounts reported critical accounting estimate assumption highly uncertain matters could material effect consolidated financial statements another also reasonable amount used change estimate reasonably likely period base assumptions historical experience estimates believe reasonable circumstances actual results could differ significantly estimates significant changes accounting policies significant changes accounting estimates 2020 periodically discuss development selection disclosure estimates audit committee management believes following critical accounting policies reflect significant estimates assumptions revenue recognition recognize revenue core principle depict transfer control customers amount reflecting consideration expect entitled order achieve core principle apply following fivestep approach 1 identify contract customer 2 identify performance obligations contract 3 determine transaction price 4 allocate transaction price performance obligations contract 5 recognize revenue performance obligation satisfied revenue product sales recognized point time model point control transfers customer generally products shipped company’s manufacturing distribution facilities delivered customer’s named location sales tax valueadded tax taxes collected concurrent revenue producing activities excluded revenue freight costs billed customers shipping handling activities included revenue related cost included selling general administrative expenses see note 4 notes consolidated financial statements annual report form 10k disclosures detail regarding revenue recognition inventory valuation inventories stated lower cost net realizable value costs determined primarily firstin firstout basis utilize specific product identification historical product demand basis determining excess obsolete inventory reserve identify inventories exceed range one three years sales determined comparing current inventory balance unit sales trailing twelve months new products added inventory within past twelve months excluded analysis portion products contain recoverable materials therefore excess obsolete reserve established net recoverable amounts changes market conditions lowerthan expected customer demand changes technology features could result additional obsolete inventory saleable could require additional inventory reserve provisions certain countries additional inventory reserves maintained potential shrinkage experienced manufacturing process reserve established based prior year’s inventory losses adjusted change gross inventory balance goodwill intangibles made numerous acquisitions years recognized significant amount goodwill tested impairment annually frequently event circumstance indicates impairment loss may incurred application goodwill impairment test requires judgment including identification reporting units assignment assets liabilities reporting units determination fair value reporting unit quantitative analysis performed estimate fair value reporting units using income approach based present value estimated future cash flows appropriate guideline public company guideline transaction market approaches accounting guidance allows us assess goodwill impairment utilizing either qualitative quantitative analyses option first assess qualitative factors determine whether existence events circumstances leads determination likely fair value reporting unit less carrying amount assessing totality events circumstances determine likely fair value reporting unit greater carrying amount performing quantitative impairment test unnecessary first identify reporting units believe could pass qualitative assessment determine whether impairment testing necessary reporting unit identified qualitative analysis includes 1a review recent fair value calculation identify extent cushion fair value carrying amount determine substantial cushion existed 2a review events circumstances occurred since recent fair value calculation determine events circumstances would affected previous fair value assessment items identified reviewed include macroeconomic conditions industry market changes cost factor changes events affect reporting unit financial performance expectations reporting unit’s performance relative peers compile information make assessment whether likely fair value reporting unit less carrying amount determine likely quantitative analysis required 2020 seven reporting units one reporting units water quality goodwill performed qualitative analysis six remaining reporting units include blücher us drains fluid solutionseurope fluid solutionsamericas heating hot water solutions “hhws” apmea october 25 2020 testing date 5908 million goodwill balance sheet result qualitative analyses determined fair values six reporting units noted likely greater carrying amounts 2020 need proceed beyond qualitative analysis goodwill impairments recorded intangible assets trademarks trade names generally recorded connection business acquisition values assigned intangible assets typically determined independent valuation firm based estimates judgments regarding expectations success life cycle products technology acquired accounting guidance allows us perform qualitative impairment assessment indefinitelived intangible assets consistent goodwill guidance noted previously 2020 impairment assessment occurred october 25 2020 performed qualitative assessment certain tradenames fair value significantly exceeded carrying value previous quantitative assessment performed sales growth 2020 sales declined primarily due impact covid19 pandemic sales growth expected tradename 2021 indicators impairment present remaining tradenames 2020 company performed quantitative assessment methodology employed quantitative assessments relief royalty method subset income approach 2020 2019 2018 impairment recognized indefinitelived intangible assets product liability retention requirements associated insurance policies generally selfinsured potential product liability claims subject variety potential liabilities connection product liability cases significant volume liability matters maintain high selfinsured retention limit within product liability general liability coverage believe generally accordance industry practices maintain excess liability insurance minimize risks related claims excess primary insurance policies product liability accrual established considering applicable insurance coverage product liability cases us establish product liability accrual includes legal costs associated accrued claims significant volume liability matters utilize thirdparty actuarial valuations incorporate historical trend factors specific claims experience derived loss reports provided thirdparty claims administrators establish product liability accrual remainder product liability accrual utilize thirdparty actuarial valuations maintain insurance calculate potential product liability accruals includes legal costs associated accrued claims case basis changes nature product liability claims legal costs actual settlement amounts could affect adequacy estimates require changes accrual liability estimate ultimate liability may less reported material change aforementioned factors could adverse impact operating results particular period depending part upon operating results period legal contingencies defendant numerous legal matters including involving environmental issues product liability discussed detail part item 1 “businessproduct liability environmental litigation matters” note 15 notes consolidated financial statements annual report form 10k required gaap determine whether estimated loss contingency accrued assessing whether loss deemed probable loss amount reasonably estimated possible estimate reasonably possible loss range loss amount accrued estimate aggregated disclosed estimates potential outcomes contingencies often developed consultation outside counsel assessment based upon available information litigation inherently uncertain actual liability fully resolve litigation cannot predicted assurance accuracy event unfavorable outcome one legal matters ultimate liability may excess amounts currently accrued may material operating results cash flows particular quarterly annual period however based information currently known us management believes ultimate outcome legal contingencies resolved time likely material adverse effect financial condition though outcome could material operating results particular period depending part upon operating results period income taxes subject income taxes us federal state foreign jurisdictions significant judgment required evaluating uncertain tax positions determining provision income taxes estimate use expected annual effective income tax rates accrue income taxes effective tax rates determined based budgeted earnings taxes including best estimate permanent items affect effective rate year management periodically reviews rates outside tax advisors changes made material variances expectations identified income taxes accounted asset liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax basis operating loss tax credit carry forwards deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized income period includes enactment date valuation allowance provided offset net deferred tax assets based upon available evidence likely deferred tax assets realized consider estimated future taxable income future reversals deferred tax liabilities assessing need valuation allowance 2017 tax act enacted december 22 2017 introduced significant changes us income tax law effective 2018 2017 tax act reduced us statutory tax rate 35 21 created new taxes certain foreignsourced earnings certain relatedparty payments referred global intangible lowtaxed income tax base erosion tax respectively addition 2017 subject toll tax onetime transition tax accumulated foreign subsidiary earnings previously subject us income tax accounting income tax effects 2017 tax act december 31 2017 required significant judgments estimates interpretation calculations provisions 2017 tax act required recognize effect tax law changes period enactment determining toll tax remeasuring us deferred tax assets liabilities well reassessing net realizability deferred tax assets liabilities due timing enactment complexity involved applying provisions 2017 tax act made reasonable estimates effects recorded provisional amounts financial statements year ended december 31 2017 december 2017 sec staff issued staff accounting bulletin 118 income tax accounting implications tax cuts jobs act sab 118 allowed us record provisional amounts measurement period extend beyond one year enactment date december 22 2018 marked end measurement period purposes sab 118 completed analysis based legislative updates relating act currently available resulted additional tax benefit 37 million fourth quarter 2018 final total tax charge 214 million related implementation 2017 tax act new accounting standards discussion recent accounting pronouncements included note 2 notes consolidated financial statements annual report form 10k item 7aitem 7 management’s discussion analysis financial condition results operations overview leading supplier products use water quality water safety water flow control water conservation markets north america europe 130 years designed manufactured products promote comfort safety people quality conservation water used commercial residential light industrial applications earn revenue income almost exclusively sale products principal product lines include · backflow preventers preventing contamination potable water caused reverse flow within water supply lines fire protection systems · wide range water pressure regulators commercial residential applications · water supply drainage products commercial residential applications · temperature pressure relief valves water heaters boilers associated systems · pointofuse water filtration reverse osmosis systems commercial residential applications · thermostatic mixing valves tempering water commercial residential applications · systems underfloor radiant applications hydraulic pump groups gas boiler manufacturers · flexible stainless steel connectors natural liquid propane gas commercial food service residential applications business reported three geographic segments north america europe china distribute products three primary distribution channels wholesale doityourself diy original equipment manufacturers oems interest rates indirect effect demand products due effect rates number new residential commercial construction starts remodeling projects residential commercial construction starts impact levels sales earnings 2005 organic segment sales north american wholesale diy markets combined increased approximately 95 prior year also 2005 organic segment sales europe increased approximately 22 prior year despite weak european economy additional factor effect sales fluctuation foreign currencies portion sales certain portions costs assets liabilities denominated currencies us dollar believe factors relating future growth include ability continue make selective acquisitions core markets well new complementary markets regulatory requirements relating quality conservation water increased demand clean water continued enforcement plumbing building codes healthy economic environment completed twentyfive acquisitions since divesting industrial oil gas business 1999 acquisition strategy focuses businesses manufacture preferred brand name products address themes water quality water safety water conservation water flow control related complimentary markets target businesses provide us one following entry new markets increase shelf space existing customers new improved technology expansion breadth water quality water conservation water safety water flow control products residential commercial markets 2005 sales acquisitions contributed approximately 49 total sales growth prior period products representing majority sales subject regulatory standards code enforcement typically require products meet stringent performance criteria together commissioned manufacturers’ representatives consistently advocated development enforcement plumbing codes focused maintaining stringent quality control testing procedures manufacturing facilities order manufacture products compliance code requirements take advantage resulting demand compliant products believe product development product testing capability investment plant equipment needed manufacture products compliance code requirements represents barrier entry competitors believe increasing demand among consumers products ensure water quality creates growth opportunities products require substantial amounts raw materials produce products including bronze brass cast iron steel plastic substantially raw materials require purchased outside sources experienced increases costs certain raw materials particularly copper bronze brass copperbased alloys 2005 spot copper cost increased approximately 469 additionally due increases cost crude oil costs certain plastic resins use increased approximately 98 190 2005 risk face ability deal effectively increases raw material costs manage risk monitoring related market prices working suppliers achieve maximum level stability costs related pricing seeking alternative supply sources necessary implementing cost reduction programs passing increases costs customers maximum extent possible occur additionally limited basis use commodity futures contracts manage risk although currently contracts response recent cost increases implemented price increases products become expensive manufacture due increases raw material costs 2005 cost increases raw materials completely recovered increased selling prices product cost reductions able predict whether long cost increases continue cost increases continue able reduce eliminate effect cost increases reducing production costs implementing price increases profit margins could decrease another risk face areas business competition consider brand preference engineering specifications code requirements price technological expertise delivery times breadth product offerings primary competitive factors mentioned previously believe product development product testing capability investment plant equipment needed manufacture products compliance code requirements represents barrier entry competitors committed maintaining capital equipment level consistent current technologies thus spent approximately 186 million 2005 210 million 2004 committed expanding manufacturing capacity lower cost countries china tunisia bulgaria manufacturing plant relocations consolidations important part ongoing commitment reduce production costs recent developments february 7 2006 declared quarterly dividend nine cents 009 per share company’s class common stock class b common stock increase 001 per share compared dividend paid comparable period last year results operations year ended december 31 2005 compared year ended december 31 2004 net sales business reported three geographic segments north america europe china net sales segments years ended december 31 2005 2004 follows increase net sales attributable following internal growth net sales north america broadbased wholesale diy markets wholesale market 2005 excluding sales acquisitions grew 85 compared 2004 primarily due increased sales backflow preventor units well increased underfloor radiant heating product lines increased unit selling prices product lines sales north american diy market 2005 increased organically 123 compared 2004 primarily due increased sales fittings supply lines underfloor radiant heating products increase net sales due foreign exchange north america due canadian dollar appreciating us dollar cannot predict whether canadian dollar continue appreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact net sales acquired growth net sales north america due inclusion net sales dormont acquired december 28 2005 core acquired december 2 2005 flexflow acquired november 4 2005 savard acquired july 8 2005 alamo acquired june 20 2005 hf acquired january 5 2005 sea tech acquired january 4 2005 orion acquired may 21 2004 internal growth europe net sales results increased sales wholesale market result gaining market share particularly germany sales european oem market primarily flat compared last year net sales negatively impacted foreign exchange europe primarily depreciation euro us dollar cannot predict whether euro continue depreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact net sales acquired growth europe net sales due inclusion net sales microflex acquired july 5 2005 electro controls acquired may 11 2005 team acquired april 16 2004 increase net sales china primarily attributable increased sales chinese domestic export markets gross profit gross profit 2005 increased 34141000 117 compared 2004 increase gross profit attributable following internal margin growth 6891000 2569000 3646000 north america europe china respectively internal growth resulted increased sales volume regions however commodity costs especially copperbased products oil sales mix shift north america europe dampened margin growth 2005 experienced raw material cost increases able fully recover price increases products north america experienced higher growth lowermargin retail sales partially offset reclassification product liability costs cost sales selling general administrative expense europe’s oem business flat increase lower margin wholesale product sales regions benefited completed manufacturing restructuring efforts china segment increased gross margin primarily due increased sales volume domestic marketplace increase gross margin foreign exchange primarily due appreciation canadian dollar yuan us dollar partially offset depreciation euro us dollar increase gross margin acquisitions due inclusion gross profit dormont core flexflow savard microflex alamo electro controls hf sea tech orion team additionally increase gross profit due decreased manufacturing restructuring costs 2005 charged 1816000 accelerated depreciation costs cost sales compared 2873000 accelerated depreciation costs 2004 anticipate recording total approximately 3000000 manufacturing restructuring costs 2006 north american europe segment selling general administrative expenses selling general administrative expenses sga expenses 2005 increased 22552000 109 compared 2004 increase sga expenses attributable following internal sga expenses increased primarily higher variable selling expenses caused increased sales volumes north america china duediligence related charges increased bad debt reserves cost increases partially offset lower costs complying section 404 sarbanesoxley act 2002 sox additionally recorded 1000000 reserve reductions 2004 related favorable ruling legal matter increase sga expenses foreign exchange primarily due appreciation canadian dollar yuan us dollar partially offset depreciation euro us dollar increase sga expenses acquisitions due inclusion dormont core savard microflex alamo electro controls hf sea tech orion team includes costs 2454000 prior period corrections including earnout arrangement prior period acquisition accounted compensation expense earnout arrangement completed august 31 2005 operating income operating income geographic segment 2005 2004 follows increase operating income attributable following internally north american segment experienced decrease operating income primarily increased commodity costs increased sga expenses partially offset benefits resulting completed manufacturing restructuring projects outsourcing 2005 experienced raw material cost increases able fully recover price increases products 2005 recorded 1005000 net costs associated manufacturing restructuring plan compared 2968000 2004 acquired growth due inclusion operating income dormont core savard alamo hf sea tech orion represents costs accrued earnout arrangement prior period acquisition earnout arrangement completed august 31 2005 increase operating income due foreign exchange north america due canadian dollar appreciating us dollar cannot predict whether canadian dollar continue appreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact net sales internally european segment also experienced decrease operating income primarily due soft european economy increased sales lower margin wholesale products increased sga expenses offset benefits resulting completed manufacturing restructuring projects outsourcing 2005 recorded 1540000 costs associated manufacturing restructuring plan record costs 2004 decrease europe’s operating income foreign exchange primarily due depreciation euro us dollar cannot predict whether euro continue depreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact operating income increase internal growth china 1622000 primarily attributable increased capacity utilization low cost sourcing domestic facilities offset increased sga expenses primarily related increased variable selling expenses due increased sales volumes increased bad debt reserves increase internal operating income corporate 1149000 primarily attributable reductions sox audit expenses partially offset 1000000 reserve reduction first quarter 2004 due favorable ruling legal matter consists 724000 adjustments made fourth quarter 2004 correct errors accrued expenses interest expense interest expense decreased 211000 20 2005 compared 2004 primarily due reduced debt levels europe debt levels increased us december 2005 result fourth quarter acquisition activity effective july 1 2005 entered threeyear interest rate swap counter party notional amount 25000000 outstanding revolving credit facility swapped threemonth euribor plus 06 fixed rate 302 impact swap immaterial overall interest expense previously entered interest rate swap notional amount 25000000 outstanding prior revolving credit facility swapped threemonth euribor plus 07 fixed rate 23 swap terminated june 30 2005 impact swap immaterial overall interest expense income taxes effective tax rate continuing operations 2005 increased 359 329 2004 increase primarily due benefits realized 2004 approximately 800000 previously unrecognized deferred tax assets china addition 2004 recorded multiyear refund claims relating state tax credits 2005 tax credits realized current year increase partially offset decrease european tax rate 2005 compared 2004 due earnings mix europe income continuing operations income continuing operations 2005 increased 6282000 129 55020000 167 per common share 48738000 149 per common share 2004 case diluted basis income continuing operations 2005 2004 includes net costs incurred manufacturing restructuring plan 1633000 005 per share 1825000 006 per share respectively also included income continuing operations 2004 net charge 2289000 007 per share accounting corrections relating certain accrued expenses loss discontinued operations recorded charge net tax discontinued operations 2005 421000 001 per common share 1918000 006 per common share 2004 case diluted basis included loss discontinued operations 2005 2004 charges attributable legal fees associated james jones litigation obligations former shareholders james jones company 421000 001 per share 1125000 004 per share respectively see part item 1 “businessproduct liability environmental litigation matters” additionally losses discontinued operations 2004 include impairment charge operating loss totaling 793000 002 per share divesture interest jameco llc year ended december 31 2004 compared year ended december 31 2003 fourth quarter 2004 identified corrected errors related certain accrued expenses tax adjustments affected selling general administrative tax expense necessary correct errors amounted 2289000 007 per share portions adjustments related year ended december 31 2004 fourth quarter 2004 1520000 005 per share 411000 001 per share respectively impact amount related prior periods material financial statements prior periods thus amount related prior periods also recorded fourth quarter 2004 following table illustrates effects adjustments earnings per share continuing operations net sales business reported three geographic segments north america europe china net sales segments years ended december 31 2004 2003 follows increase net sales attributable following internal growth net sales north america due increased price unit sales wholesale diy markets sales wholesale market 2004 excluding sales acquisitions grew 10 compared 2003 primarily due increased sales backflow preventor units well plumbing underfloor radiant heating product lines sales north american diy market 2004 increased 10 compared 2003 primarily due increased sales brass tubular products increase net sales due foreign exchange north america due canadian dollar appreciating us dollar cannot predict whether canadian dollar continue appreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact net sales acquired growth net sales north america due inclusion net sales flowmatic acquired january 5 2004 orion acquired may 21 2004 internal growth net sales europe primarily due increased sales european oem market share gains european wholesale markets increase net sales due foreign exchange europe primarily due appreciation euro us dollar cannot predict whether euro continue appreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact net sales acquired growth net sales europe due inclusion net sales martin orgee acquired april 18 2003 anello acquired july 30 2003 team acquired april 16 2004 increase net sales china primarily attributable downward adjustments made 2003 previously recorded sales increased sales rebates returns recorded twt joint venture located tianjin china repeat 2004 internal growth primarily due increased domestic shipments whollyowned subsidiary located taizhou china gross profit gross profit 2004 increased 50696000 211 compared 2003 increase gross profit attributable following internal growth primarily due 21449000 increase internal gross profit north american segment increase primarily due improved sales mix due increased sales volume north american wholesale market typically generates higher gross margins north american retail market benefits resulting completed manufacturing restructuring projects outsourcing european segment increased internal gross profit 3972000 primarily due sales growth european oem wholesale customers benefits resulting completed manufacturing restructuring projects china segment increased gross profit 7076000 primarily due inventory writedowns increased sales rebates returns net adjustments recorded 2003 repeat 2004 increased sales volumes wpt formerly referred shida improved manufacturing efficiencies wholly owned manufacturing plant tianjin 2004 increase gross profit foreign exchange primarily due appreciation euro canadian dollar us dollar increase gross profit acquisitions due inclusion gross profit orion team flowmatic martin orgee anello factors contributed increased consolidated gross profit percent 352 2004 compared 342 2003 increase gross profit partially offset increased manufacturing restructuring costs 2004 charged 2873000 accelerated depreciation cost sales compared 804000 accelerated depreciation costs 2003 selling general administrative expenses sga expenses 2004 increased 37428000 221 compared 2003 increase sga expenses attributable following internal increase sga expenses primarily due increased variable selling expense due increased sales volume costs incurred comply requirements sox partially offset reserve reduction due favorable ruling one legal cases 2004 commission expense selling expense approximately 42 115 respectively sales expense percentages consistent 2003 2004 recorded approximately 5900000 soxrelated expenses discussed previously fourth quarter 2004 identified corrected errors related certain accrued expenses adjustments net income necessary correct errors included pretax charge sga expenses 4926000 sga expenses percentage sales 2004 increased 251 compared 241 2003 primarily sox costs fourth quarter accrual adjustments operating income operating income geographic segment 2004 2003 follows increase operating income attributable following internal growth north america primarily due increased gross profit wholesale market benefits resulting completed manufacturing restructuring projects outsourcing partially offset increased net sga expenses 2004 experienced raw material cost increases able recover implementing price increases products 2004 recorded 2968000 costs associated manufacturing restructuring plan compared 162000 2003 expect record additional 750000 first half 2005 approved costs associated manufacturing restructuring plan acquired growth due inclusion operating income orion flowmatic 5650000 relates compensation expense regarding accrual adjustment internal growth europe primarily due increased gross profit increased sales volume oem wholesale markets benefits resulting previous manufacturing restructuring projects partially offset increased sga expenses 2004 record costs associated manufacturing restructuring plan compared 906000 2003 increase operating income foreign exchange primarily due appreciation euro us dollar cannot predict whether euro continue appreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact operating income acquired growth includes operating income team martin orgee anello increase internal growth china 5529000 attributable inventory writedowns net adjustments recorded 2003 repeat 2004 internal growth primarily due increased sales volumes improved manufacturing efficiencies associated manufacturing plant tianjin 2003 startup phase decrease operating income corporate 5280000 primarily attributable costs incurred compliance sox 724000 includes adjustments correct errors accrued expenses interest expense interest expense decreased 1544000 128 2004 compared 2003 primarily due overlapping interest charges three separate senior note issues outstanding 2003 two senior note issues remain outstanding 2004 partially offset elimination favorable amortization interest rate swap increased indebtedness 125000000 senior notes decreased indebtedness us revolving credit facility september 1 2001 entered interest rate swap respect 75000000 8375 notes due december 2003 swap converted interest fixed floating august 5 2002 sold swap received 2315000 cash 2003 reduced interest expense 1420000 amortizing adjustment fair value swap amortization swap completed upon repayment 75000000 8375 notes december 1 2003 may 15 2003 refinanced 75000000 8375 notes proceeds issuance 125000000 senior notes july 1 2003 entered interest rate swap notional amount 25000000 outstanding prior revolving credit facility swapped threemonth euribor plus 07 fixed rate 23 2004 euribor rate fluctuate materially impact swap immaterial overall interest expense income taxes effective tax rate continuing operations 2004 decreased 329 380 2003 decrease primarily due improvements results chinese operations allowed us recognize benefit deferred tax assets also provided favorable mix earnings also recognized benefit significant amount state income tax credits 2004 addition credit 462000 recorded accounting corrections made fourth quarter 2004 accrual related prior years income continuing operations income continuing operations 2004 increased 12319000 338 48738000 149 per common share 36419000 132 per common share 2003 case diluted basis appreciation euro canadian dollar us dollar resulted positive impact income continuing operations 005 per share 2004 compared 2003 cannot predict whether euro canadian dollar continue appreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact net income continuing operations 2004 2003 includes net costs incurred manufacturing restructuring plan 1825000 006 per share 1084000 004 per share respectively also included income continuing operations 2004 net charge 2289000 007 per share accounting corrections relating certain accrued expenses loss discontinued operations recorded charge net tax discontinued operations 2004 1918000 006 per common share 3057000 011 per common share 2003 case diluted basis included loss discontinued operations 2004 charges attributable legal fees associated james jones litigation obligations former shareholders james jones company 1125000 004 per share compared 3111000 011 per share 2003 see part item 1 “businessproduct liability environmental litigation matters” additionally losses discontinued operations 2004 2003 include impairment charge operating loss totaling 793000 002 per share income 54000 000 per share respectively planned divesture interest jameco llc liquidity capital resources generated 51867000 cash continuing operations 2005 experienced increase accounts receivable north america europe china totaling 16546000 increase primarily due increased sales volume additionally experienced increase inventories north america europe china totaling 20330000 portion overall increase inventory due increased costs raw materials increase inventory europe primarily due increased finished goods support delivery requirements oem customers europe increase safety stocks restructuring north american china inventories increased primarily due incremental volume products sourced extended china supply chain increase inventory accounts receivable partially offset increased accounts payable approximately 14257000 used 183203000 net cash investing activities 2005 used 191396000 fund acquisitions dormont core flexflow savard microflex alamo electro controls hf sea tech also invested 18590000 capital equipment capital expenditures primarily manufacturing machinery equipment part ongoing commitment improve manufacturing capabilities expect invest approximately 25000000 capital equipment 2006 generated 26600000 sale investment securities generated 112924000 net cash financing activities 2005 primarily increased borrowings us europe acquisitions proceeds exercise stock options offset dividend payments debt paid 3750000 debt owed former shareholders hunter innovations leaving balance 3750000 remaining paid may 2006 revolving credit facility syndicate banks revolving credit facility provides multicurrency unsecured borrowings standby letters credit 300000000 matures september 2009 revolving credit facility used support acquisition program working capital requirements general corporate purposes outstanding indebtedness revolving credit facility bears interest rate determined type loan plus applicable margin determined company’s debt rating depending applicable base rate bond rating 2005 average interest rate revolving credit facility us dollar borrowings approximately 50 euro based borrowings approximately 27 approximately 100096000 unused potentially available revolving credit december 31 2005 december 31 2005 127000000 us dollar denominated debt 40263000 eurobased borrowings outstanding revolving credit facility additionally 32641000 outstanding standby letters credit revolving credit facility december 31 2005 revolving credit facility includes operational financial covenants customary facilities type including among others restrictions additional indebtedness liens investments maintenance certain leverage ratios december 31 2005 compliance covenants related revolving credit facility effective july 1 2005 entered threeyear interest rate swap counter party notional amount 25000000 outstanding revolving credit facility swapped threemonth euribor plus 06 fixed rate 302 designated swap hedge using cash flow method december 31 2005 fair value swap approximately 484000 previously entered interest rate swap notional amount 25000000 outstanding revolving credit facility expired june 30 2005 term swap two years swapped threemonth euribor plus 07 fixed rate 23 designated swap hedging instrument using cash flow method used 1050000 net cash discontinued operations 2005 received approximately 548000 cash settlement payment indemnification costs incurred james jones case offsetting liability recorded december 31 2005 possibility might reimburse insurance company ultimately successful future appeal also received approximately 2100000 cash reimbursement defense costs related james jones case 2005 paid approximately 2503000 defense costs 550000 legal costs approximately 1021000 indemnity costs incurred james jones case working capital defined current assets less current liabilities december 31 2005 305092000 compared 303374000 december 31 2004 ratio current assets current liabilities 24 1 december 31 2005 compared 26 1 december 31 2004 cash equivalents 45758000 december 31 2005 compared 65913000 december 31 2004 decrease cash primarily due cash paid acquisitions increased working capital requirements capital expenditures offset sale investment securities may 2005 filed universal shelf registration statement form s3 securities exchange commission pursuant registered 300000000 indeterminate amount debt andor equity securities expect funds offerings would used finance acquisitions working capital repay refinance debt general corporate purposes generated 40210000 cash continuing operations 2004 experienced increase inventory north america china north america increase primarily due planned increases finished goods set additional distribution centers lengthened supply chain producing products abroad increased sales volume addition due cost increases certain raw materials carrying value inventory north america 2004 increased approximately 9000000 compared 2003 additionally experienced increase accounts receivable north america partially offset decrease europe north america increase primarily due increased sales volume timing certain cash receipts certain large customers used 111379000 net cash investing activities 2004 invested 20999000 capital equipment capital expenditures primarily manufacturing machinery equipment part ongoing commitment improve manufacturing capabilities received 2143000 proceeds primarily sale one north american manufacturing facilities respect entered sale lease back arrangement business acquisitions net cash acquired consisted cash purchases 16796000 assets flowmatic 5750000 40 equity interest shida held former joint venture partner 17247000 team acquisition 27873000 orion acquisition 787000 additional 34 investment watts stern rubinetti srl additionally net investment securities primarily investment grade auction rate securities increased 26600000 2004 4000000 2003 used 16526000 net cash financing activities 2004 primarily dividend payments debt repayment china 3750000 debt paid former shareholders hunter innovations partially offset proceeds stock option exercises generated 52303000 net cash continuing operations 2003 experienced increase inventories north america europe china increase inventory north america primarily due planned increases imported raw materials finished goods support delivery capability extended supply chain lower cost regions well increase inventory support increased retail business increase inventory europe primarily due increased safety stock growth cover planned distribution relocations support delivery requirements oem customers europe increase inventory china result whollyowned manufacturing plant startup operations reductions accounts receivable europe china partially offset increased accounts receivable north america increase north america due increased sales volume funded 6800000 pension plans year ended december 31 2003 used 37747000 net cash investing activities 2003 invested 20030000 capital equipment year ended december 31 2003 capital expenditures primarily manufacturing machinery equipment part ongoing commitment improve manufacturing capabilities two largest components expenditure building added shida joint venture facility taizhou china additional machinery equipment whollyowned manufacturing plant tianjin china january 29 2003 invested additional 3040000 shida joint venture bringing total amount approximately 8040000 joint venture owned 60 us 40 chinese partner addition april 18 2003 paid approximately 1600000 acquire martin orgee uk limited july 30 2003 paid approximately 10600000 net cash acquired 1400000 acquire giuliani anello srl generated 122079000 net cash financing activities 2003 december 10 2003 completed public offering 4600000 shares newly issued class common stock 1900 per share net proceeds approximately 82500000 taking account underwriter discounts expenses associated transaction may 6 2003 paid 3750000 debt owed former shareholders hunter innovations leaving balance 11250000 remaining paid free cash flow 23449000 defined net cash provided continuing operations minus capital expenditures dividends plus proceeds sale assets year ended december 31 2005 versus free cash flow 12283000 2004 increase 2005 compared 2004 primarily due decreased growth inventories partially offset increased accounts receivable net debt capitalization ratio defined short longterm interestbearing liabilities less cash equivalents percentage sum short long term interestbearing liabilities less cash equivalents plus total stockholders’ equity including minority interest increased 331 2005 193 2004 increase resulted increase debt fund acquisitions decrease cash due working capital requirements 2005 payments made acquisitions free cash flow 12283000 year ended december 31 2004 versus free cash flow 27179000 2003 decrease 2004 compared 2003 primarily due increased growth inventories increased accounts receivable increased dividends partially offset increases accrued expenses believe free cash flow appropriate supplemental measure operating performance company provides investors measure ability generate cash repay debt fund acquisitions computation may comparable companies may define free cash flow differently free cash flow represent cash generated operating activities accordance gaap therefore considered alternative net cash provided operations indication performance free cash flow also considered alternative net cash provided operations defined gaap reconciliation net cash provided continuing operations free cash flow provided net debt capitalization ratio computed accordance gaap management believes appropriate supplemental measure helps investors understand ability meet financing needs computation may comparable companies may define net debt capitalization differently reconciliation longterm debt including current portion net debt net debt capitalization ratio provided reconciliation capitalization provided anticipate available funds current operations existing cash revolving credit facility sources liquidity sufficient meet current operating requirements anticipated capital expenditures least next 12 months however may consider external sources financing large future acquisitions longterm contractual obligations december 31 2005 presented following table recognized consolidated balance sheet includes 8900000 bonds due less one year dormont acquisition settled former owners see note 11 consolidated financial statements b includes acquisition related agreement commodity capital expenditure commitments december 31 november 2005 signed definitive agreement acquire assets business changsha valve works located changsha china changsha valve works leading manufacturer large diameter hydraulic actuated butterfly valves thermopower hydropower plants water distribution projects water works projects china consummation acquisition remains subject fulfillment certain closing conditions changsha valve works entered preliminary agreement purchase building located northern italy local italian government simultaneously sell local italian government one facilities northern italy transaction expected consummated march 2006 purchase price new building approximates 15300000 selling price existing building approximates 9100000 book value approximately 2800000 management’s intention finance purchase new building sale lease back arrangement however specific terms conditions financing yet determined therefore payments future financing included contractual obligations schedule related transaction agreement sell another building northern italy private third party approximately 3700000 expect transaction consummated fourth quarter 2006 book value building approximates 2500000 transactions part strategy consolidate italian manufacturing activities maintain letters credit guarantee performance payment third parties accordance specified terms conditions amounts outstanding total letters credit approximately 48651000 december 31 2005 42570000 december 31 2004 letters credit primarily associated insurance coverage lesser extent foreign purchases generally expire within one year issuance increase primarily associated increased foreign purchases instruments may exist expire without drawn therefore necessarily represent future cash flow obligations 20 interest wwwplumbworldcouk limited plumbworld variable interest entity plumbworld primarily ebusiness sells bathroom sanitary appliances well plumbing heating products tools plumbing consumables latest fiscal year sales approximately 11600000 nominal investment approximately 500 plumbworld maintain loan receivable amount approximately 603000 plumbworld entered agreement majority shareholders plumbworld exchange 20 ownership interest full receipt loan receivable expect receive installment payments september 2006 time relinquish shares plumbworld continue account investment plumbworld using equity method critical accounting policies key estimates preparation consolidated financial statements accordance us gaap requires management make judgments assumptions estimates affect amounts reported critical accounting estimate assumption highly uncertain matters could material effect consolidated financial statements another also reasonable amount used change estimate reasonably likely period base assumptions historical experience estimates believe reasonable circumstances actual results could differ significantly estimates changes accounting policies significant changes accounting estimates 2005 discussed development selection disclosure estimates audit committee management believes following critical accounting policies reflect its’ significant estimates assumptions revenue recognition recognize revenue following criteria met 1 entered binding agreement 2 product shipped title passed 3 sales price customer fixed determinable 4 collectibility reasonably assured recognize revenue based upon determination criteria revenue recognition met based majority shipping terms considered occurred upon shipment finished product shipping terms require goods received customer title passes instances revenues recognized customer received goods record estimated reductions revenue customer returns allowances customer programs provisions returns allowances made time sale derived historical trends form portion allowance doubtful accounts customer programs primarily annual volume incentive plans allow customers earn credit attaining agreed upon purchase targets us record customer programs adjustment net sales allowance doubtful accounts allowance doubtful accounts established represent best estimate net realizable value outstanding accounts receivable development allowance doubtful accounts varies region general based review past due amounts historical writeoff experience well aging trends affecting specific accounts general operational factors affecting accounts north america management specifically analyzes individual accounts receivable establishes specific reserves financially troubled customers addition factors developed utilizing historical trends bad debts returns allowances ratio factors sales rolling twelvemonth basis applied total outstanding receivables net accounts specifically identified establish reserve europe management develops bad debt allowance aging analysis accounts china management specifically analyzes individual accounts receivable establishes specific reserves needed addition waterworks customers whose payment terms generally extended reserve majority accounts receivable excess one year invoice date uniformly consider current economic trends changes customer payment terms evaluating adequacy allowance doubtful accounts also aggressively monitor creditworthiness largest customers periodically review customer credit limits reduce risk circumstances relating specific customers change unanticipated changes occur general business environment estimates recoverability receivables could adjusted inventory valuation inventories stated lower cost market costs generally determined firstin firstout basis utilize specific product identification historical product demand basis determining excess obsolete inventory reserve identify inventories exceed range one three years sales determined comparing current inventory balance unit sales trailing twelve months new products added inventory within past twelve months excluded analysis portion products contain recoverable materials therefore excess obsolete reserve established net recoverable amounts changes market conditions lower expected customer demand changes technology features could result additional obsolete inventory saleable could require additional inventory reserve provisions certain countries additional inventory reserves maintained potential shrinkage experienced manufacturing process reserve established based prior year’s inventory losses adjusted change gross inventory balance goodwill intangibles adopted financial accounting standards board statement 142 “goodwill intangible assets” fas 142 january 1 2002 result longer amortize goodwill intangible assets indefinite lives tested annually impairment accordance provisions fas 142 use judgment assessing whether assets may become impaired annual impairment tests perform annual test indications goodwill impairment last day fiscal october 30 fiscal 2005 intangible assets purchased technology generally recorded connection business acquisition values assigned intangible assets determined independent valuation firm based estimates judgments regarding expectations success life cycle products technology acquired since adoption fas 142 valuations greater carrying value goodwill intangibles believe estimates future cash flows reasonable different assumptions regarding factors future sales volume selling price changes material cost changes cost savings programs capital expenditures could significantly affect valuations changes may affect valuations include limited product acceptances regulatory approval actual product acceptance differs significantly estimates may required record impairment charge write assets realizable value severe decline market value could result unexpected impairment charge goodwill could material impact results operations financial position product liability workers compensation costs retention requirements associated insurance policies generally selfinsured potential product liability claims workers’ compensation costs associated workplace accidents product liability cases us management estimates expected settlement costs utilizing loss reports provided third party administrators well developing internal historical trend factors based specific claims experience management utilizes internal trend factors reflect final expected settlement costs countries maintain insurance coverage relatively high deductible payments product liability claims tend smaller experienced us changes nature claims actual settlement amounts could affect adequacy estimate require changes provisions workers compensation liabilities us recognized claims incurred including claims incurred reported changes status individual case reserves time workers’ compensation claim filed liability estimated settle claim liability workers’ compensation claims determined based management’s estimates nature severity claims based analysis provided third party administrators various state statutes reserve requirements developed trend factors based specific claims experience countries workers compensation costs applicable maintain insurance coverage limited deductible payments liability estimate ultimate liability may less reported maintain excess liability insurance outside insurance carriers minimize risks related catastrophic claims excess selfinsured positions material change aforementioned factors could adverse impact operating results legal contingencies defendant numerous legal matters including involving environmental law product liability discussed note 15 notes consolidated financial statements required financial accounting standards board statement 5 “accounting contingencies” fas 5 determine whether estimated loss contingency accrued assessing whether loss deemed probable loss amount reasonably estimated net applicable insurance proceeds estimates potential outcomes contingencies developed consultation outside counsel assessment based upon available information litigation inherently uncertain actual liability fully resolve litigation cannot predicted assurance accuracy final settlement matters could possibly result significant effects results operations cash flows financial position pension benefits account pension plans accordance financial accounting standards board statement 87 “employers accounting pensions” fas 87 applying fas 87 assumptions made regarding valuation benefit obligations performance plan assets primary assumptions follows · weighted average discount ratethis rate used estimate current value future benefits rate adjusted based movement longterm interest rates · expected longterm rate return assetsthis rate used estimate future growth investments investment earnings expected return based upon combination historical market performance anticipated future returns portfolio reflecting mix equity debt investments indicative plan assets · rates increase compensation levelsthis rate used estimate projected annual pay increases used determine wage base used project employees’ pension benefits retirement determine assumptions based consultation outside actuaries investment advisors variance assumptions could significant impact future recognized pension costs assets liabilities income taxes estimate use expected annual effective income tax rates accrue income taxes effective tax rates determined based budgeted earnings taxes including best estimate permanent items affect effective rate year management periodically reviews rates outside tax advisors changes made material discrepancies expectations identified recognize deferred taxes expected future consequences events reflected consolidated financial statements accordance rules financial accounting standards board statement 109 “accounting income taxes” fas 109 fas 109 deferred tax assets liabilities determined based differences book values tax bases particular assets liabilities using tax rates effect years differences expected reverse valuation allowance provided offset net deferred tax assets based upon available evidence likely deferred tax assets realized consider estimated future taxable income ongoing prudent tax planning strategies assessing need valuation allowance new accounting standards november 2004 financial accounting standards board fasb issued financial accounting standards board statement 151 “inventory costs” fas 151 fas 151 amends guidance accounting research bulletin 43 chapter 4 “inventory pricing” clarify accounting inventory costs provisions statement effective fiscal years beginning june 15 2005 although early application permitted expect impact statement material consolidated financial statements december 2004 fasb issued final standard accounting sharebased payments sbp financial accounting standards board statement 123r fas 123r requires companies expense value employee stock options similar awards statement applies outstanding unvested sbp awards company’s adoption date securities exchange commission delayed implementation fiscal years beginning june 15 2005 therefore implemented fas 123r effective january 1 2006 using modified prospective method requires recognizing expense options remaining vesting period portion options’ fair value attributable vested awards prior adoption never recognized impact statement results operations based equity instruments outstanding december 31 2005 fiscal year ending december 31 2006 expected approximately 003 per share december 2004 fasb issued financial accounting standards board statement 153 “exchanges nonmonetary assets amendment apb opinion 29 accounting nonmonetary transactions” fas 153 amendments made fas 153 based principle exchanges nonmonetary assets measured based fair value assets exchanged amendments eliminate narrow exception nonmonetary exchanges similar productive assets replace broader exception exchanges nonmonetary assets commercial substance previously opinion 29 required accounting exchange productive asset similar productive asset equivalent interest similar productive asset based recorded amount asset relinquished statement effective nonmonetary asset exchanges occurring fiscal periods beginning june 15 2005 earlier application permitted nonmonetary asset exchanges occurring fiscal periods beginning date issuance provisions statement applied prospectively january 2006 march 2005 fasb issued fasb interpretation 47 “accounting conditional asset retirement obligations” fin 47 fin 47 interpretation fasb statement 143 “accounting asset retirement obligations” fas 143 serves clarify entity required recognize liability fair value conditional asset retirement obligation incurred liability’s fair value reasonably estimated fin 47 also clarifies entity would sufficient information reasonably estimate liability fin 47 effective later end fiscal years ending december 15 2005 concluded fin 47 material impact consolidated financial statements december 31 2005 may 2005 fasb issued financial accounting standards board statement 154 “accounting changes error corrections” fas 154 replacement apb opinion 20 “accounting changes” replacement fasb statement 3 “reporting accounting changes interim financial statements” fas 154 changes accounting reporting change accounting principle statement requires retrospective application prior periods financial statements voluntary changes accounting principles changes required new accounting standards standard include specific transition provisions unless impracticable statement effective accounting changes corrections errors fiscal years beginning december 15 2005 earlier application permitted accounting changes corrections errors fiscal years beginning june 1 2005 item 7aitem 7 managements discussion analysis financial condition results operations overview leading supplier products use water quality water safety water flow control water conservation markets north america europe expanding presence asia 130 years designed manufactured products promote comfort safety people quality conservation water used commercial residential applications earn revenue income almost exclusively sale products principal product lines include •water quality products including backflow preventers check valves preventing reverse flow within water lines fire protection systems pointofuse water filtration reverse osmosis systems commercial residential applications •a wide range water pressure regulators commercial residential applications •drainage products industrial commercial marine residential applications •water supply products commercial residential applications •temperature pressure relief valves water heaters boilers associated systems •thermostatic mixing valves tempering water commercial residential applications •systems underfloor radiant applications hydraulic pump groups gas boiler manufacturers renewable energy applications including solar heat pump control packages •flexible stainless steel connectors natural liquid propane gas commercial food service residential applications •large diameter butterfly valves use chinas water infrastructure business reported three geographic segments north america europe china distribute products three primary distribution channels wholesale doityourself diy original equipment manufacturers oems interest rates indirect effect demand products due effect rates number new residential commercial construction starts remodeling projects three activities impact sales earnings additional factor effect sales fluctuation foreign currencies portion sales certain portions costs assets liabilities denominated currencies us dollar believe factors relating future growth include ability continue make selective acquisitions core markets well new complementary markets regulatory requirements relating quality conservation water increased demand clean water continued enforcement plumbing building codes healthy economic environment completed 32 acquisitions since divesting industrial oil gas business 1999 acquisition strategy focuses businesses manufacture preferred brand name products address themes water quality water conservation water safety water flow control related complementary markets target businesses provide us one following entry new markets increase shelf space existing customers new improved technology expansion breadth water quality water conservation water safety water flow control products residential commercial markets 2008 2007 sales acquisitions contributed approximately 46 39 total sales growth prior year products representing majority sales subject regulatory standards code enforcement typically require products meet stringent performance criteria together commissioned manufacturers representatives consistently advocated development enforcement plumbing codes focused maintaining stringent quality control testing procedures manufacturing facilities order manufacture products compliance code requirements take advantage resulting demand compliant products believe product development product testing capability investment plant equipment needed manufacture products compliance code requirements represent barrier entry competitors believe long term increasing demand among consumers products ensure water quality creates growth opportunities products adverse economic developments 2008 created challenging environment us credit crisis recessionary pressures negatively impacted primary markets serve took steps year reduce costs conserve cash fourth quarter 2008 reduced workforce 10 us step expected save us approximately 100 million 110 million per year addition reduction force took several steps help conserve cash 2009 including suspending stock repurchase program first freezing us wages salaries later implementing salary reductions controlling capital spending levels continuing focus working capital levels also announced operational restructuring program consolidate manufacturing footprint north america china continue evaluate acquisition candidates 2009 expect funds spent acquisitions less spent 2008 enhancing focus productivity continuous improvement managing working capital levels well positioning many products benefit market returns believe well positioned weather current economic crisis due ability continue generate positive cash flows control spending levels faced major liquidity events 2010 time 500 million debt come due require substantial amounts raw materials produce products including bronze brass cast iron steel plastic substantially raw materials require purchased outside sources experienced volatility costs certain raw materials particularly copper bronze brass copperbased alloys fourth quarter 2008 prices copper dropped highs experienced less nine months earlier risk face ability deal effectively changes raw material costs manage risk monitoring related market prices working suppliers achieve maximum level stability costs related pricing seeking alternative supply sources necessary implementing cost reduction programs passing increases costs customers additionally time may use commodity futures contracts limited basis manage risk able predict whether long volatility continue costs continue decrease may experience pressure customers reduce product pricing unable predict timing impact pricing decreases could profit margins another risk face areas business competition consider brand preference engineering specifications code requirements price technological expertise delivery times breadth product offerings primary competitive factors mentioned previously believe product development product testing capability investment plant equipment needed manufacture products compliance code requirements represent barrier entry competitors committed maintaining capital equipment level consistent current technologies thus spent approximately 266 million 2008 378 million 2007 recent developments february 10 2009 plan approved board directors expand program consolidate manufacturing footprint north america china plan provides closure three plants relocation operations existing facilities either north america china new central facility united states footprint consolidation pretax charge approximately 117 million including severance charges approximately 32 million relocation costs approximately 33 million asset writedowns approximately 52 million also expect record net gain property sales 24 million onetime tax charges approximately 70 million regarding payback prior tax holiday benefits also expected incurred part building relocations approximately 400 positions eliminated connection consolidation net tax charge manufacturing consolidation program expected approximately 149 million 44 million non cash costs incurred december 2009 expect spend approximately 48 million capital expenditures consolidate operations expect entire project selffunded net proceeds sale buildings assets disposed part plan february 9 2009 declared quarterly dividend eleven cents 011 per share outstanding share class common stock class b common stock results operations year ended december 31 2008 compared year ended december 31 2007 net sales business reported three geographic segments north america europe china net sales segments years ended december 31 2008 2007 follows change net sales attributable following organic net sales 2008 decreased north america primarily due decreased sales wholesale market sales 25 lower 2007 unit sale declines due large part soft economy widespread across number product lines backflow product line impacted organic sales north american retail market 2008 remained relatively flat compared 2007 decreasing 06 unit sale reductions retail market due soft economy offset selected price increases new product rollouts given current recession stringent bank lending standards believe commercial residential construction markets sell wholesale diy channels continue soft 2009 result believe sales north america may decline 2009 growth north america due acquisitions due inclusion sales topway acquired november 2007 organic net sales 2008 increased europe primarily due 110 increase sales european oem market compared 2007 oem sales positively impacted germany sales products alternative energy conservation markets strong sales wholesale market 2008 decreased 45 compared 2007 negatively affected declines construction activity acquired sales growth europe due inclusion blücher seven months 2008 expect sales europe increase constant currency basis 2009 blücher reported full year expect alternative energy products sales grow offset unit declines core product lines core sales expected impacted widening recession europe organic net sales 2008 declined china due decreased sales chinese domestic export markets china sales also negatively affected compared 2007 disposal commodity butterfly valve business fourth quarter 2008 decrease partially offset increase sales large diameter butterfly valves water infrastructure customers 2008 increases net sales due foreign exchange north america europe china primarily due appreciation canadian dollar euro yuan respectively us dollar cannot predict whether currencies continue appreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact net sales recent fluctuations foreign currency rates portend reduction currencies us dollar gross profit gross profit gross profit percent net sales gross margin 2008 2007 follows gross margin improved 10 basis points 335 2008 compared 2007 improvement attributable primarily margin improvements north america europe offset declines china north americas margin improved 70 basis points 344 primarily due price increases implemented offset prior raw material cost increases lesser extent mix product sold 2007 north american gross margins negatively impacted approximately 65 million approximately 100 basis points prior year gross margin charges associated product discontinuances change estimate workers compensation costs gross margin europe increased 323 310 primarily due ability leverage additional volume alternative energy product sales better factory absorption levels due rationalization efforts made last two years italy china gross margin deteriorated compared 2007 primarily due excess capacity due sales declines value added tax increases negative impact increase value chinese yuan us dollar disruptions plant move labor disputes 2007 initiated global restructuring program approved board directors october 30 2007 program includes plans shut five manufacturing facilities rightsize sixth facility incur costs relocate one china facilities addition performed evaluation certain product lines 2007 completing evaluation initiated plan discontinue certain product lines accordance restructuring program product line discontinuance commenced 2007 anticipated spending 129 million date incurred 89 million costs associated plans successfully shut two manufacturing facilities right sized another facility management reviewing status program timing charges europe segment anticipate restructuring program completed 2010 expectation europe segment incur costs 2010 previous estimates savings programs likely achieved 2010 rather second half 2009 following table presents total estimated pretax charges incurred global restructuring program product line discontinuances initiated 2007 reportable segments amounts charged date selling general administrative expenses selling general administrative expenses sga expenses 2008 increased 275 million 83 compared 2007 increase sga expenses attributable following organic increase sga expenses primarily due increased incentive compensation costs increased variable european selling expenses due increased sales volumes partially offset decreased shipping costs variable north american selling expenses due decreased sales volumes increase sga expenses foreign exchange primarily due appreciation euro yuan canadian dollar us dollar increase sga expenses acquisitions due inclusion blücher topway total sga expenses percentage sales 247 2008 compared 241 2007 restructuring income charges 2008 recorded 56 million severance asset writedowns accelerated depreciation north america china europe 2007 recorded 32 million asset writedowns accelerated depreciation severance north america china goodwill impairment charge goodwill impairment charge 2008 approximately 220 million related one north american reporting units water quality see note 2 notes consolidated financial statements annual report form 10k additional information regarding impairment operating income operating income geographic segment 2008 2007 follows change operating income attributable following decrease consolidated organic operating income due primarily underutilization capacity china lesser extent north america caused recessionary unit volume declines oneoff events china labor strike plant move natural disasters also sga expenses salaries product liability fixed spending increased items partially offset higher sales better productivity europe reductions certain sga expenses shipping pension costs bad debts corporate costs decreased result lower benefit costs including lower stock based compensation reduced costs nonqualified deferred compensation plan lower costs related sarbanes oxley compliance efforts reduced legal costs blücher acquisition accounts net increase operating profits acquisitions net increase operating income foreign exchange primarily due appreciation euro us dollar cannot predict whether currencies continue appreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact operating income interest income interest income decreased 94 million 648 2008 compared 2007 primarily due cash used fund blücher acquisition stock buyback program initiated november 2007 well lower interest rate environment 2008 compared 2007 interest expense interest expense decreased 07 million 26 2008 compared 2007 primarily due lower outstanding balances revolving credit facility partially offset increase average variable rates charged revolving credit facility income expense increased 68 million 2957 2008 compared 2007 primarily due foreign currency transaction losses metal commodity transactions negative changes asset valuation nonqualified deferred compensation plan foreign currency transaction losses increased china europe canada 2008 compared 2007 income taxes effective tax rate continuing operations increased 346 2008 318 2007 main driver increase goodwill impairment portion goodwill relates stock acquisitions impaired tax deductible european effective rate declined due provision releases favorable tax treatments related blücher acquisition financing income continuing operations income continuing operations 2008 decreased 303 million 390 473 million 128 per common share 776 million 199 per common share 2007 case diluted basis repurchased shares accretive impact 007 per common share 2008 income continuing operations included aftertax goodwill impairment charge 173 million 047 per common share 2008 income continuing operations 2007 includes tax refund 19 million 005 per common share income continuing operations 2008 2007 included costs net tax restructuring plan reductioninforce product line discontinuances 39 million 010 per common share 51 million 013 per common share respectively appreciation euro chinese yuan canadian dollar us dollar resulted positive impact income continuing operations 007 per common share 2008 compared comparable period last year cannot predict whether euro canadian dollar yuan appreciate depreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact net income loss discontinued operations loss discontinued operations 2008 2007 07 million 002 per common share 02 million 001 per common share diluted basis comparable period losses 2008 2007 primarily attributable increased legal fees associated james jones litigation described part item 1 businessproduct liability environmental litigation matters 2007 loss partially offset reserve adjustments year ended december 31 2007 compared year ended december 31 2006 net sales net sales three geographic segments years ended december 31 2007 2006 follows increase net sales attributable following organic growth net sales north america primarily due increased unit selling prices increased unit sales certain product lines wholesale market sales wholesale market 2007 excluding sales acquisition calflex manufacturing inc calflex topway grew 77 compared 2006 primarily due increased sales backflow products sales north american diy market 2007 decreased 44 compared 2006 primarily due discontinuing certain lower margin product lines partially offset price increases new product rollouts acquired growth net sales north america due inclusion net sales calflex acquired june 2 2006 topway acquired november 9 2007 organic sales growth europe broadbased especially eastern europe oem market partially offset weak german market sales wholesale oem markets 2007 excluding sales acquisitions ats expansion group ats kim olofsson safe corporation kimsafe black teknigas limited teknigas grew 31 44 respectively compared 2006 acquired growth net sales europe due inclusion net sales ats acquired may 19 2006 kimsafe acquired june 7 2006 teknigas acquired august 14 2006 organic sales growth china primarily due increased export sales europe increased sales domestic chinese markets elimination onemonth reporting lag two chinese entities acquired growth net sales china due inclusion net sales changsha valve works changsha acquired april 26 2006 increases net sales due foreign exchange north america europe china primarily due appreciation canadian dollar euro yuan respectively us dollar gross profit gross profit gross profit percent net sales gross margin 2007 2006 follows gross margin decreased 2007 compared 2006 primarily due increased material costs writeoff inventory related discontinuance certain product lines increase workers compensation reserve primarily due change estimate north american margin 2007 affected charge related discontinuance certain product lines cost increases copperbased alloys stainless steel products exceeded realized sales price increases year european margin remained relatively flat primarily due higher margins contributed price increases offset increased material costs shift sales lower margin products primarily oem market china segments gross margin decreased primarily due higher material costs underutilized capacity certain locations primarily due relocation joint venture facility charge related discontinuance certain product lines value added tax increases shift product mix selling general administrative expenses sga expenses 2007 increased 325 million 108 compared 2006 increase sga expenses attributable following organic increase sga expenses primarily due increased product liability costs increased stockbased compensation costs increased variable selling expenses due increased sales volumes partially offset decreased incentive compensation costs increase sga expenses foreign exchange primarily due appreciation euro canadian dollar yuan us dollar increase sga expenses acquisitions due inclusion changsha ats calflex watts valve ningbo co ltd ningbo kimsafe teknigas topway total sga expenses percentage sales 241 2007 compared 244 2006 restructuring income charges 2007 recorded 32 million asset writedowns accelerated depreciation severance north america china 2006 recorded income 57 million primarily due gain approximately 82 million related sale two buildings italy partially offset charge 25 million primarily severance costs related european restructuring programs operating income operating income geographic segment 2007 2006 follows change operating income attributable following decrease organic operating income north america primarily due increased material costs partially offset unit price increases net increase workers compensation reserve primarily due change estimate increased product liability costs partially offset decreased incentive compensation costs 2007 recorded charge 31 million related discontinuance certain product lines 04 million primarily severance costs related global restructuring program acquired decrease primarily due amortization certain costs associated acquisition topway europes organic growth operating income due ability leverage sga expenses increased selling prices partially offset increased material costs shift sales lower margin products primarily oem market 2007 record costs associated restructuring compared gain 60 million period 2006 recorded gain 82 million building sales italy partially offset 22 million primarily severance costs acquired growth europe due inclusion operating income ats kimsafe teknigas decrease organic operating income china primarily attributable decreased production levels wholly owned manufacturing plants acquired growth china due inclusion operating income changsha ningbo 2007 recorded 33 million asset writedowns accelerated depreciation severance related global restructuring program 07 million related discontinuance certain product lines elimination onemonth reporting lag two chinese entities material impact chinas operating income decrease organic operating income corporate primarily attributable increased stockbased compensation costs legal costs partially offset decreased incentive compensation costs net increase operating income foreign exchange primarily due appreciation euro canadian dollar yuan us dollar interest income interest income increased 95 million 1900 2007 compared 2006 primarily due investment net proceeds approximately 2190 million public offering 575 million shares class common stock november 2006 interest expense interest expense increased 48 million 217 2007 compared 2006 primarily due april 27 issuance 2250 million 585 senior notes due 2016 increase average variable rates charged revolving credit facility partially offset decreased debt levels acquisitions effective july 1 2005 entered interest rate swap notional amount €250 million outstanding revolving credit facility swapped adjustable rate three month euribor plus 06 fixed rate 302 recorded reduction interest expense approximately 07 million recognize fair value swap 2006 swap terminated october 3 2006 income expense income expense increased 32 million 3556 2007 compared 2006 primarily due currency movements losses forward currency contracts foreign currency losses recorded europe canada china 2007 whereas foreign currency gains recorded 2006 minority interest minority interest increased 10 million 556 2007 compared 2006 primarily due credit recorded 40 liability joint venture partners share recording 24 million twt restructuring costs income taxes effective tax rate continuing operations decreased 318 2007 336 2006 decrease primarily due onetime benefit associated refund withholding taxes italy 2006 recording higher taxes sale two buildings decrease partially offset recording 32 million valuation allowance deferred tax assets 60 owned chinese joint venture income continuing operations income continuing operations 2007 increased 05 million 06 776 million 199 per common share 771 million 229 per common share 2006 case diluted basis income continuing operations 2007 included tax refund 19 million 005 per common share income continuing operations 2007 2006 included costs net tax restructuring plan product line discontinuances 51 million 013 per common share included income net tax 15 million 004 per share respectively 2006 gains sales buildings italy resulted aftertax gain 51 million 015 per share appreciation euro chinese yuan canadian dollar us dollar resulted positive impact income continuing operations 009 per common share 2007 compared comparable period last year additionally november 2006 company completed public offering 575 million shares class common stock received net proceeds approximately 2190 million interest earned net proceeds provided approximately 71 million aftertax income 2007 issuance additional 575 million shares dilutive impact earnings per share 011 per share 2007 considering interest income net proceeds loss discontinued operations loss discontinued operations 2007 2006 02 million 001 per common share 34 million 010 per common share diluted basis comparable period losses 2007 2006 primarily attributable increased deductible costs 2006 legal fees associated james jones litigation described part item 1 businessproduct liability environmental litigation matters 2007 loss partially offset reserve adjustments liquidity capital resources believe effectively managing cash necessary given uncertainty current credit markets achieve cash management goals manage potential downside liquidity events taken steps control spending increase productivity reduce net working capital levels control capital expenditures spend conservatively acquisitions available cash 1656 million december 31 2008 available capacity line credit discussed continued working capital management focus large debt payments due 2010 spending costcutting programs place believe well positioned transition challenging 2009 two recent negative developments related inventory could affect 2009 cash flows recently experienced destocking issues within customer base delay ability sell inventory customers adopting justintime inventory techniques minimize inventory investment puts pressure plants hold inventory meet expected nearterm customer demand developments could affect ability reduce inventory levels 2009 therefore could reduce cash flows also may consider external sources financing large future acquisitions 2008 generated 1464 million cash operating activities compared 917 million 2007 managements enhanced focus 2008 working capital management net working capital cash outflows decreased 251 million 2007 net working capital cash inflow 434 million 2008 685 million positive change better overall management inventory accounts receivable accounts payable drove improvement working capital change offset extent lower income continuing operations used 1722 million net cash investing activities 2008 used approximately 1679 million net cash fund current year acquisition spent 93 million acquisition costs related prior years acquisitions received proceeds 333 million sale auction rate securities invested 266 million capital equipment part ongoing commitment improve manufacturing capabilities expect invest approximately 270 capital equipment 2009 december 31 2008 held 60 million investments auction reset feature auction rate securities since december 31 2007 reduced exposure auction rate securities 306 million recorded impairment approximately 24 million remaining securities expense consolidated statement operations decline fair value longer considered temporary time purchase auction rate securities carried aaa credit rating auction rate securities currently hold longterm debt obligations secured municipal bonds student loans carry aa better credit rating liquidity auction rate securities ars typically provided auction process allows holders sell notes resets applicable interest rate predetermined intervals usually every 7 35 days auction rate securities investment portfolio december 31 2008 experienced failed auctions assurance future auctions securities succeed fourth quarter 2008 company broker elected participate settlement offer ubs ag ubs terms settlement company broker issued rights ubs right entitles holder sell underlying ars par ubs time period june 30 2010 july 2 2012 ubs could elect time settlement expiration settlement agreement purchase ars case ubs would required pay par value ars determined rights separate investment recorded value approximately 23 million income consolidated statement operations classified investment ars ubs rights longterm investments predict ubs purchase sell ars earliest date require ubs purchase ars par used 924 million net cash financing activities 2008 primarily due payments stock repurchase program payments debt dividend payments partially offset increased borrowings line credit 3500 million revolving credit facility syndicate banks used support acquisition program working capital requirements general corporate purposes outstanding indebtedness revolving credit facility bears interest rate determined type loan plus applicable margin determined debt rating depending applicable base rate bond rating 2008 average interest rate revolving credit facility eurobased borrowings approximately 52 us dollar borrowings december 31 2008 revolving credit facility includes operational financial covenants customary facilities type including among others restrictions additional indebtedness liens investments maintenance certain leverage ratios december 31 2008 compliance covenants related revolving credit facility 2600 million unused potentially available credit revolving credit facility 550 million eurobased borrowings outstanding 350 million standby letters credit outstanding revolving credit facility used 06 million net cash discontinued operations 2008 paid approximately 12 million defense legal costs incurred james jones litigation also received 13 million reimbursements defense costs working capital defined current assets less current liabilities december 31 2008 5047 million compared 6670 million december 31 2007 decrease primarily due decreases cash investment securities cash equivalents decreased 1656 million december 31 2008 compared 2903 million december 31 2007 primarily due funding acquisitions payments stock repurchase program ratio current assets current liabilities 27 1 december 31 2008 compared 33 1 december 31 2007 generated 917 million cash continuing operations 2007 experienced increases inventory north america china increases primarily due increased raw material costs also decrease accounts payable accrued expenses liabilities primarily europe north america europe accounts payable declined 2007 due decline inventory north america payments cash compensation increased 2007 also cash payments cover income tax obligations greater 2007 accounts receivable decreased three segments used 874 million net cash investing activities 2007 invested 378 million capital equipment part ongoing commitment improve manufacturing capabilities invested 275 million investment grade auction rate securities used 181 million fund acquisitions topway paid 45 million additional acquisition costs related prior years acquisitions used 665 million net cash financing activities 2007 primarily due payments debt payments stock repurchase program dividend payments partially offset increased borrowings line credit tax benefits exercise stock awards generated 01 million net cash discontinued operations 2007 paid approximately 05 million defense costs approximately 05 million legal costs incurred james jones litigation also received 10 million indemnity payments generated 830 million cash continuing operations 2006 experienced increase inventory accounts receivable north america europe china increase accounts receivable 170 million primarily due increased sales volume selling prices increase inventory 373 million primarily due increased cost raw materials planned increases european safety stocks increase inventory accounts receivable partially offset increased accounts payable accrued expenses liabilities 295 million used 1192 million net cash investing activities 2006 used 911 million fund acquisitions changsha ats calflex ningbo kimsafe teknigas 19 million additional costs related 2005 acquisitions 04 million complete planned increase ownership stern invested 118 million investment grade auction rate securities 447 million capital equipment capital expenditures consisted approximately 267 million manufacturing machinery equipment approximately 180 million purchase land building infrastructure improvements site italy subsequently entered saleleaseback transaction respect building received proceeds 319 million primarily included 160 million related saleleaseback italy 134 million sales two facilities northern italy also received proceeds two buildings held sale totaling approximately 25 million 2006 generated 3313 million net cash financing activities 2006 november 21 2006 completed public offering 575 million shares newly issued class common stock 4000 per share net proceeds approximately 2186 million taking account underwriting discounts expenses associated transaction additionally generated cash completion 2250 million private placement 585 notes april 2006 increased borrowings line credit use europe proceeds exercise stock options partially offset payments debt dividend payments debt issue costs generated 09 million net cash operations discontinued operations 2006 also received approximately 28 million cash reimbursement defense costs related james jones litigation 2006 paid approximately 06 million defense costs approximately 05 million indemnity costs incurred james jones litigation free cash flow 1209 million nongaap financial measure defined net cash provided continuing operations minus capital expenditures plus proceeds sale assets year ended december 31 2008 versus free cash flow 545 million 2007 increase 2008 compared 2007 primarily due growth cash generated operations focused working capital management net debt capitalization ratio nongaap financial measure defined short longterm interestbearing liabilities less cash equivalents percentage sum short long term interestbearing liabilities less cash equivalents plus total stockholders equity increased 228 2008 135 2007 increase resulted use cash purchase blücher funds used stock repurchase program free cash flow 545 million year ended december 31 2007 versus free cash flow 702 million 2006 decrease 2007 compared 2006 primarily due proceeds sale property plant equipment 2006 partially offset growth cash generated operations believe free cash flow appropriate supplemental measure operating performance provides investors measure ability generate cash repay debt fund acquisitions may comparable companies may define free cash flow differently free cash flow represent cash generated operating activities accordance gaap therefore considered alternative net cash provided operations indication performance free cash flow also considered alternative net cash provided operations defined gaap reconciliation net cash provided continuing operations free cash flow provided net debt capitalization ratio also nongaap financial measure used management believes appropriate supplemental measure helps investors understand ability meet financing needs basis evaluate financial structure computation may comparable companies may define net debt capitalization differently reconciliation longterm debt including current portion net debt net debt capitalization ratio provided reconciliation capitalization provided contractual obligations december 31 2008 presented following table aas recognized consolidated balance sheet bassumes balance revolving credit facility remains 550 million interest rate remains approximately 36 presented periods cincludes commodity capital expenditure commitments benefits december 31 2008 maintain letters credit guarantee performance payment third parties accordance specified terms conditions amounts outstanding approximately 393 million december 31 2008 450 million december 31 2007 letters credit primarily associated insurance coverage lesser extent foreign purchases generally expire within one year issuance instruments may exist expire without drawn therefore necessarily represent future cash flow obligations offbalance sheet arrangements except operating lease commitments offbalance sheet arrangements reasonably likely current future effect financial condition changes financial condition revenues expenses results operations liquidity capital expenditures capital resources material investors application critical accounting policies key estimates preparation consolidated financial statements accordance us gaap requires management make judgments assumptions estimates affect amounts reported critical accounting estimate assumption highly uncertain matters could material effect consolidated financial statements another also reasonable amount used change estimate reasonably likely period base assumptions historical experience estimates believe reasonable circumstances actual results could differ significantly estimates changes accounting policies significant changes accounting estimates 2008 periodically discuss development selection disclosure estimates audit committee management believes following critical accounting policies reflect significant estimates assumptions revenue recognition recognize revenue following criteria met 1 entered binding agreement 2 product shipped title passed 3 sales price customer fixed determinable 4 collectibility reasonably assured recognize revenue based upon determination criteria revenue recognition met based majority shipping terms considered occurred upon shipment finished product shipping terms require goods received customer title passes instances revenues recognized customer received goods record estimated reductions revenue customer returns allowances customer programs provisions returns allowances made time sale derived historical trends form portion allowance doubtful accounts customer programs primarily annual volume incentive plans allow customers earn credit attaining agreed upon purchase targets us record estimated reductions revenue made time sale customer programs based estimated purchase targets allowance doubtful accounts allowance doubtful accounts established represent best estimate net realizable value outstanding accounts receivable development allowance doubtful accounts varies region general based review past due amounts historical writeoff experience well aging trends affecting specific accounts general operational factors affecting accounts north america management specifically analyzes individual accounts receivable establishes specific reserves financially troubled customers addition factors developed utilizing historical trends bad debts returns allowances ratio factors sales rolling twelvemonth basis applied total outstanding receivables net accounts specifically identified establish reserve europe management develops bad debt allowance aging analysis accounts china management specifically analyzes individual accounts receivable establishes specific reserves needed addition waterworks customers whose payment terms generally extended reserve majority accounts receivable excess one year invoice date uniformly consider current economic trends changes customer payment terms evaluating adequacy allowance doubtful accounts also aggressively monitor creditworthiness largest customers periodically review customer credit limits reduce risk circumstances relating specific customers change unanticipated changes occur general business environment estimates recoverability receivables could adjusted inventory valuation inventories stated lower cost market costs determined primarily firstin firstout basis utilize specific product identification historical product demand basis determining excess obsolete inventory reserve identify inventories exceed range one four years sales determined comparing current inventory balance unit sales trailing twelve months new products added inventory within past twelve months excluded analysis portion products contain recoverable materials therefore excess obsolete reserve established net recoverable amounts changes market conditions lower expected customer demand changes technology features could result additional obsolete inventory saleable could require additional inventory reserve provisions certain countries additional inventory reserves maintained potential shrinkage experienced manufacturing process reserve established based prior years inventory losses adjusted change gross inventory balance goodwill intangibles goodwill intangible assets indefinite lives tested annually impairment accordance provisions financial accounting standards board statement 142 goodwill intangible assets fas 142 use judgment assessing whether assets may become impaired annual impairment tests due current economic conditions well business factors concluded goodwill water quality reporting unit impaired october 26 2008 time latest annual review recorded charge 220 million fourth quarter accordance fas 142 perform annual test indicators goodwill nonamortizable intangible assets impairment fourth quarter fiscal year sooner indicators impairment exist intangible assets purchased technology generally recorded connection business acquisition values assigned intangible assets determined independent valuation firm based estimates judgments regarding expectations success life cycle products technology acquired use discounted cash flow method determine fair value reporting unit eight reporting units based guidance contained fas 142 related literature discounted cash flow model includes number estimates future cash flows develop assumptions based historical results including sales growth operating profits working capital levels tax rates 2008 testing also incorporated assumptions regarding current economic environment including expectations regarding recession would end point would see orders return historical levels believe discounted cash flow model sensitive selected discount rate use thirdparty experts help develop appropriate discount rates reporting unit use standard valuation practices arrive weighted average cost capital based market guideline public companies higher discount rate lower discounted cash flows believe estimates future cash flows reasonable different assumptions could significantly affect valuations result impairments future changes may affect valuations include limited product acceptances regulatory approval actual product acceptance differs significantly estimates may required record impairment charge write assets realizable value severe decline market value could result unexpected impairment charge goodwill could material impact results operations financial position although experienced goodwill impairment remaining reporting units assurances future goodwill impairment occur product liability workers compensation costs retention requirements associated insurance policies generally selfinsured potential product liability claims workers compensation costs associated workplace accidents product liability cases us management estimates expected settlement costs utilizing loss reports provided thirdparty administrators well developing internal historical trend factors based specific claims experience management utilizes internal trend factors reflect final expected settlement costs countries maintain insurance coverage relatively high deductible payments product liability claims tend smaller experienced us changes nature claims actual settlement amounts could affect adequacy estimate require changes provisions liability estimate ultimate liability may less reported workers compensation liabilities us recognized claims incurred including claims incurred reported changes status individual case reserves time workers compensation claim filed liability estimated settle claim liability workers compensation claims determined based managements estimates nature severity claims based analysis provided third party administrators various state statutes reserve requirements developed trend factors based specific claims experience countries workers compensation costs applicable maintain insurance coverage limited deductible payments liability estimate ultimate liability may less reported determine trend factors product liability workers compensation liabilities based consultation outside actuaries maintain excess liability insurance outside insurance carriers minimize risks related catastrophic claims excess selfinsured positions material change aforementioned factors could adverse impact operating results legal contingencies defendant numerous legal matters including involving environmental law product liability discussed part item 1 businessproduct liability environmental litigation matters required statement financial accounting standards 5 accounting contingencies fas 5 determine whether estimated loss contingency accrued assessing whether loss deemed probable loss amount reasonably estimated net applicable insurance proceeds estimates potential outcomes contingencies developed consultation outside counsel assessment based upon available information litigation inherently uncertain actual liability fully resolve litigation cannot predicted assurance accuracy final resolution matters could possibly result significant effects results operations cash flows financial position pension benefits account pension plans accordance statement financial accounting standards 87 employers accounting pensions fas 87 statement financial accounting standards 158 employers accounting defined benefit pension postretirement plansan amendment fasb statements 87 88 106 132r fas 158 applying fas 87 fas 158 assumptions made regarding valuation benefit obligations performance plan assets primary assumptions follows •weighted average discount ratethis rate used estimate current value future benefits rate adjusted based movement longterm interest rates •expected longterm rate return assetsthis rate used estimate future growth investments investment earnings expected return based upon combination historical market performance anticipated future returns portfolio reflecting mix equity debt investments indicative plan assets •rates increase compensation levelsthis rate used estimate projected annual pay increases used determine wage base used project employees pension benefits retirement determine assumptions based consultation outside actuaries investment advisors variance assumptions could significant impact future recognized pension costs assets liabilities income taxes estimate use expected annual effective income tax rates accrue income taxes effective tax rates determined based budgeted earnings taxes including best estimate permanent items affect effective rate year management periodically reviews rates outside tax advisors changes made material variances expectations identified recognize deferred taxes expected future consequences events reflected consolidated financial statements accordance rules statement financial accounting standards 109 accounting income taxes fas 109 fas 109 deferred tax assets liabilities determined based differences book values tax bases particular assets liabilities using tax rates effect years differences expected reverse valuation allowance provided offset net deferred tax assets based upon available evidence likely deferred tax assets realized consider estimated future taxable income ongoing prudent tax planning strategies assessing need valuation allowance january 1 2007 adopted provisions financial interpretation 48 accounting uncertainty income taxes fin 48 purpose fin 48 increase comparability financial reporting income taxes fin 48 requires order tax benefit booked income statement item question must meet morelikelythannot greater 50 likelihood sustained upon examination taxing authorities threshold adoption fin 48 material effect financial statements cumulative effect booked beginning retained earnings 2008 reduced unrecognized tax benefits approximately 22 million result finalizing federal state income tax audits estimate reasonably possible portion currently remaining unrecognized tax benefit may recognized end 2009 result conclusion federal income tax audit amount expense accrued penalties interest 11 million worldwide december 31 2008 gross unrecognized tax benefits approximately 23 million approximately 19 million recognized would affect effective tax rate difference amount unrecognized tax benefits amount would impact effective tax rate consists federal tax benefit state income tax items new accounting standards june 2008 financial accounting standards board fasb issued fasb staff position fsp eitf issue 0361 determining whether instruments granted sharebased payment transactions participating securities fsp eitf 0361 fsp eitf 0361 requires unvested sharebased payment awards contain rights receive nonforfeitable dividends dividend equivalents included twoclass method computing earnings per share described statement financial accounting standards fas 128 earnings per share fsp effective financial statements issued fiscal years beginning december 15 2008 interim periods within years accordingly adopt fsp eitf 0361 fiscal year 2009 adoption fsp eitf 0361 expected material impact consolidated financial statements may 2008 fasb issued fas 162 hierarchy generally accepted principles fas 162 identifies sources accounting principles framework selecting principles used preparation financial statements nongovernmental entities presented conformity generally accepted accounting principles gaap united states gaap hierarchy fas 162 effective 60 days following secs approval public company accounting oversight board amendments au section 411 meaning present fairly conformity generally accepted accounting principles adoption fas 162 expected impact consolidated financial statements april 2008 fasb issued fsp fas 1423 determination useful life intangible assets fsp amends factors considered developing renewal extension assumptions used determine useful life recognized intangible asset fas 142 goodwill intangible assets fas 142 objective fsp improve consistency useful life recognized intangible asset fas 142 period expected cash flows used measure fair value asset fas 141r principles gaap fsp applies intangible assets whether acquired business combination otherwise shall effective financial statements issued fiscal years beginning december 15 2008 interim periods within fiscal years applied prospectively intangible assets acquired effective date early adoption prohibited adoption fsp significant impact consolidated financial statements march 2008 fasb issued fas 161 disclosures derivative instruments hedging activitiesan amendment fasb statement 133 fas 161 expands current disclosure requirements fas 133 accounting derivative instruments hedging activities entities must provide enhanced disclosures quarterly basis regarding entity uses derivatives related hedged items accounted fas 133 derivatives related hedged items affect entitys financial position performance cash flow fas 161 effective prospectively annual interim periods beginning november 15 2008 accordingly adopt fas 161 2009 december 2007 fasb issued fas 141 r business combinations fas 141r requires identifiable assets liabilities noncontrolling interests goodwill acquired business combination recorded full fair value fas 141r business combinations accounted acquisition method significant changes among others current guidance resulting fas 141r includes requirement contingent assets liabilities contingent consideration shall recorded estimated fair value acquisition date subsequent changes fair value charged credited earnings acquisitionrelated costs expensed rather treated part acquisition fas 141r effective periods beginning december 15 2008 expect adoption fas 141r increase costs charged operations made january 1 2009 december 2007 fasb issued fas 160 noncontrolling interests consolidated financial statements amendment arb 151 fas 160 requires noncontrolling interests previously referred minority interest treated separate component equity outside equity current practice fas 160 applies noncontrolling interests transactions noncontrolling interest holders consolidated financial statements fas 160 effective periods beginning december 15 2008 expect adoption fas 160 material impact consolidated financial statements february 2007 fasb issued fas 159 fair value option financial assets financial liabilitiesincluding amendment fas 115 fas 159 permits entities choose measure many financial instruments certain items fair value fas 159 effective financial statements issued fiscal years beginning november 15 2007 interim periods within fiscal years earlier application encouraged elected measure eligible financial instruments fair value therefore adoption fas 159 impact consolidated financial statements september 2006 securities exchange commission issued staff accounting bulletin 108 considering effects prior year misstatements quantifying misstatements current year financial statements sab 108 provides interpretive guidance effects carryover reversal prior year misstatements considered quantifying current year misstatement sab 108 effective fiscal years ending november 15 2006 impact sab 108 material consolidated financial statements september 2006 fasb issued fas 158 employers accounting defined benefit pension postretirement plansan amendment fasb statements 87 88 106 132r fas 158 requires employer recognize statement financial position asset plans overfunded status liability plans underfunded status b measure plans assets obligations determine funded status end employers fiscal year c recognize changes funded status defined benefit postretirement plan year changes occur changes reported comprehensive income requirement recognize funded status benefit plan disclosure requirements effective end fiscal year ending december 15 2006 companies publicly traded equity securities requirement measure plan assets benefit obligations date employers fiscal yearend statement financial position effective fiscal years ending december 15 2008 although earlier adoption permitted result requirement recognize funded status benefit plans december 31 2006 recorded increase pension liability approximately 83 million decrease approximately 13 million assets net decrease accumulated comprehensive income approximately 58 million net tax earlyadopted measurement date provisions fas 158 effective january 1 2007 pension plans previously used september 30 measurement date plans measured december 31 consistent fiscal year end noncash effect adoption measurement date provisions fas 158 material effect results operations september 2006 fasb issued fas 157 fair value measurements fas 157 defines fair value establishes guidelines measuring fair value expands disclosures regarding fair value measurements fas 157 require new fair value measurements rather eliminates inconsistencies guidance found various prior accounting pronouncements effective fiscal years beginning november 15 2007 february 2008 fasb issued fasb fsp 1572 delayed effective date fas 157 nonfinancial assets nonfinancial liabilities except recognized disclosed fair value financial statements recurring basis least annually fiscal years beginning november 15 2008 interim periods within fiscal years nonfinancial items include assets liabilities reporting units measured fair value goodwill impairment test nonfinancial assets acquired liabilities assumed business combination effective january 1 2008 adopted fas 157 financial assets liabilities recognized fair value recurring basis partial adoption fas 157 financial assets liabilities material impact consolidated financial position results operations cash flows july 2006 fasb issued financial interpretation 48 accounting uncertainty income taxes fin 48 clarifies accounting uncertainty income taxes recognized financial statements accordance sfas 109 accounting income taxes fin 48 provides tax benefit uncertain tax position may recognized likely position sustained upon examination based technical merits interpretation also provides guidance measurement derecognition classification interest penalties accounting interim periods disclosure transition adopted provisions fin 48 january 1 2007 impact material consolidated financial statements march 2006 fasb issued fas 156 accounting servicing financial assetsan amendment fasb statement 140 fas 156 fas 156 amends fas statement 140 accounting transfers servicing financial assets extinguishments liabilities respect accounting separately recognized servicing assets servicing liabilities fas 156 addresses recognition measurement separately recognized servicing assets liabilities provides approach simplify efforts obtain hedgelike offset accounting adopted fas 156 january 1 2007 impact material consolidated financial statements february 2006 fasb issued fas 155 accounting certain hybrid financial instrumentsan amendment fasb statements 133 140 fas 155 fas 155 amends fas 133 accounting derivatives hedging activities fas 140 accounting transfers servicing financial assets extinguishments liabilities allows entity remeasure fair value hybrid financial instrument contains embedded derivative otherwise would require bifurcation host holder irrevocably elects account whole instrument fair value basis subsequent changes fair value instrument would recognized earnings adopted fas 155 january 1 2007 impact material consolidated financial statements item 7aitem 7 managements discussion analysis financial condition results operations overview leading supplier products use water quality water safety water flow control water conservation markets americas emea growing presence asia pacific 139 years designed manufactured products promote comfort safety people quality conservation water used commercial residential applications earn revenue income almost exclusively sale products principal product lines include •residential commercial flow control productsincludes products typically sold plumbing hot water applications backflow preventers water pressure regulators temperature pressure relief valves thermostatic mixing valves •hvac gas productsincludes hydronic electric heating systems underfloor radiant applications hydronic pump groups boiler manufacturers alternative energy control packages flexible stainless steel connectors natural liquid propane gas commercial food service residential applications hvac acronym heating ventilation air conditioning •drains water reuse productsincludes drainage products engineered rain water harvesting solutions commercial industrial marine residential applications •water quality productsincludes pointofuse pointofentry water filtration conditioning scale prevention systems commercial residential applications business reported three geographic segments americas emea asia pacific distribute products three primary distribution channels wholesale doityourself diy original equipment manufacturers oems believe factors relating future growth include ability continue make selective acquisitions core markets well new complementary markets regulatory requirements relating quality conservation water safe use water increased demand clean water continued enforcement plumbing building codes healthy economic environment completed 36 acquisitions since 1999 acquisition strategy focuses businesses manufacture preferred brand name products address themes water quality water conservation water safety water flow control related complementary markets target businesses provide us one following entry new markets increase shelf space existing customers new improved technology expansion breadth water quality water conservation water safety water flow control products commercial industrial residential markets products representing majority sales subject regulatory standards code enforcement typically require products meet stringent performance criteria together commissioned manufacturers representatives consistently advocated development enforcement plumbing codes focused maintaining stringent quality control testing procedures manufacturing facilities order manufacture products compliance code requirements take advantage resulting demand compliant products believe product development product testing capability investment plant equipment needed manufacture products compliance code requirements represent competitive advantage us performance 2013 varied driven different economic business dynamics within region participate americas saw sequential growth 2013 us residential new construction marketplace continued recover repair replace end market remained strong although experienced minimal growth new commercial construction market recent positive macroeconomic signs recovery forthcoming emea weak pan european economy negatively impacted sales certain parts europe italy france germany remained affected general economic downturn however able partially mitigate effect sales volume reduction productivity initiatives cost reduction initiatives emea segment continued expand sales eastern europe year asia pacific solid growth expanded sales marketing efforts overall sales grew organically 21 compared 2012 organic sales growth excludes impacts acquisitions divestitures foreign exchange yearoveryear comparisons believe provides investors complete understanding underlying sales trends providing sales growth consistent basis compared 2012 organic sales americas asia pacific grew 55 205 respectively offset reduction emea organic sales 36 operationally us continued focus around transition lead free production 2013 2012 committed aggregate approximately 183 million capital spending new foundry machinery us meet expected lead free demand products sold us construction new foundry completed second quarter 2013 incurred 58 million transition costs 2013 relating inefficiencies experienced part lead free conversion project including furnace repairs excess scrap consulting costs related new foundry impact commodity costs 2013 minimal especially important raw material copper saw copper spot prices first quarter trending higher prices declining consistent level remainder year pricing turn fairly stable although experienced pricing pressures certain geographies certain product lines americas especially diy channel emea able selectively increase pricing certain products however believe economic uncertainty europe may continue affecting competitors pricing end markets continually review business implement restructuring plans needed restructuring program emea announced july 2013 proceeding accordance expectations please see note 4 notes consolidated financial statements detailed explanation restructuring activities fourth quarter 2013 began program refer european transformation program designed refocus european operations country specific pan european business unit operating strategy initiative intend 1 develop better sales capabilities improved product management enhanced product crossselling efforts 2 drive efficient european sourcing logistics 3 enhance focus emerging market opportunities plan align legal tax structure accordance business structure take advantage favorable tax rates possible expect project ongoing 2016 anticipate total nonrecurring external deployment costs 122 million approximately 90 million anticipated spent 2014 incurred approximately 12 million fourth quarter 2013 deployment costs total annual savings forecasted 180 million 2018 approximately 35 million 100 million annual savings expected 2014 2015 respectively expect need add approximately 40 million infrastructure costs per annum current operational base 2018 maintain program approximately 35 million added 2014 acquisitions disposals august 1 2013 company completed sale outstanding shares indirectly whollyowned subsidiary austroflex receiving net cash proceeds 79 million austroflex austrianbased manufacturer preinsulated flexible pipe systems district heating solar applications underfloor radiant heating systems austroflex meet performance expectations since purchase 2010 loss tax disposal business approximately 22 million year ended december 31 2011 company wrote austroflexs longlived assets 148 million company substantial continuing involvement austroflexs operations cash flows therefore austroflexs results operations presented discontinued operations comparative periods presented adjusted consolidated financial statements reflect austroflexs results discontinued operations please see note 3 notes consolidated financial statements additional information regarding operating results austroflex december 21 2012 disposed outstanding shares flomatic corporation flomatic third party cash transaction flomatic acquired part danfoss socla sas socla acquisition april 2011 flomatic specializes manufacturing various valves well water industry product line core business operating results flomatic classified discontinued operations 2012 2011 net loss disposal approximately 38 million charged discontinued operations 2012 january 31 2012 completed acquisition tekmar control systems tekmar share purchase transaction designer manufacturer control systems used heating ventilation air conditioning applications tekmar expected enhance hydronic systems product offerings us canada initial purchase price paid cad 180 million earnout based future earnings levels achieved initial purchase price paid equal approximately 178 million based exchange rate canadian dollar us dollars january 31 2012 contingent liability 51 million recognized estimate acquisition date fair value earnout portion contingent consideration paid 2013 amount 12 million based performance metrics achieved 2012 contingent liability increased 10 million year ended 2013 based performance metrics achieved expected achieved total purchase price exceed cad 262 million recent developments january 9 2014 david j coghlan resigned positions chief executive officer president director company board directors appointed dean p freeman executive vice president chief financial officer serve interim chief executive officer president company companys board directors initiated search companys next chief executive officer president february 18 2014 declared quarterly dividend thirteen cents 013 per share outstanding share class common stock class b common stock february 18 2014 entered new credit agreement new credit agreement among company certain subsidiaries become borrowers new credit agreement jpmorgan chase bank na administrative agent swing line lender letter credit issuer lenders referred therein new credit agreement provides 500 million fiveyear senior unsecured revolving credit facility may increased additional 500 million certain circumstances subject terms new credit agreement new credit agreement sublimit 100 million letters credit expect use borrowings new credit agreement general corporate purposes acquisitions repayment existing debt connection execution delivery new credit agreement outstanding amounts owing prior credit agreement prior credit agreement dated june 18 2010 among company certain subsidiaries company borrowers bank america na administrative agent swing line lender letter credit issuer lenders referred therein repaid full prior credit agreement terminated results operations year ended december 31 2013 compared year ended december 31 2012 net sales business reported three geographic segments americas emea asia pacific net sales segments years ended december 31 2013 2012 follows change net sales attributable following organic net sales 2013 americas wholesale market increased 370 million 63 compared 2012 mainly increased sales residential commercial flow product lines customers continuing transition lead free products organic sales americas diy market 2013 increased 48 million 27 compared 2012 primarily due increased product sales 19 million residential commercial flow control products 12 million water quality products unit sales increases substantially offset competitive pricing diy market organic net sales emea wholesale market decreased 107 million 37 compared 2012 primarily due economic market conditions france germany organic net sales emea oem market decreased 60 million 23 compared 2012 primarily due slower hvac market germany fewer large project sales drains business offset increased sales electronics business net increase sales due foreign exchange primarily due appreciation euro us dollar cannot predict whether currencies appreciate depreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact net sales acquired net sales growth americas due tekmar gross profit gross profit gross profit percent net sales gross margin 2013 2012 follows americas gross margin decreased primarily due inefficiencies related lead free transition program retail pricing pressure offset partially product mix volume growth emea gross margin increased slightly compared 2012 primarily due production efficiencies driven ongoing restructuring programs offsetting lower overhead absorption related reduced manufacturing volumes selling general administrative expenses selling general administrative expenses sga expenses 2013 increased 247 million 65 compared 2012 increase sga expenses attributable following net organic increase sga primarily attributable increased legal costs 125 million increased product liability cost 45 million increased freight commission costs 41 million associated increased sales increased personnel costs 22 million offset lower depreciation amortization 16 million lower advertising costs 13 million incremental legal costs include impact agreement principle settle claims trabakoolas et al v watts water technologies inc et al matter pending united states district court northern district california net settlement charged operations amounted 136 million 2013 refer note 14 notes consolidated financial statements annual report form 10k detail increased product liability cost 45 million americas based thirdparty actuarial analysis incorporated higher reported claims 2013 offset extent impact trabakoolas settlement increased personnel costs primarily relate investments new positions increased stock incentive plan costs increase sga expenses foreign exchange primarily due appreciation euro us dollar acquired sga expenses related tekmar acquisition total sga expense percentage sales 275 2013 267 2012 restructuring charges 2013 recorded net charge 87 million primarily severance costs incurred part previously announced restructuring programs compared 42 million 2012 detailed description current restructuring plans see note 4 notes consolidated financial statements annual report form 10k gain adjustment disposal business 2011 booked net gain approximately 77 million relating primarily recognition currency translation adjustments resulting sale twvc 2012 2013 recorded adjustments decrease gain disposal 16 million increase gain disposal 06 million respectively goodwill longlived asset impairment charges 2013 recorded asset impairment charges 12 million primarily relating 03 million goodwill impairment charge brae trade name impairment charges 03 million 04 million americas emea respectively goodwill impairment based historical results expectations reduction expected future cash flows generated brae see results operations discussion year ended december 31 2012 compared year ended december 31 2011 details 2012 goodwill longlived asset impairment charges see also note 2 notes consolidated financial statements annual report form 10k additional information regarding impairments operating income operating income geographic segment 2013 2012 follows change operating income attributable following decrease consolidated organic operating income due primarily increase sga expenses previously discussed acquired operating income relates tekmar acquisition increase restructuring impairment charges 2013 2012 primarily driven emea restructuring programs previously discussed net increase operating income foreign exchange primarily due appreciation euro us dollar cannot predict whether euro appreciate depreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact operating income interest expense interest expense decreased 31 million 126 2013 compared 2012 primarily due retirement midmay 2013 75 million unsecured senior notes lower balance outstanding standby letters credit see note 10 notes consolidated financial statements annual report form 10k additional information regarding financing arrangements expense income net expense income net increased 36 million 2013 compared 2012 primarily due foreign currency transaction losses americas emea asia pacific result appreciation chinese yuan euro us dollar appreciation us dollar canadian dollar 2013 addition favorable customs settlement recorded 2012 repeat 2013 income taxes effective tax rate continuing operations increased 306 2013 297 2012 2013 rate slightly due change tax laws france limited intercompany interest deductions 2012 rate favorably impacted release tax reserve following completion european tax audit net income continuing operations net income continuing operations 2013 609 million 171 per common share compared 704 million 195 per common share 2012 results 2013 include net aftertax charges 183 million 051 per common share including legal settlement charges 026 restructuring net charges 017 goodwill longlived asset impairments 004 earnout adjustments 002 emea transformation deployment costs 002 results 2012 include net aftertax charges 81 million 022 per common share including restructuring net charges 007 goodwill longlived asset impairments 007 charge adjust twvc gain 004 retention costs former chief financial officer 003 net legalcustoms settlement charges 002 net credits 001 primarily related favorable tax adjustment due change 2012 italian tax rules appreciation primarily euro us dollar 2013 resulted positive impact operations 003 per common share compared 2012 cannot predict whether euro canadian dollar chinese yuan appreciate depreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact net income loss discontinued operations loss discontinued operations 2013 23 million 007 per common share related operations loss disposal austroflex see note 3 notes consolidated financial statements results operations year ended december 31 2012 compared year ended december 31 2011 net sales business reported three geographic segments americas emea asia pacific net sales segments years ended december 31 2012 2011 follows change net sales attributable following organic net sales 2012 americas wholesale market increased 40 million 06 compared 2011 minimal increases noted four major product categories ranging 02 water quality products 20 hvac gas products organic sales americas diy market 2012 increased 112 million 69 compared 2011 primarily due increased product sales 85 million residential commercial flow control products 21 million water quality products organic net sales emea wholesale market essentially flat compared 2011 wholesale sales increased 57 million due stronger plumbing valves sales middle east eastern europe increased drain sales pan european basis 10 million however gains offset wholesale sales reductions 35 million italy 21 million france due poor overall economy reduction preinsulated pipe products sales 21 million organic sales oem market 2012 decreased 60 million compared 2011 decline primarily due decreased sales nordic region 62 million lower demands heating pump electrical heating manufacturers lower sales france italy 35 million 14 million respectively due economic slowdown declines offset increased sales 84 million related drains product line net decrease sales due foreign exchange primarily due depreciation euro canadian dollar us dollar cannot predict whether currencies appreciate depreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact net sales acquired net sales emea asia pacific related socla acquisition americas due tekmar gross profit gross profit gross profit percent net sales gross margin 2012 2011 follows consolidated gross margin fairly stable 2012 compared 2011 varied geography americas gross margin declined due noncommodity cost increases well manufacturing inefficiencies driven preproduction costs outsourcing costs caused certain us plants transitioning lead free production americas gross margin also affected product mix diy sales grew faster wholesale sales selective price concessions meet market competition americas gross margin increased second half 2012 lead free related costs abated emea gross margin increased compared 2011 partially due acquisition accounting charges 47 million made 2011 connection socla acquisition partially due better product mix improved pricing 2012 selling general administrative expenses selling general administrative expenses sga expenses 2012 increased 95 million 26 compared 2011 increase sga expenses attributable following net organic increase sga primarily attributable increases professional services 64 million insurance costs 44 million variable selling sales related costs 28 million offset lower personnel related costs 77 million lower depreciation amortization 09 million 17 million reduction expenses professional service costs increased due higher legal fees legal settlement costs tax related projects undertaken 2012 insurance costs increased due higher product liability charges americas personnel costs reduced 2012 primarily due separation costs incurred 2011 former chief executive officer lower retirement costs 2012 related 2011 pension freeze decrease sga expenses foreign exchange primarily due depreciation euro us dollar acquired sga expenses related socla tekmar acquisitions total sga expense percentage sales 267 2012 264 2011 restructuring charges 2012 recorded net charge 42 million primarily severance costs incurred part previously announced restructuring programs compared 88 million 2011 detailed description current restructuring plans see note 4 notes consolidated financial statements annual report form 10k goodwill longlived asset impairment charges 2012 recorded asset impairment charges 34 million including 17 million impairment charges longlived assets americas ultimately sold 2012 10 million goodwill impairment charge brae 04 million impairment charge americas trade name 03 million asset writedowns europe goodwill impairment based historical results expectations reduction expected future cash flows generated brae see note 2 notes consolidated financial statements annual report form 10k additional information regarding impairments gain adjustment disposal business 2011 booked net gain approximately 77 million relating primarily recognition currency translation adjustments resulting sale twvc 2012 recorded adjustment 16 million decrease gain operating income operating income geographic segment 2012 2011 follows change operating income attributable following decrease consolidated organic operating income due primarily reduction gross margin americas reasons previously discussed impact offset partially reduction acquisition costs emea related 2011 socla acquisition acquired operating income relates socla tekmar acquisitions increase restructuring impairment charges 2011 2012 primarily driven gain disposal business recorded 2011 repeat 2012 previously discussed offset primarily decreased restructuring costs net decrease operating income foreign exchange primarily due depreciation euro us dollar cannot predict whether euro appreciate depreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact operating income interest expense interest expense decreased 12 million 47 2012 compared 2011 primarily due decrease amounts outstanding revolving credit facility used partially finance socla acquisition 2011 see note 10 notes consolidated financial statements annual report form 10k additional information regarding financing arrangements expense income net expense income net decreased 16 million 2012 compared 2011 primarily due reduction foreign currency transaction losses favorable customs settlement asia pacific 2012 income taxes effective rate continuing operations increased 297 2012 285 2011 primary cause lower rate 2011 tax benefit realized connection disposition twvc facility china partially offset release tax reserve 2012 following completion european tax audit net income continuing operations net income continuing operations 2012 704 million 195 per common share compared 772 million 206 per common share 2011 results 2012 include net aftertax charges 81 million 022 per common share including restructuring net charges 007 goodwill longlived asset impairments 007 charge adjust twvc gain 004 retention costs former chief financial officer 003 net legalcustoms settlement charges 002 net credits 001 primarily related favorable tax adjustment due change 2012 italian tax rules results 2011 include net aftertax charges 57 million 016 per common share including restructuring charge 018 acquisition due diligence costs 012 charge related former chief executive officers separation agreement 011 goodwill asset impairment charges 005 pension curtailment loss 002 offset gain disposal twvc 030 net gains 002 primarily related earnout legal adjustments depreciation euro canadian dollar us dollar 2012 resulted negative impact operations 009 per common share compared 2011 cannot predict whether euro canadian dollar chinese yuan appreciate depreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact net income loss discontinued operations loss discontinued operations 2012 20 million 005 per common share related operations disposal flomatic austroflex loss discontinued operations 2011 108 million 028 per common share primarily related operating loss austroflex see note 3 notes consolidated financial statements liquidity capital resources 2013 cash flows 2013 generated 1183 million cash operating activities compared 1303 million 2012 decrease primarily due lower net income cash used fund lead free inventory increase americas generated approximately 921 million free cash flow nongaap financial measure reconcile defined net cash provided continuing operating activities minus capital expenditures plus proceeds sale assets compared free cash flow 1030 million 2012 free cash flow percentage net income continuing operations 1512 2013 compared 1463 2012 2013 used 241 million net cash investing activities including 277 million cash capital equipment offset partially proceeds sale buildings equipment 15 million anticipate investing approximately 270 million capital equipment 2014 improve manufacturing capabilities 2013 used 1095 million net cash financing activities significant cash outlays included repayment 750 million unsecured senior notes matured may 15 2013 payments repurchase approximately 454000 shares class common stock cost approximately 230 million payment dividends 177 million offset proceeds 119 million option exercises employee stock plans june 18 2010 entered credit agreement prior credit agreement among company certain subsidiaries company become borrowers prior credit agreement bank america na administrative agent swing line lender letter credit issuer lenders referred therein prior credit agreement provided 3000 million fiveyear senior unsecured revolving credit facility could increased additional 1500 million certain circumstances subject terms prior credit agreement prior credit agreement sublimit 750 million letters credit borrowings outstanding prior credit agreement bore interest fluctuating rate per annum equal 1 case eurocurrency rate loans british bankers association libor rate plus applicable percentage ranging 170 230 determined reference consolidated leverage ratio plus case certain lenders mandatory cost calculated accordance terms prior credit agreement 2 case base rate loans swing line loans highest federal funds rate plus 05 b rate interest effect day announced bank america na prime rate c british bankers association libor rate plus 10 plus applicable percentage ranging 070 130 determined reference consolidated leverage ratio addition paying interest prior credit agreement also required pay certain fees connection credit facility including limited facility fee letter credit fees february 18 2014 entered new credit agreement new credit agreement among company certain subsidiaries company become borrowers credit agreement jpmorgan chase bank na administrative agent swing line lender letter credit issuer lenders referred therein new credit agreement provides 500 million fiveyear senior unsecured revolving credit facility may increased additional 500 million certain circumstances subject terms new credit agreement new credit agreement sublimit 100 million letters credit connection entering new credit agreement terminated prior credit agreement borrowings outstanding new credit agreement bear interest fluctuating rate per annum equal applicable percentage equal 1 case eurocurrency rate loans british bankers association libor rate plus applicable percentage ranging 0975 145 determined reference companys consolidated leverage ratio plus case certain lenders mandatory cost calculated accordance terms new credit agreement 2 case base rate loans swing line loans highest federal funds rate plus 05 b rate interest effect day announced jpmorgan chase bank na prime rate c british bankers association libor rate plus 10 plus applicable percentage ranging 000 045 determined reference companys consolidated leverage ratio addition paying interest new credit agreement also required pay certain fees connection credit facility including limited unused facility fee letter credit fees new credit agreement matures february 18 2019 subject extension certain circumstances subject terms new credit agreement may repay loans outstanding new credit agreement time without premium penalty customary breakage costs subject terms new credit agreement december 31 2013 held 2679 million cash equivalents ability fund operations cash equivalents could limited market liquidity well possible tax implications moving proceeds across jurisdictions amount approximately 2144 million cash equivalents held foreign subsidiaries us operations currently generate sufficient cash flows meet domestic obligations also ability borrow funds reasonable interest rates utilize committed funds new credit agreement however amounts held foreign subsidiaries needed fund operations united states could required accrue pay taxes repatriate funds charges may include federal tax 350 dividends received us potential state income taxes additional withholding tax payable foreign jurisdictions 100 however intent permanently reinvest undistributed earnings foreign subsidiaries current plans repatriate fund operations united states covenant compliance prior credit agreement required satisfy maintain specified financial ratios financial condition tests december 31 2013 financial ratios included consolidated interest coverage ratio based consolidated earnings income taxes interest expense depreciation amortization consolidated ebitda consolidated interest expense defined prior credit agreement prior credit agreement defined consolidated ebitda exclude unusual nonrecurring charges gains also required maintain consolidated leverage ratio consolidated funded debt consolidated ebitda consolidated funded debt defined credit agreement included long shortterm debt capital lease obligations trade letters credit outstanding finally required maintain consolidated net worth exceeds minimum net worth calculation consolidated net worth defined total stockholders equity reported adjusted cumulative translation adjustments goodwill impairments december 31 2013 actual financial ratios calculated accordance prior credit agreement compared required levels prior credit agreement follows december 31 2013 compliance covenants related prior credit agreement 2764 million unused available credit prior credit agreement 236 million standby letters credit outstanding prior credit agreement borrowings outstanding prior credit agreement december 31 2013 new credit agreement retains interest charge coverage ratio leverage ratio financial covenants consolidated net worth covenant eliminated required levels interest charge coverage ratio leverage ratio financial covenants remain consistent required levels prior credit agreement several senior note agreements detailed note 10 notes consolidated financial statements senior note agreements require us maintain fixed charge coverage ratio consolidated ebitda plus consolidated rent expense period consolidated fixed charges consolidated fixed charges sum consolidated interest expense period consolidated rent expense december 31 2013 actual fixed charge coverage ratio calculated accordance senior note agreements compared required ratio therein follows addition financial ratios prior credit agreement new credit agreement senior note agreements contain affirmative negative covenants include limitations disposition sale assets prohibitions assuming incurring liens assets limited exceptions limitations making investments permitted agreements used 01 million net cash operating activities discontinued operations 2013 related austroflex generated 79 million net cash investing activities discontinued operations resulting proceeds received upon disposal austroflex august 2013 working capital defined current assets less current liabilities december 31 2013 5302 million compared 4549 million december 31 2012 increase primarily due retirement midmay 2013 750 million unsecured senior notes ratio current assets current liabilities 26 1 december 31 2013 compared 22 1 december 31 2012 increased primarily retirement senior notes previously mentioned also buildup inventory december 31 2013 preparation lead free transition 2012 cash flows 2012 generated 1303 million cash operating activities compared 1261 million 2011 generated approximately 1030 million free cash flow nongaap financial measure reconcile defined net cash provided continuing operating activities minus capital expenditures plus proceeds sale assets compared free cash flow 1044 million 2011 free cash flow percentage net income continuing operations 1463 2012 compared 1352 2011 2012 used 429 million net cash investing activities including 175 million purchase tekmar 305 million cash capital equipment offset partially proceeds sale buildings equipment 32 million 2012 used 807 million net cash financing activities significant cash outlays included 658 million repurchase two million shares class common stock 160 million fund dividend payments repayments longterm debt related amounts borrowed prior credit agreement 2012 operating purposes repayments related 2011 borrowings purchase socla generated 32 million net cash operating activities discontinued operations 2012 related legal settlement regarding disposal former chinese subsidiary operating activities discontinued operations related austroflex generated 83 million net cash investing activities discontinued operations resulting primarily proceeds received upon disposal flomatic december 2012 2011 cash flows 2011 generated 1261 million cash operating activities generated approximately 1044 million free cash flow nongaap financial measure reconcile defined net cash provided continuing operating activities minus capital expenditures plus proceeds sale assets free cash flow percentage net income continuing operations 1352 2011 used 1881 million net cash investing activities primarily purchase socla capital equipment 2011 used 239 million net cash financing activities borrowings repayments primarily related funds borrowed prior credit agreement purchase socla partially repaid cash outflows included 272 million used repurchase one million shares class common stock 2011 163 million dividend payments nongaap financial measures believe free cash flow appropriate supplemental measure operating performance provides investors measure ability generate cash repay debt fund acquisitions companies may define free cash flow differently free cash flow represent cash generated operating activities accordance gaap therefore considered alternative net cash provided operations indication performance free cash flow also considered alternative net cash provided operations defined gaap cash conversion rate free cash flow net income continuing operations also measure performance cash flow generation reconciliation net cash provided continuing operations free cash flow calculation cash conversion rate provided net debt capitalization ratio nongaap financial measure used management decreased 38 2013 108 2012 decrease net debt capitalization ratio due reduction net debt incremental net income recorded period management believes appropriate supplemental measure helps investors understand ability meet financing needs basis evaluate financial structure computation may comparable companies may define net debt capitalization differently reconciliation longterm debt including current portion net debt net debt capitalization ratio provided reconciliation capitalization provided contractual obligations contractual obligations december 31 2013 presented following table aas recognized consolidated balance sheet bthe majority relates commodity capital commitments december 31 2013 maintain letters credit guarantee performance payment third parties accordance specified terms conditions amounts outstanding approximately 236 million december 31 2013 348 million december 31 2012 respectively letters credit primarily associated insurance coverage lesser extent foreign purchases generally expire within one year issuance instruments may exist expire without drawn therefore necessarily represent future cash flow obligations offbalance sheet arrangements except operating lease commitments offbalance sheet arrangements reasonably likely current future effect financial condition changes financial condition revenues expenses results operations liquidity capital expenditures capital resources material investors application critical accounting policies key estimates preparation consolidated financial statements accordance us gaap requires management make judgments assumptions estimates affect amounts reported critical accounting estimate assumption highly uncertain matters could material effect consolidated financial statements another also reasonable amount used change estimate reasonably likely period base assumptions historical experience estimates believe reasonable circumstances actual results could differ significantly estimates changes accounting policies significant changes accounting estimates 2013 2011 changed amortization period pension gains losses discussed caption pension benefits periodically discuss development selection disclosure estimates audit committee management believes following critical accounting policies reflect significant estimates assumptions revenue recognition recognize revenue following criteria met 1 entered binding agreement 2 product shipped title passed 3 sales price customer fixed determinable 4 collectability reasonably assured recognize revenue based upon determination criteria revenue recognition met based majority shipping terms considered occurred upon shipment finished product shipping terms require goods received customer title passes instances revenues recognized customer received goods record estimated reductions revenue customer returns allowances customer programs provisions returns allowances made time sale derived historical trends form portion allowance doubtful accounts customer programs primarily annual volume incentive plans allow customers earn credit attaining agreed upon purchase targets us record estimated reductions revenue made time sale customer programs based estimated purchase targets allowance doubtful accounts allowance doubtful accounts established represent best estimate net realizable value outstanding accounts receivable development allowance doubtful accounts varies region general based review past due amounts historical writeoff experience well aging trends affecting specific accounts general operational factors affecting accounts addition factors developed certain regions utilizing historical trends sales returns allowances cash discount activities derive reserve returns allowances cash discounts uniformly consider current economic trends changes customer payment terms evaluating adequacy allowance doubtful accounts also aggressively monitor creditworthiness largest customers periodically review customer credit limits reduce risk circumstances relating specific customers change unanticipated changes occur general business environment estimates recoverability receivables could adjusted inventory valuation inventories stated lower cost market costs determined primarily firstin firstout basis utilize specific product identification historical product demand basis determining excess obsolete inventory reserve identify inventories exceed range one four years sales determined comparing current inventory balance unit sales trailing twelve months new products added inventory within past twelve months excluded analysis portion products contain recoverable materials therefore excess obsolete reserve established net recoverable amounts changes market conditions lowerthanexpected customer demand changes technology features could result additional obsolete inventory saleable could require additional inventory reserve provisions certain countries additional inventory reserves maintained potential shrinkage experienced manufacturing process reserve established based prior years inventory losses adjusted change gross inventory balance goodwill intangibles made numerous acquisitions years included recognition significant amount goodwill tested impairment annually frequently event circumstance indicates impairment loss may incurred application goodwill impairment test requires judgment including identification reporting units assignment assets liabilities reporting units determination fair value reporting unit estimate fair value reporting units using income approach based present value estimated future cash flows appropriate guideline public company guideline transaction market approaches accounting guidance allows us review goodwill impairment utilizing either qualitative quantitative analyses option first assess qualitative factors determine whether existence events circumstances leads determination likely fair value reporting unit less carrying amount assessing totality events circumstances determine likely fair value reporting unit greater carrying amount performing twostep quantitative impairment test unnecessary first identify reporting units believe could pass qualitative assessment determine whether impairment testing necessary reporting unit identified qualitative analysis includes 1a review recent fair value calculation identify extent cushion fair value carrying amount determine substantial cushion existed 2a review events circumstances occurred since recent fair value calculation determine events circumstances would affected previous fair value assessment items identified reviewed include macroeconomic conditions industry market changes cost factor changes events affect reporting unit financial performance expectations reporting units performance relative peers compile information make assessment whether likely fair value reporting unit less carrying amount determine likely quantitative analysis required eight reporting units continuing operations one water quality goodwill 2013 performed qualitative analysis residential commercial blücher drains water reuse dormont asia pacific reporting units result qualitative analyses determined fair values reporting units greater carrying amounts second analysis goodwill impairment involves quantitative twostep process 2013 performed quantitative impairment analysis emea reporting unit brae including impairment analysis second quarter emea reporting unit due results expectations emea reporting unit represents emea geographic segment excluding blücher reporting unit first step impairment test requires comparison fair value reporting units respective carrying value carrying value reporting unit less fair value indication impairment exists second step performed carrying amount reporting unit higher fair value indication impairment may exist second step must performed second step impairment computed comparing implied fair value reporting units goodwill carrying amount goodwill carrying amount reporting units goodwill greater implied fair value goodwill impairment loss must recognized excess charged operations inherent development fair value reporting unit assumptions estimates used income market approaches discounted cash flow method income approach calculates present value future cash flows projections based assumptions estimates derived review operating results business plans expected growth rates cost capital tax rates also make certain assumptions future economic conditions market data develop assumptions based historical results including sales growth operating profits working capital levels tax rates market approaches calculate estimated fair values based valuation multiples derived stock prices enterprise values publicly traded companies comparable company guideline public company method based valuation multiples derived actual transactions comparable public private companies guideline transaction method believe discounted cash flow model sensitive selected discount rate market approaches sensitive valuation multiples used use thirdparty valuation specialists help develop appropriate discount rate valuation multiples use standard valuation practices arrive weighted average cost capital based market guideline public companies higher discount rate lower discounted cash flows believe estimate future cash flows market approach valuations reasonable different assumptions could significantly affect valuations result impairments future fourth quarter 2013 third quarter 2012 fourth quarter 2011 recognized pretax noncash goodwill impairment charge 03 million 10 million 12 million respectively related brae reporting unit within americas segment december 31 2013 goodwill brae fully impaired charges taken result reduced expectations regarding reporting unit october 27 2013 testing date approximately 5164 million goodwill balance sheet impairment testing indicated fair values reporting units exceeded carrying values thereby resulting impairment results emea reporting units quantitative impairment analysis summarized table underlying analyses supporting fair value assessment related comparable companies historical projected results current transaction values outlook business longterm performance included key assumptions appropriate revenue ebitda multiples discount rate longterm growth rate connection october 27 2013 impairment test utilized discount rate 105 growth rates beyond planning periods ranging 0 5 longterm terminal growth rate 3 future increases discount rates due changing interest rates declining economic environment different market multiples could impact assumptions value reporting unit intangible assets trademarks trade names generally recorded connection business acquisition values assigned intangible assets determined independent valuation firm based estimates judgments regarding expectations success life cycle products technology acquired 2013 2012 2011 recognized noncash pretax charges approximately 07 million 04 million 14 million respectively impairment certain indefinitelived intangible assets addition 2011 recognized noncash pretax charges 135 million impairment certain amortizable intangible assets emea segment company determined prospects austroflex part emea segment lower originally estimated due current operating profits forecast tempered future growth expectations accordingly company performed fair value assessment result wrote longlived assets 148 million approximately 78 including customer relationships 121 million trade names 14 million property plant equipment 13 million fair value based discounted cash flows using market participant assumptions utilized estimated weighted average cost capital subsequently completed sale austroflex august 1 2013 austroflexs results operations presented discontinued operations periods presented revised accounting guidance issued 2012 allows us perform qualitative impairment assessment indefinitelived intangible assets consistent goodwill guidance noted previously 2013 impairment assessment performed quantitative assessments indefinitelived intangible assets methodology employed relief royalty method subset income approach impairment review occurred october 27 2013 product liability workers compensation costs retention requirements associated insurance policies generally selfinsured potential product liability claims workers compensation costs associated workplace accidents subject variety potential liabilities connection product liability cases maintain product liability insurance coverage believe generally accordance industry practices product liability cases us management establishes product liability accrual utilizing thirdparty actuarial valuations incorporates historical trend factors specific claims experience derived loss reports provided thirdparty administrators countries maintain insurance coverage relatively high deductible payments product liability claims tend smaller experienced us changes nature claims actual settlement amounts could affect adequacy estimate require changes provisions liability estimate ultimate liability may less reported workers compensation liabilities us recognized claims incurred including claims incurred reported changes status individual case reserves time workers compensation claim filed liability estimated settle claim liability workers compensation claims determined based managements estimates nature severity claims based analysis provided thirdparty administrators various state statutes reserve requirements developed trend factors based specific claims experience discounted based riskfree interest rates employ thirdparty actuarial valuations help us estimate workers compensation accrual countries workers compensation costs applicable maintain insurance coverage limited deductible payments liability estimate ultimate liability may less reported subject changes discount rates determine trend factors product liability workers compensation liabilities based consultation outside actuaries maintain excess liability insurance outside insurance carriers minimize risks related catastrophic claims excess selfinsured positions material change aforementioned factors could adverse impact operating results legal contingencies defendant numerous legal matters including involving environmental law product liability discussed detail part item 1 businessproduct liability environmental litigation matters required gaap determine whether estimated loss contingency accrued assessing whether loss deemed probable loss amount reasonably estimated net applicable insurance proceeds possible estimate reasonably possible loss range loss amount accrued estimate aggregated disclosed estimates potential outcomes contingencies developed consultation outside counsel assessment based upon available information litigation inherently uncertain actual liability fully resolve litigation cannot predicted assurance accuracy event unfavorable outcome one legal matters ultimate liability may excess amounts currently accrued may material operating results cash flows particular quarterly annual period however based information currently known us management believes ultimate outcome legal contingencies resolved time likely material adverse effect financial condition though outcome could material operating results particular period depending part upon operating results period pension benefits account pension plans accordance gaap involves recording liability asset based projected benefit obligation fair value plan assets assumptions made regarding valuation benefit obligations performance plan assets primary assumptions follows •weighted average discount ratethis rate used estimate current value future benefits rate adjusted based movement longterm interest rates •expected longterm rate return assetsthis rate used estimate future growth investments investment earnings expected return based upon combination historical market performance anticipated future returns portfolio reflecting mix equity debt investments indicative plan assets determine assumptions based consultation outside actuaries investment advisors variance assumptions could significant impact future recognized pension costs assets liabilities october 31 2011 board directors voted cease accruals effective december 31 2011 pension plan supplemental employees retirement plan recorded curtailment charge approximately 15 million fourth quarter 2011 connection action effective november 1 2011 began amortizing unamortized gains losses remaining life expectancy participants instead former policy average remaining service period income taxes estimate use expected annual effective income tax rates accrue income taxes effective tax rates determined based budgeted earnings taxes including best estimate permanent items affect effective rate year management periodically reviews rates outside tax advisors changes made material variances expectations identified recognize deferred taxes expected future consequences events reflected consolidated financial statements deferred tax assets liabilities determined based differences book values tax bases particular assets liabilities using tax rates effect years differences expected reverse valuation allowance provided offset net deferred tax assets based upon available evidence likely deferred tax assets realized consider estimated future taxable income ongoing prudent tax planning strategies assessing need valuation allowance new accounting standards july 2013 financial accounting standards board fasb issued accounting standards update asu 201311 presentation unrecognized tax benefit net operating loss carryforward similar tax loss tax credit carryforward exists intended eliminate diversity practice presentation unrecognized tax benefits instances asu 201311 effective fiscal years interim periods beginning december 15 2013 early adoption permitted adoption guidance expected material impact companys financial statements march 2013 fasb issued asu 201305 parents accounting cumulative translation adjustment upon derecognition certain subsidiaries groups assets within foreign entity investment foreign entity asu intended eliminate diversity practice release cumulative translation adjustment net income parent either sells part investment foreign entity longer holds controlling financial interest addition amendments asu resolve diversity practice treatment business combinations achieved stages sometimes also referred step acquisitions involving foreign entity provisions asu effective interim annual periods beginning december 15 2013 early adoption permitted must applied prospectively company early adopted asu 2013 adoption guidance material impact companys financial statements february 2013 fasb issued asu 201302 reporting amounts reclassified accumulated comprehensive income requires additional disclosures amounts reclassified comprehensive income oci component either face income statement separate footnote financial statements asu 201302 effective fiscal years interim periods within years beginning december 15 2012 adoption guidance material impact companys financial statements item 7aitem 7 managements discussion analysis financial condition results operations overview leading supplier products solutions manage conserve flow fluids energy buildings residential commercial markets americas emea asiapacific 140 years designed produced valve systems safeguard regulate water systems energy efficient heating hydronic systems drainage systems water filtration technology helps conserve water earn revenue income almost exclusively sale products principal product lines include • residential commercial flow control productsincludes products typically sold plumbing hot water applications backflow preventers water pressure regulators temperature pressure relief valves thermostatic mixing valves • hvac gas productsincludes commercial highefficiency boilers water heaters heating solutions hydronic electric heating systems underfloor radiant applications custom heat hot water solutions hydronic pump groups boiler manufacturers alternative energy control packages flexible stainless steel connectors natural liquid propane gas commercial food service residential applications hvac acronym heating ventilation air conditioning • drainage water reuse productsincludes drainage products engineered rain water harvesting solutions commercial industrial marine residential applications • water quality productsincludes pointofuse pointofentry water filtration conditioning scale prevention systems commercial residential applications business reported three geographic segments americas emea asiapacific distribute products three primary distribution channels wholesale original equipment manufacturers oems doityourself diy september 2015 divested substantial portion diy business americas reduce significance diy distribution channel products 2016 believe factors relating future growth include ability continue make selective acquisitions core markets well new complementary markets regulatory requirements relating quality conservation water safe use water increased demand clean water continued enforcement plumbing building codes healthy economic environment completed 22 acquisitions little decade acquisition strategy focuses businesses advance strategies around safety regulation energy efficiency water conservation target businesses provide us one following entry new markets geographies improved channel access unique andor proprietary technologies advanced production capabilities products representing majority sales subject regulatory standards code enforcement typically require products meet stringent performance criteria together commissioned manufacturers representatives consistently advocated development enforcement plumbing codes focused maintaining stringent quality control testing procedures manufacturing facilities order manufacture products compliance code requirements take advantage resulting demand compliant products believe product development product testing capability investment plant equipment needed manufacture products compliance code requirements represent competitive advantage us strive invest product innovation meets needs customers end markets focus differentiated products provide greater opportunity distinguish market place providing system solutions customers rather supplying components continually look strategic opportunities invest new products markets divest existing product lines necessary order meet objectives 2015 established expanded leadership team introduced key initiatives including phase one two americas asiapacific transformation program discussed reenergized commitment commercial excellence continued focus operational excellence completed integration aerco international inc aerco acquisition added apex valves limited apex portfolio late year also settled certain longterm obligations including pension plan supplemental employee retirement plan obligations resulting onetime charge 647 million believe 2015 year change transition company performance 2015 mixed driven different economic business dynamics within region operate americas saw modest volume growth core business compared 2014 us residential construction marketplace experienced strong growth repair replacement end market commercial market experienced moderate growth emea important markets like france germany russia continued decline primarily related challenging economic environments fourth quarter 2015 recorded aftertax goodwill impairment charge 1263 million relating emea reporting unit charge driven continued challenging macroeconomic environment lowered expectations reporting unit going forward asiapacific growth decelerated especially second half 2015 due challenging economic conditions china overall reported sales 2015 declined 3 46 million organic sales 2015 grew 05 74 million compared 2014 organic sales growth excludes impacts acquisitions divestitures foreign exchange yearoveryear comparisons believe provides investors complete understanding underlying sales trends providing sales growth consistent basis compared 2014 organic sales americas asiapacific grew 21 126 respectively offset reduction emea organic sales 32 part ongoing focus operational excellence implemented broad transformation program first emea 2013 past year americas asiapacific businesses february 2015 board directors approved initial phase restructuring program relating transformation americas asiapacific businesses primarily involved exit lowmargin noncore product lines global sourcing actions phase one eliminated approximately 175 million combined americas asiapacific net sales primarily sell diy distribution channel september 2015 able sell certain assets represented approximately 105 million rationalized product line revenues sold fittings brass tubular vinyl tubing product lines sioux chief mfg co inc sioux chief allcash transaction approximately 331 million recording immaterial loss sale expect discontinue selling remaining rationalized product lines first half 2016 part rationalization exercise entered agreement sell manufacturing plant china whose production used exclusively products rationalized expect complete asset sale first half 2016 approximately 9 million sourcing initiatives focused americas realized approximately 4 million savings 2015 estimate could save incremental 4 million 2016 initiative total expected costs relating phase one fully recognized 2015 total pretax cost incurred 315 million included noncash charges 171 million total net aftertax charges 262 million october 2015 board directors approved second phase transformation program related americas asiapacific businesses phase two phase two involves decreasing square footage americas facilities together phase one expected reduce americas net operating footprint approximately 30 phase two designed improve utilization remaining facilities better leverage cost structure reduce working capital improve execution customer delivery requirements estimate total phase two pretax costs approximately 31 million 37 million 83 million incurred date total phase two noncash charges estimated 9 million total net aftertax charges estimated 194 million 224 million total gross annualized savings phase two estimated 10 million 2018 expect spend approximately 21 million 2016 phase two activities realize approximately 2 million operational savings combined basis total estimated pretax cost transformation program related americas asiapacific businesses 63 million 68 million including restructuring costs 212 million goodwill intangible asset impairments 134 million transformation deployment costs approximately 28 million 33 million transformation deployment costs include consulting project management fees associated costs program expected incurred 2017 refer note 4 5 item 15 exhibits financial statement schedules details emea transformation program began 2013 designed realign european operating strategy portfolio independent businesses paneuropean platform structure initiative made progress 1 develop better sales capabilities improved product management enhanced product crossselling efforts 2 drive efficient sourcing logistics 3 enhance focus emerging market opportunities process aligning legal tax structure accordance business structure take advantage favorable tax rates possible expect project ongoing 2018 incurred deployment costs approximately 34 million 75 million 12 million 2015 2014 2013 respectively costs consist primarily external consulting related costs anticipate total deployment costs approximately 3 million 2016 emea program total annual net savings approximately 2 million achieved 2014 approximately 8 million 2015 anticipate annual net savings approximately 10 million 2016 approximately 14 million net savings expected 2018 project completed also announced restructuring effort emea fourth quarter 2015 response current market conditions better align internal cost base external market environment emea restructuring action subject completion statutory labor relations requirements including consultation receipt advisory opinions relevant works councils please see note 4 notes consolidated financial statements detailed explanation restructuring activities acquisitions disposals november 30 2015 completed acquisition 80 outstanding shares apex new zealand company commitment purchase remaining 20 ownership within three years closing aggregate purchase price approximately 204 million recorded liability 55 million estimate acquisition date fair value contractual call option purchase remaining 20 apex acquisition increase presence asiapacific outside china apex manufactures highend valves new zealand market believe could introduced china market countries south east asia also believe could cost synergies realized existing sourcing capabilities apexs annual revenues 2015 approximately 12 million 09 million included 2015 consolidated financial statements december 1 2014 completed acquisition aerco share purchase transaction aggregate purchase price 2715 million financed borrowing companys credit agreement aerco leading provider commercial highefficiency boilers water heaters heating solutions north america aerco based blauvelt new york products distributed commercial municipal use primarily north america aerco strengthens strategic vision expand heat source products strengthens solutions system offering capabilities aercos annual revenues 2014 approximately 100 million 53 million included 2014 consolidated financial statements please see note 6 notes consolidated financial statements additional information regarding operating results aerco recent developments february 11 2016 declared quarterly dividend seventeen cents 017 per share outstanding share class common stock class b common stock february 12 2016 entered new credit agreement new credit agreement among company certain subsidiaries become borrowers new credit agreement jpmorgan chase bank na administrative agent swing line lender letter credit issuer lenders referred therein new credit agreement provides 500 million fiveyear senior unsecured revolving credit facility revolving credit facility sublimit 100 million letters credit new credit agreement also provides 300 million fiveyear term loan facility term loan facility available us single draw connection execution delivery new credit agreement borrowed 200 million revolving credit facility 300 million term loan facility february 12 2016 closing date used portion proceeds borrowings made closing date new credit agreement prepay outstanding loans accrued unpaid interest thereon companys credit agreement dated february 18 2014 prior credit agreement upon repayment outstanding loans prior credit agreement prior credit agreement terminated intend use 225 million borrowings revolving credit facility retire amounts outstanding 585 senior unsecured notes due april 30 2016 due date expect use future borrowings revolving credit facility acquisitions working capital general corporate purposes february 16 2016 announced munish nanda president americas appointed president americas europe eli melhem president asiapacific appointed president asiapacific middle east africa changes help drive synergies sales product development operational practices throughout regions february 9 2016 mario sanchez president emea company gave notice decision resign company effective april 1 2016 company expects mr sanchez assist transition duties duration employment company february 16 2016 reached agreement principle settle claims class action cases captioned ponzo v watts regulator co klug v watts regulator co matters pending united states district courts district massachusetts district nebraska respectively ponzo klug matters brought putative nationwide class actions seeking recover damages relief based alleged failure water heater connectors floodsafe connectors respectively total settlement amount 14 million watts expected pay approximately 41 million portion settlement insurance proceeds settlement subject completion final written settlement agreement preliminary court approval final court approval fairness hearing results operations year ended december 31 2015 compared year ended december 31 2014 net sales business reported three geographic segments americas emea asiapacific net sales segments years ended december 31 2015 december 31 2014 follows change net sales attributable following products sold wholesalers oems diy chains change organic net sales channel attributable following organic net sales americas increased 197 million compared 2014 due growth wholesale markets particularly relating commercial boilers backflow valve product sales drainage products weather issues northeast midwest south central us first half 2015 partially offset sales increases year organic net sales emea wholesale diy oem markets decreased compared 2014 primarily due struggling endmarkets france germany russia decreases partially offset increased sales middle east uk markets electronics business organic net sales asiapacific wholesale market increased compared 2014 primarily due increased sales residential valve heating products sold expanded geographic regions within china outside china also increased sales australia year net decrease sales due foreign exchange primarily due depreciation euro canadian dollar us dollar 2015 cannot predict whether foreign currencies appreciate depreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact net sales change net sales due acquireddivested relates acquisition aerco december 2014 contributed 1042 million net sales first eleven months 2015 acquisition apex november 30 2015 contributed 09 million last month 2015 offset divestiture noncore product lines americas asiapacific reduced net sales 640 million compared 2014 gross profit gross profit gross profit percent net sales gross margin 2015 2014 follows americas gross margin increased compared 2014 due primarily product mix price realization material cost savings increase product mix largely due aerco acquisition positive impact divested products material cost savings improved part due lower copper prices americas lead free foundry operated efficiently prior year emeas gross margin decreased primarily due lower overhead absorption related volume declines unfavorable product mix offset transformation production efficiencies asiapacifics gross margin increased primarily due productivity initiatives increased thirdparty sales offset partially reduced intercompany activity selling general administrative expenses selling general administrative sga expenses increased 843 million 207 2015 compared 2014 increase sga expenses attributable following organic increase sga expenses primarily related settlement certain longterm obligations including pension obligations 647 million increased personnel costs 93 million increased legal costs 35 million increased product liability costs 81 million offset decreased acquisition related costs 44 million reduced commission freight costs 35 million increased personnel costs primarily relate increased compensation costs 44 million increased stockbased compensation costs 25 million partially due benefit recognized prior year related former ceos forfeiture unvested equity awards increased pension costs 17 million increased employee related costs 07 million partially offset reduced relocation costs 10 million incremental legal costs include impact settlement principle relating two class action lawsuits regarding legacy products net settlement charged operations amounted 35 million 2015 refer note 15 notes consolidated financial statements annual report form 10k detail increased product liability cost americas 81 million driven recent increase reported claims majority relate divested discontinued products 25 million charge related resolution certain legacy claims undifferentiated products exited decrease sga expenses foreign exchange primarily due depreciation euro canadian dollar us dollar 2015 acquired sga costs relate aerco apex acquisitions total sga expenses percentage sales 335 2015 269 2014 restructuring 2015 recorded net charge 214 million primarily transformation americas asiapacific businesses involuntary terminations corporate involuntary terminations costs incurred part emea restructuring plans compared 152 million 2014 detailed description current restructuring plans see note 4 notes consolidated financial statements annual report form 10k goodwill longlived asset impairment charges 2015 recorded impairment charges 1305 million primarily relating 1297 million goodwill impairment charge emea reporting unit trade name impairment charges 05 million 01 million americas emea respectively compared 142 million 2014 see note 2 notes consolidated financial statements annual report form 10k additional information regarding impairments operating loss income operating income loss geographic segment 2015 2014 follows increase decrease operating income loss attributable following decrease consolidated operating income largely due noncash goodwill impairment charge recorded emea 1297 million settlement certain longterm obligations including pension obligations 647 million corporate increase restructuring charges factors contributing decrease included increase sga unfavorable foreign exchange offset partially contribution aerco acquisition americas organic operating income decrease primarily due increased sga expenses related product liability costs 81 million transformationrelated costs 71 million emea organic operating income decrease primarily due volume decline interest expense interest expense increased 44 million 221 2015 compared 2014 primarily due interest borrowings used purchase aerco december 2014 income expense net income expense net fluctuated 55 million income balance 24 million 2015 compared 2014 primarily due net foreign currency transaction gains 2015 compared losses 2014 result depreciation euro chinese yuan canadian dollar us dollar depreciation canadian dollar euro 2015 income taxes effective income tax rate changed 17 2015 395 2014 significant change tax rate due impact nondeductible income tax reserve items loss income taxes reported 2015 compared 2014 primarily related goodwill impairment charge settlement pension plan supplemental employee retirement plan obligations net loss income net loss 2015 1129 million 324 per common share compared 503 million 142 per common share 2014 results 2015 include aftertax charge 1268 million 363 per common share goodwill longlived asset impairment charges 446 million 128 per common share longterm obligation settlements including pension obligations 139 million 040 per common share restructuring 90 million 026 per common share emea americas transformation deployment costs 37 million 011 per common share legal settlements 09 million 003 per common share acquisition related costs results 2014 include net aftertax charges 385 million 109 per common share including acquisitions impairment related costs 051 restructuring net charges 039 emea americas transformation deployment costs 019 results operations year ended december 31 2014 compared year ended december 31 2013 net sales business reported three geographic segments americas emea asiapacific net sales segments years ended december 31 2014 2013 follows change net sales attributable following products sold wholesalers diy chains oems change organic net sales channel attributable following organic net sales americas wholesale diy oem markets increased 2014 compared 2013 increase driven growth principal products lines particular growth residential commercial flow product lines organic net sales emea wholesale market decreased compared 2013 primarily due softening france germany italy wholesale markets decreases diy channel primarily due decreases france diy market decreases oem channel primarily due decreases germany italy markets partially offset increases electronic controls drains businesses organic net sales asiapacific wholesale market increased compared 2013 primarily due increased sales residential valve heating products expansion east north regions china net decrease sales due foreign exchange primarily due depreciation canadian dollar us dollar cannot predict degree certainty whether foreign currencies appreciate depreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact net sales change net sales due acquisition relates acquisition aerco december 2014 gross profit gross profit gross profit percent net sales gross margin 2014 2013 follows americas gross margin remained consistent compared 2013 due primarily incremental wholesale volume pricing offset manufacturing inefficiencies foundry first half 2014 lower pricing diy channel emeas gross margin increased primarily due cost reductions production efficiencies driven ongoing restructuring initiatives offsetting lower overhead absorption related reduced manufacturing volumes selling general administrative expenses selling general administrative expenses sga expenses increased 13 million 03 2014 compared 2013 increase sga expenses attributable following organic decrease sga expenses primarily due decreased legal costs 185 million decrease product liability costs 35 million offset increased nonrecurring transformation deployment costs americas emea 81 million acquisition costs 45 million increased personnel costs 27 million increased commission freight costs 41 million lower depreciation amortization 07 million primary driver decrease legal cost relates agreement settle claims trabakoolas et al v watts water technologies inc et al matter net settlement charged operations amounted 136 million 2013 refer note 15 notes consolidated financial statements annual report form 10k detail nonrecurring americas emea deployment costs consist primarily external consulting related costs acquisition costs 45 million relate aerco acquisition decrease sga expenses foreign exchange primarily due depreciation canadian dollar us dollar 2014 acquired sga costs relate aerco acquisition total sga expenses percentage sales 269 2014 275 2013 restructuring charges 2014 recorded net charge 152 million primarily involuntary terminations costs incurred part emea restructuring initiatives reductioninforce americas corporate reductionsinforce asiapacific restructuring charges 2013 87 million detailed description current restructuring plans see note 4 notes consolidated financial statements annual report form 10k goodwill longlived asset impairment charges 2014 recorded impairment charges 142 million primarily relating 129 million goodwill impairment charge asiapacific reporting unit trade name impairment charges 05 million 08 million americas emea respectively compared 12 million 2013 see note 2 notes consolidated financial statements annual report form 10k additional information regarding impairments operating income operating income geographic segment 2014 2013 follows change operating income attributable following decrease consolidated operating income due primarily increase restructuring impairment charges offset increase gross profit increased sales volume cost containment initiatives increase americas organic operating income driven higher sales volume reduced sga expenses offset partially increased restructuring expenses emea organic operating income decrease primarily due lower sales volumes higher restructuring costs transformation deployment costs partially offset productivity efficiencies cost containment efforts asiapacifics organic operating income decreased primarily due impact gross margins reduced absorption driven lower intercompany sales higher sga expenses january 1 2014 began allocating certain expenses three operating segments previously recorded corporate expenses primarily include stock compensation legal expenses audit expenses directly attributable benefit three operating segments 2013 results retrospectively revised comparative purposes interest expense interest expense decreased 16 million 74 2014 compared 2013 primarily due retirement midmay 2013 75 million unsecured senior notes lower borrowing rates standby letters credit offset interest borrowings credit agreement see note 11 notes consolidated financial statements annual report form 10k additional information regarding financing arrangements expense income net expense income net increased 03 million 2014 compared 2013 primarily due higher foreign currency transaction losses canada income taxes effective tax rate continuing operations increased 395 2014 306 2013 increase rate primarily due 129 million goodwill impairment charge recorded asiapacific tax benefit addition increase also due audit settlements belgium germany recorded third quarter 2014 earnings mix us contributing larger portion worldwide earnings 2014 2013 net income continuing operations net income continuing operations 2014 503 million 142 per common share compared 609 million 171 per common share 2013 results 2014 include net aftertax charges 385 million 109 per common share including acquisitions impairment related costs 051 restructuring net charges 039 emea americas transformation deployment costs 019 results 2013 include net aftertax charges 183 million 051 per common share including legal settlement charges 026 restructuring net charges 017 goodwill longlived asset impairments 004 earnout adjustments 002 emea transformation deployment costs 002 loss discontinued operations loss discontinued operations 2013 23 million 007 per common share related operations loss disposal austroflex see note 3 notes consolidated financial statements liquidity capital resources 2015 cash flows 2015 generated 1094 million cash operating activities compared 1352 million 2014 decrease primarily due 492 million settlement certain longterm obligations including pension plan offset inventory reduction efforts stronger accounts receivable collections generated approximately 818 million free cash flow nongaap financial measure reconcile defined net cash provided continuing operating activities minus capital expenditures plus proceeds sale assets compared free cash flow 1119 million 2014 2015 used 173 million net cash investing activities including 204 million purchase apex 277 million cash capital equipment offset cash proceeds approximately 331 million sale certain assets relating divested product lines americas anticipate investing approximately 35 million 40 million capital equipment 2016 improve manufacturing capabilities 2015 used 709 million net cash financing activities including 446 million used repurchase approximately 813000 shares class common stock 231 million used pay dividends february 18 2014 entered credit agreement prior credit agreement among company certain subsidiaries company become borrowers prior credit agreement jpmorgan chase bank na administrative agent swing line lender letter credit issuer lenders referred therein prior credit agreement terminated february 12 2016 provided 500 million fiveyear senior unsecured revolving credit facility could increased additional 500 million certain circumstances subject terms prior credit agreement prior credit agreement sublimit 100 million letters credit borrowings outstanding prior credit agreement bore interest fluctuating rate per annum equal applicable percentage equal 1 case eurocurrency rate loans british bankers association libor rate plus applicable percentage ranging 0975 145 determined reference companys consolidated leverage ratio 2 case base rate loans swing line loans highest federal funds rate plus 05 b rate interest effect day announced jpmorgan chase bank na prime rate c british bankers association libor rate plus 10 plus applicable percentage ranging 000 045 determined reference consolidated leverage ratio addition paying interest prior credit agreement also required pay certain fees connection credit facility including limited unused facility fee letter credit fees prior credit agreement required satisfy maintain specified financial ratios financial condition tests december 31 2015 compliance covenants related prior credit agreement 2002 million unused available credit prior credit agreement 248 million standby letters credit outstanding prior credit agreement 275 million borrowings outstanding prior credit agreement december 31 2015 february 12 2016 terminated prior credit agreement entered new credit agreement new credit agreement among company certain subsidiaries company become borrowers credit agreement jpmorgan chase bank na administrative agent swing line lender letter credit issuer lenders referred therein new credit agreement provides 500 million fiveyear senior unsecured revolving credit facility sublimit 100 million letters credit new credit agreement also provides 300 million fiveyear term loan facility available us single draw borrowings outstanding revolving credit facility bear interest fluctuating rate per annum equal applicable percentage defined case eurocurrency rate loans british bankers association libor rate plus applicable percentage ranging 0975 145 determined reference companys consolidated leverage ratio plus ii case base rate loans swing line loans highest federal funds rate plus 05 b rate interest effect day announced jpmorgan chase bank na prime rate c british bankers association libor rate plus 10 plus applicable percentage ranging 000 045 determined reference companys consolidated leverage ratio borrowings outstanding term loan facility bear interest fluctuating rate per annum equal applicable percentage defined british bankers association libor rate plus applicable percentage ranging 1125 175 determined reference companys consolidated leverage ratio loan term loan facility amortizes follows 0 per annum first year 75 second third years 10 fourth fifth years payments due made ratably year quarterly installments addition paying interest new credit agreement also required pay certain fees connection credit facility including limited unused facility fee letter credit fees new credit agreement matures february 12 2021 subject extension certain circumstances subject terms new credit agreement may repay loans outstanding new credit agreement time without premium penalty customary breakage costs subject terms new credit agreement repaid amounts borrowed term loan facility may borrowed connection execution delivery new credit agreement borrowed 200 million revolving credit facility 300 million term loan facility february 12 2016 closing date used portion proceeds borrowings made closing date new credit agreement prepay outstanding loans accrued unpaid interest thereon prior credit agreement intend use borrowings made revolving credit facility retire amounts outstanding 585 senior unsecured notes due april 30 2016 due date result 225 million senior unsecured note classified noncurrent liability consolidated balance sheet december 31 2015 also expect use future borrowings revolving credit facility acquisitions working capital general corporate purposes pension plan terminated effective july 31 2014 june 4 2015 received internal revenue services favorable determination letter respect termination pension plan serp terminated effective may 15 2014 september 2015 settled pension plan serp benefit obligations settled liabilities serp accordance section 409a internal revenue code paying lump sums plan participants transferred pension plan assets benefit obligations annuity provider distributed lump sum payments participants based elections made cash contributions 432 million fully fund settlement actions cumulative actuarial losses 597 million previously recorded accumulated comprehensive income recognized selling general administrative expenses quarter ended september 27 2015 associated deferred tax asset 230 million previously recorded accumulated comprehensive income netted within longterm deferred tax liabilities reversed charge recognized december 31 2015 held 2962 million cash equivalents ability fund operations cash equivalents could limited market liquidity well possible tax implications moving proceeds across jurisdictions amount approximately 2436 million cash equivalents held foreign subsidiaries us operations typically generate sufficient cash flows meet domestic obligations anticipate incremental expenditures 2016 including costs related americas emea restructuring transformation programs may borrow fund expected cash outlay reasonable interest rates utilizing uncommitted borrowings new credit agreement however amounts held foreign subsidiaries needed fund operations united states could required accrue pay taxes repatriate funds charges may include federal tax 350 dividends received us potential state income taxes additional withholding tax payable foreign jurisdictions 100 however intent permanently reinvest undistributed earnings foreign subsidiaries current plans repatriate fund operations united states covenant compliance prior credit agreement required satisfy maintain specified financial ratios financial condition tests december 31 2015 financial ratios included consolidated interest coverage ratio based consolidated earnings income taxes interest expense depreciation amortization consolidated ebitda consolidated interest expense defined prior credit agreement prior credit agreement defined consolidated ebitda exclude unusual nonrecurring charges gains also required maintain consolidated leverage ratio consolidated funded debt consolidated ebitda consolidated funded debt defined prior credit agreement included long shortterm debt capital lease obligations trade letters credit outstanding less cash balance sheet exceeded 50 million december 31 2015 actual financial ratios calculated accordance prior credit agreement compared required levels prior credit agreement follows december 31 2015 compliance covenants related prior credit agreement 2002 million unused available credit prior credit agreement 248 million standby letters credit outstanding prior credit agreement company 275 million borrowings outstanding prior credit agreement december 31 2015 new credit agreement retains covenants covenant calculations prior credit agreement several senior note agreements detailed note 11 notes consolidated financial statements senior note agreements require us maintain fixed charge coverage ratio consolidated ebitda plus consolidated rent expense period consolidated fixed charges consolidated fixed charges sum consolidated interest expense period consolidated rent expense december 31 2015 actual fixed charge coverage ratio calculated accordance senior note agreements compared required ratio therein follows addition financial ratios prior credit agreement senior note agreements contain affirmative negative covenants include limitations disposition sale assets prohibitions assuming incurring liens assets limited exceptions limitations making investments permitted agreements working capital defined current assets less current liabilities december 31 2015 5140 million compared 5286 million december 31 2014 ratio current assets current liabilities 27 1 december 31 2015 compared 25 1 december 31 2014 cash flows 2014 generated 1352 million cash operating activities compared 1183 million 2013 increase primarily due inventory reduction efforts mostly americas strong accounts receivable collections offset reductions accounts payable current year related prior year buildup lead free inventory late 2013 generated approximately 1119 million free cash flow nongaap financial measure reconcile defined net cash provided continuing operating activities minus capital expenditures plus proceeds sale assets compared free cash flow 921 million 2013 free cash flow percentage net income continuing operations 2225 2014 compared 1512 2013 2014 used 2955 million net cash investing activities including 2722 million purchase aerco 237 million cash capital equipment 2014 generated 2208 million net cash financing activities cash provided financing activities primarily due 2750 million borrowings prior credit agreement fund aerco acquisition proceeds 118 million option exercises employee stock plans offset payments repurchase approximately 670000 shares class common stock cost 396 million payment dividends 205 million 2013 cash flows 2013 generated 1183 million cash operating activities compared 1303 million 2012 decrease primarily due lower net income cash used fund lead free inventory increase americas generated approximately 921 million free cash flow nongaap financial measure reconcile defined net cash provided continuing operating activities minus capital expenditures plus proceeds sale assets compared free cash flow 1030 million 2012 free cash flow percentage net income continuing operations 1512 2013 compared 1463 2012 2013 used 241 million net cash investing activities including 277 million cash capital equipment offset partially proceeds sale buildings equipment 15 million 2013 used 1095 million net cash financing activities significant cash outlays included repayment 750 million unsecured senior notes matured may 15 2013 payments repurchase approximately 454000 shares class common stock cost approximately 230 million payment dividends 177 million offset proceeds 119 million option exercises employee stock plans nongaap financial measures believe free cash flow appropriate supplemental measure operating performance provides investors measure ability generate cash repay debt fund acquisitions companies may define free cash flow differently free cash flow represent cash generated operating activities accordance gaap therefore considered alternative net cash provided operations indication performance free cash flow also considered alternative net cash provided operations defined gaap cash conversion rate free cash flow net income continuing operations also measure performance cash flow generation reconciliation net cash provided continuing operations free cash flow adjusted free cash flow calculation cash conversion rate provided net debt capitalization ratio nongaap financial measure used management increased 285 2015 234 2014 increase net debt capitalization ratio due increase net debt primarily driven reduction cash equivalents december 31 2015 decrease stockholders equity primarily result goodwill impairment charge recorded 2015 impact foreign currency translation management believes net debt capitalization ratio appropriate supplemental measure helps investors understand ability meet financing needs serves basis evaluate financial structure computation may comparable companies may define net debt capitalization ratios differently reconciliation longterm debt including current portion net debt net debt capitalization ratio provided reconciliation capitalization provided contractual obligations contractual obligations december 31 2015 presented following table aas recognized consolidated balance sheet bthe majority relates commodity capital commitments december 31 2015 cthe retirement 225 million senior unsecured note reflected less 1 year payments due year reflective new credit facility entered february 12 2016 maintain letters credit guarantee performance payment third parties accordance specified terms conditions amounts outstanding approximately 248 million december 31 2015 december 31 2014 letters credit primarily associated insurance coverage lesser extent foreign purchases generally expire within one year issuance instruments may exist expire without drawn therefore necessarily represent future cash flow obligations offbalance sheet arrangements except operating lease commitments offbalance sheet arrangements reasonably likely current future effect financial condition changes financial condition revenues expenses results operations liquidity capital expenditures capital resources material investors application critical accounting policies key estimates preparation consolidated financial statements accordance us gaap requires management make judgments assumptions estimates affect amounts reported critical accounting estimate assumption highly uncertain matters could material effect consolidated financial statements another also reasonable amount used change estimate reasonably likely period base assumptions historical experience estimates believe reasonable circumstances actual results could differ significantly estimates changes accounting policies significant changes accounting estimates 2015 periodically discuss development selection disclosure estimates audit committee management believes following critical accounting policies reflect significant estimates assumptions revenue recognition recognize revenue following criteria met 1 entered binding agreement 2 product shipped title passed 3 sales price customer fixed determinable 4 collectability reasonably assured recognize revenue based upon determination criteria revenue recognition met based majority shipping terms considered occurred upon shipment finished product shipping terms require goods received customer title passes instances revenues recognized customer received goods record estimated reductions revenue customer returns allowances customer programs provisions returns allowances made time sale derived historical trends form portion allowance doubtful accounts customer programs primarily annual volume incentive plans allow customers earn credit attaining agreed upon purchase targets us record estimated reductions revenue made time sale customer programs based estimated purchase targets allowance doubtful accounts allowance doubtful accounts established represent best estimate net realizable value outstanding accounts receivable development allowance doubtful accounts varies region general based review past due amounts historical writeoff experience well aging trends affecting specific accounts general operational factors affecting accounts addition factors developed certain regions utilizing historical trends sales returns allowances cash discount activities derive reserve returns allowances cash discounts uniformly consider current economic trends changes customer payment terms evaluating adequacy allowance doubtful accounts also aggressively monitor creditworthiness largest customers periodically review customer credit limits reduce risk circumstances relating specific customers change unanticipated changes occur general business environment estimates recoverability receivables could adjusted inventory valuation inventories stated lower cost market costs determined primarily firstin firstout basis utilize specific product identification historical product demand basis determining excess obsolete inventory reserve identify inventories exceed range one three years sales determined comparing current inventory balance unit sales trailing twelve months new products added inventory within past twelve months excluded analysis portion products contain recoverable materials therefore excess obsolete reserve established net recoverable amounts changes market conditions lowerthan expected customer demand changes technology features could result additional obsolete inventory saleable could require additional inventory reserve provisions certain countries additional inventory reserves maintained potential shrinkage experienced manufacturing process reserve established based prior years inventory losses adjusted change gross inventory balance goodwill intangibles made numerous acquisitions years recognized significant amount goodwill tested impairment annually frequently event circumstance indicates impairment loss may incurred application goodwill impairment test requires judgment including identification reporting units assignment assets liabilities reporting units determination fair value reporting unit estimate fair value reporting units using income approach based present value estimated future cash flows appropriate guideline public company guideline transaction market approaches accounting guidance allows us review goodwill impairment utilizing either qualitative quantitative analyses option first assess qualitative factors determine whether existence events circumstances leads determination likely fair value reporting unit less carrying amount assessing totality events circumstances determine likely fair value reporting unit greater carrying amount performing twostep quantitative impairment test unnecessary first identify reporting units believe could pass qualitative assessment determine whether impairment testing necessary reporting unit identified qualitative analysis includes 1a review recent fair value calculation identify extent cushion fair value carrying amount determine substantial cushion existed 2a review events circumstances occurred since recent fair value calculation determine events circumstances would affected previous fair value assessment items identified reviewed include macroeconomic conditions industry market changes cost factor changes events affect reporting unit financial performance expectations reporting units performance relative peers compile information make assessment whether likely fair value reporting unit less carrying amount determine likely quantitative analysis required 2015 eight reporting units continuing operations one reporting units water quality goodwill company performed qualitative analysis blücher dormont us drains aerco reporting units result qualitative analyses determined fair values reporting units likely greater carrying amounts acquisition apex november 2015 goodwill determined part purchase price allocation recorded asiapacific reporting unit additional testing required balance 2015 second analysis goodwill impairment involves quantitative twostep process 2015 performed quantitative impairment analysis emea rescom reporting units performed quantitative analysis rescom part exit undifferentiated products sale certain assets related companys fittings brass tubular vinyl tubing product lines sioux chief mfg co inc third quarter fiscal 2015 fourth quarter 2015 performed quantitative analysis emea reporting unit connection annual strategic plan due underperformance budget primarily caused challenging european economic environment 2015prior performing goodwill impairment test evaluate realizability longlived assets primarily consists property equipment definite lived intangible assets events business conditions warrant due operating results meeting budgeted results emea reporting unit performed impairment test longlived assets prior performing goodwill impairment test evaluation impairment longlived assets goodwill based expectations nondiscounted future cash flows compared carrying value longlived asset groups sum expected nondiscounted future cash flows less carrying amount longlived assets would recognize impairment loss carrying amount asset group exceeds fair value cash flow estimates based upon future projected cash flows appropriate include assumed proceeds upon sale asset group end cash flow period believe procedures estimating gross future cash flows including estimated sales proceeds reasonable consistent current market conditions date annual impairment analysis emea reporting unit based evaluation performed longlived asset impairment loss recorded 2015 october 25 2015 testing date approximately 6116 million goodwill balance sheet results 2015 reporting units quantitative impairment analyses summarized table first step impairment test requires comparison fair value reporting units respective carrying value carrying value reporting unit less fair value indication impairment exists second step performed carrying amount reporting unit higher fair value indication impairment may exist second step must performed second step impairment computed comparing implied fair value reporting units goodwill carrying amount goodwill carrying amount reporting units goodwill greater implied fair value goodwill impairment loss must recognized excess charged operations inherent development fair value reporting unit assumptions estimates used income appropriate market approaches discounted cash flow method income approach calculates present value future cash flows projections based assumptions estimates derived review operating results business plans expected growth rates appropriate revenue ebitda multiples discount rates also make certain assumptions future economic conditions market data develop assumptions based historical results including sales growth operating profits working capital levels tax rates market approaches calculate estimated fair values based valuation multiples derived stock prices enterprise values publicly traded companies comparable company guideline public company method based valuation multiples derived actual transactions comparable public private companies guideline transaction method appropriate believe discounted cash flow model sensitive selected discount rate market approaches sensitive valuation multiples used use thirdparty valuation specialists help develop appropriate discount rate valuation multiples use standard valuation practices arrive weighted average cost capital based market guideline public companies higher discount rate lower discounted cash flows believe estimate future cash flows market approach valuations reasonable different assumptions could significantly affect valuations result impairments future expected cash flows discounted present value using weighted average cost capital wacc key assumptions used determine appropriate wacc rates utilized income approach emea rescom reporting units follows • risk free rate based 20year aaarated euro area central government bond emea risk free rate based 20year us treasury bonds rescom assessment dates • market risk premium determined part published historical studies adjusted business risk index reporting unit business risk index derived comparable companies measures estimated stock price volatility • comparable company market interest rate information used determine cost debt appropriate longterm capital structure order weight cost debt cost equity overall wacc • small stock premium based size reporting unit depending reporting unit underlying analyses supporting fair value assessment related comparable companies historical projected results current transaction values outlook business longterm performance included key assumptions appropriate revenue ebitda multiples discount rate longterm growth rate connection 2015 impairment tests utilized discount rates ranging 1011 depending reporting unit growth rates beyond planning periods ranging 07 4 longterm terminal growth rate 23 future increases discount rates due changing interest rates declining economic environment different market multiples could impact assumptions value reporting units goodwill may risk impairment future impairment testing indicated fair value rescom reporting unit exceeded carrying value thereby resulting impairment estimated fair value rescom reporting unit using present value expected future cash flows income approach well guideline public company approach market approach impairment testing indicated carrying value emea reporting unit exceeded fair value estimated fair value emea reporting unit using present value expected future cash flows income approach well guideline public company approach market approach income approach emea reporting unit included impact recent underperformance due continued challenging macroeconomic environment lowered expectations reporting unit going forward second step impairment test carrying value goodwill exceeded implied fair value goodwill resulting pretax impairment charge 1297 million emea reporting unit recorded fourth quarter 2015 remaining goodwill balance december 31 2015 464 million fourth quarter 2014 2013 recognized pretax noncash goodwill impairment charge 129 million 03 million respectively charge 2014 related asiapacific reporting unit 2013 related brae reporting unit within americas segment december 31 2014 goodwill asiapacific reporting unit fully impaired december 31 2013 goodwill brae fully impaired intangible assets trademarks trade names generally recorded connection business acquisition values assigned intangible assets determined independent valuation firm based estimates judgments regarding expectations success life cycle products technology acquired 2015 2014 2013 recognized noncash pretax charges approximately 06 million 13 million 07 million respectively impairment certain indefinitelived intangible assets accounting guidance allows us perform qualitative impairment assessment indefinitelived intangible assets consistent goodwill guidance noted previously 2015 impairment assessment occurred october 25 2015 performed quantitative assessments indefinitelived intangible assets methodology employed relief royalty method subset income approach product liability workers compensation costs retention requirements associated insurance policies generally selfinsured potential product liability claims workers compensation costs associated workplace accidents subject variety potential liabilities connection product liability cases maintain high selfinsured retention limit within product liability general liability coverage believe generally accordance industry practices product liability cases us management establishes product liability accrual includes legal costs associated accrued claims utilizing thirdparty actuarial valuations incorporate historical trend factors specific claims experience derived loss reports provided thirdparty administrators product liability accrual established considering applicable insurance coverage changes nature product liability claims legal costs actual settlement amounts could affect adequacy estimates require changes accrual liability estimate ultimate liability may less reported workers compensation liabilities us recognized claims incurred including claims incurred reported changes status individual case reserves time workers compensation claim filed liability estimated settle claim liability workers compensation claims determined based managements estimates nature severity claims based various state statutes reserve requirements developed trend factors based specific claims experience discounted based riskfree interest rates employ thirdparty actuarial valuations help us estimate workers compensation accrual countries workers compensation costs applicable maintain insurance coverage limited deductible payments liability estimate ultimate liability may less reported subject changes discount rates determine trend factors product liability workers compensation liabilities based consultation outside actuaries maintain excess liability insurance minimize risks related claims excess primary insurance policies material change aforementioned factors could adverse impact operating results legal contingencies defendant numerous legal matters including involving environmental issues product liability discussed detail part item 1 businessproduct liability environmental litigation matters required gaap determine whether estimated loss contingency accrued assessing whether loss deemed probable loss amount reasonably estimated possible estimate reasonably possible loss range loss amount accrued estimate aggregated disclosed estimates potential outcomes contingencies often developed consultation outside counsel assessment based upon available information litigation inherently uncertain actual liability fully resolve litigation cannot predicted assurance accuracy event unfavorable outcome one legal matters ultimate liability may excess amounts currently accrued may material operating results cash flows particular quarterly annual period however based information currently known us management believes ultimate outcome legal contingencies resolved time likely material adverse effect financial condition though outcome could material operating results particular period depending part upon operating results period pension benefits accounted pension plans accordance gaap involves recording liability asset based projected benefit obligation fair value plan assets assumptions made regarding valuation benefit obligations performance plan assets primary assumptions follows • weighted average discount ratethis rate used estimate current value future benefits rate adjusted based movement longterm interest rates • expected longterm rate return assetsthis rate used estimate future growth investments investment earnings expected return based upon combination historical market performance anticipated future returns portfolio reflecting mix equity debt investments indicative plan assets determined assumptions based consultation outside actuaries investment advisors april 28 2014 board directors voted terminate pension plan supplemental employees retirement plan serp terminations follow amendments pension plan serp cease freeze benefit accruals eligible employees plans effective december 31 2011 pension plan terminated effective july 31 2014 june 4 2015 received internal revenue services favorable determination letter respect termination pension plan serp terminated effective may 15 2014 september 2015 settled pension plan serp benefit obligations included following actions • settled liabilities serp accordance section 409a internal revenue code paying lump sums plan participants • transferred pension plan assets benefit obligations annuity provider distributed lump sum payments participants based elections • made cash contributions 432 million fully fund settlement actions cumulative actuarial losses 597 million previously recorded accumulated comprehensive income recognized selling general administrative expenses quarter ended september 27 2015 associated deferred tax asset 230 million previously recorded accumulated comprehensive income netted within longterm deferred tax liabilities reversed quarter ended september 27 2015 refer note 14 notes consolidated financial statements item details income taxes estimate use expected annual effective income tax rates accrue income taxes effective tax rates determined based budgeted earnings taxes including best estimate permanent items affect effective rate year management periodically reviews rates outside tax advisors changes made material variances expectations identified income taxes accounted asset liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax basis operating loss tax credit carry forwards deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized income period includes enactment date valuation allowance provided offset net deferred tax assets based upon available evidence likely deferred tax assets realized consider estimated future taxable income future reversals deferred tax liabilities assessing need valuation allowance new accounting standards november 2015 financial accounting standards board fasb issued accounting standards update asu 201517 income taxes balance sheet classification deferred taxes asu 201517 requires deferred tax liabilities assets classified noncurrent classified statement financial position asu 201517 effective financial statements issued annual periods beginning december 15 2016 interim periods thereafter earlier application permitted entities beginning interim annual reporting period applied either prospectively retrospectively periods presented adoption guidance expected material impact companys financial statements september 2015 fasb issued asu 201516 business combinations simplifying accounting measurementperiod adjustments asu 201516 eliminates requirement retrospectively adjust financial statements measurementperiod adjustments occur periods business combination consummated asu 201516 effective first quarter 2016 public companies calendar year ends applied prospectively early adoption permitted adoption guidance expected material impact companys financial statements july 2015 fasb issued asu 201511 inventory simplifying measurement inventory new standard changes inventory measurement lower cost market lower cost net realizable value standard eliminates requirement consider replacement cost net realizable value less normal profit margin measuring inventory asu 201511 effective first quarter 2017 public companies calendar year ends applied prospectively early adoption permitted adoption guidance expected material impact companys financial statements april 2015 fasb issued asu 201503 interestimputation interest simplifying presentation debt issuance costs asu 201503 debt issuance costs related recognized debt liability presented balance sheet direct deduction debt liability similar presentation debt discounts cost issuing debt longer recorded separate asset except incurred receipt funding associated debt liability asu 201503 effective first quarter 2016 public companies calendar year ends early adoption permitted asu requires retrospective application prior periods presented financial statements adoption guidance expected material impact companys financial statements january 2015 fasb issued asu 201501 income statementextraordinary unusual items simplifying income statement presentation eliminating concept extraordinary items asu 201501 eliminates us gaap concept extraordinary items part initiative reduce complexity accounting standards asu 201501 effective first quarter 2016 public companies calendar year ends early adoption permitted provided guidance applied beginning fiscal year adoption asu may applied prospectively retrospectively prior periods presented adoption guidance expected material impact companys financial statements item 7aitem 7 managements discussion analysis financial condition results operations december 15 1998 company announced plan spinoff industrial oil gas business separately traded public company circor international inc terms spinoff completed october 18 1999 holders watts common stock received one share circor common stock every two shares watts stock held companys results operations periods presented reflect circor discontinued operations may 11 1999 companys board directors voted amend companys bylaws change companys fiscal year end june 30 calendar year result company reported six month transition period ending december 31 1999 results operations twelve months ended december 31 2000 compared twelve months ended december 31 1999 net sales twelve months ended december 31 2000 increased 6444000 13 516100000 compared period 1999 increase net sales attributable following internal growth 7456 15 acquisitions 15030 29 foreign exchange 16042 31 total change 6444 13 increase net sales internal growth attributable increased unit shipments north american european plumbing heating valves north american increases offset recent softness housing market resulting increased interest rates 2000 growth net sales acquired companies due inclusion heatway spacemaker cazzaniga spa biassono italy acquired march 9 1999 excluding acquired revenue cazzaniga impact foreign exchange shipments european plumbing heating valves 31 higher last year decrease sales due foreign exchange principally due devaluation euro depreciated almost 13 us dollar twelve month period ended december 31 2000 watts monitors net sales three geographical segments north america europe asia outlined north america europe asia accounted 776 200 24 net sales respectively twelve months ended december 31 2000 compared 761 213 26 respectively twelve months ended december 31 1999 companys net sales groups twelve months ended december 31 2000 1999 follows 123100 123199 change north america 400384 388049 12335 europe 103085 108579 5494 asia 12631 13028 397 total 516100 509656 6444 increase north america primarily due watts heatway spacemaker acquisitions lesser extent increased unit sales decrease europe due impact euros devaluation us dollar substantially offset increased unit sales inclusion cazzaniga decrease asia primarily due reduced demand north american export market gross profit twelve months ended december 31 2000 decreased 1414000 08 185304000 compared period 1999 decreased percentage net sales 366 percent 359 percent percentage reduction attributable price competition certain markets company serves additional production costs associated new product introductions europe partially offset inclusion acquired companies currently operating higher gross margins rest company selling general administrative expenses twelve months decreased 3666000 28 125317000 compared period 1999 decrease attributable decreased corporate headquarters expenses resulting circor spinoff euros devaluation us dollar reduced variable selling expenses partially offset inclusion selling general administrative expenses acquired companies selling general administrative expenses twelve months decreased percentage sales 253 twelve months ended december 31 1999 243 twelve months ended december 31 2000 decreased percentage primarily due decreased corporate headquarters expenses resulting circor spinoff operating income twelve months ended december 31 2000 increased 3712000 66 59987000 increased percentage sales 116 110 compared period 1999 due increased net sales decreased selling general administrative expenses companys operating income segment twelve months ended december 31 2000 1999 follows 123100 123199 change north america 55661 56439 778 europe 13225 12560 665 asia 882 1519 637 corporate 9781 14243 4462 total 59987 56275 3712 decrease north america due decreased unit prices certain markets increase europe primarily due increased net sales cazzaniga acquisition substantially offset euros devaluation us dollar decrease asia due decreased net sales decrease corporate due reduced headquarter expenses attributable circor spinoff interest expense increased 1964000 9897000 twelve months ended december 31 2000 compared period 1999 primarily due increased effective interest rates companys effective tax rate continuing operations increased 359 percent 367 percent twelve months ended december 31 2000 compared period 1999 increase primarily attributable revised tax structure required execute circor spinoff income continuing operations twelve months ended december 31 2000 increased 474000 15 31171000 117 per common share compared 115 per common share twelve months ended december 31 1999 diluted basis impact foreign exchange primarily due devaluation euro us dollar decreased income approximately 1331000 05 per common share diluted basis period ended december 31 2000 twelve months ended december 31 2000 discontinued operations reported net loss 7170000 027 per share diluted basis loss results charge recorded fiscal year representing companys current estimate tax impact cost bring james jones litigation resolution additional details james jones litigation provided part item 1 product liability environmental litigation matters note 15 notes consolidated financial statements twelve months ended december 31 1999 discontinued operations reported net loss 3143000 012 per share diluted basis results twelve months ended december 31 1999 negatively impacted tax charges 11599000 spinoff related costs including professional fees facility relocation costs income tax costs associated reorganizing companys legal entity structure anticipation spinoff well legal fees associated james jones litigation excluding charges discontinued operations would net income 8456000 032 per share twelve months ended december 31 1999 additional details spinoff transaction provided note 3 notes consolidated financial statements results operations six months ended december 31 1999 compared six months ended december 31 1998 net sales increased 31869000 139 261019000 increase net sales attributable following internal growth 20234 88 acquisitions 17061 74 foreign exchange 5426 23 total change 31869 139 increase net sales internal growth primarily attributable increased unit shipments north american segment growth net sales acquired companies due inclusion net sales cazzaniga spa biassono italy acquired march 9 1999 foreign exchange impact reflects adverse affects euros devaluation us dollar period excluding cazzaniga shipments european plumbing heating market 92 higher last year watts monitors net sales three geographical segments north america europe asia outlined north america europe asia accounted 739 226 35 net sales respectively six months ended december 31 1999 compared 772 190 38 respectively six months ended december 31 1998 companys net sales groups six months ended december 31 1999 1998 follows 123199 123198 change north america 192975 176918 16057 europe 58934 43598 15336 asia 9110 8634 476 total 261019 229150 31869 increase north america due increased unit sales increase europe due cazzaniga acquisition increased unit sales partially offset devaluation euro us dollar gross profit increased 11676000 140 95166000 remained constant percentage net sales 364 percent increase attributable increased net sales period ended december 31 1999 company recorded restructuring charge 1460000 taxes charge comprised severance costs 1299000 contract termination costs 134000 exit costs 27000 company consolidated certain italian manufacturing warehouse facilities cazzaniga facility biassono italy project included termination 29 employees completed fiscal 2000 total program costs differ materially original estimate selling general administrative expenses increased 5779000 99 64148000 increase primarily attributable inclusion selling general administrative expenses cazzaniga increased variable selling expenses primarily commissions freight costs operating income six months ended december 31 1999 increased 4437000 177 29558000 due increased gross profit without restructuring charge operating income would increased 235 increased percentage sales 110 119 companys operating income segment six months ended december 31 1999 1998 follows 123199 123198 change north america 27793 25684 2109 europe 7252 5682 1570 asia 731 822 91 corporate 6218 7067 849 total 29558 25121 4437 increase north america due increased net sales increase europe primarily due increased net sales cazzaniga acquisition partially offset restructuring charge interest expense increased 1783000 six months ended december 31 1999 primarily due increased levels debt associated acquisition cazzaniga companys effective tax rate continuing operations increased 321 352 increase attributable acquired companies operating higher tax rate jurisdictions rest company tax planning strategies favorably impacting fiscal 1998 revised tax structure required effect distribution net income continuing operations six months ended december 31 1999 increased 1243000 82 16468000 61 per common share compared 56 per common share six months ended december 31 1998 diluted basis net income continuing operations exclusive restructuring charge would increased 2104000 17329000 64 per common share diluted basis impact foreign exchange primarily due devaluation euro us dollar decreased net income 02 per common share diluted basis period ended december 31 1999 six months ended december 31 1999 discontinued operations generated net loss 1226000 005 per share compared net income 8419000 031 per share six months ended december 31 1998 results six months ended december 31 1999 negatively impacted tax charge 2433000 spinoff related costs including professional fees facility relocation costs income tax costs associated reorganizing companys legal entity structure anticipation spinoff excluding charge discontinued operations would net income 1207000 005 per share six months ended december 31 1999 net sales discontinued operations three months ended september 30 1999 76957000 decrease 3699000 46 comparable period 1998 decrease net sales primarily attributable lower demand oil gas valve products declining prices resulting increased competition reduced manufacturing levels resulting lower absorption fixed manufacturing costs associated integration acquired companies negatively impacted operating profits six months ended december 31 1999 additional details spinoff transaction provided note 3 notes consolidated financial statements results operations twelve months ended june 1999 compared twelve months ended june 1998 net sales twelve months ended june 30 1999 increased 33134000 75 477869000 444735000 fiscal year ended june 30 1998 increase net sales attributable following internal growth 26208 59 acquisitions 10095 23 divestitures 3386 08 foreign exchange 217 01 total change 33134 75 increase net sales internal growth primarily attributable increased unit shipments north american segment growth net sales due acquired companies primarily attributable inclusion cazzaniga spa biassono italy acquired march 1999 excluding cazzaniga shipments european segment consistent prior year company monitors net sales three geographical segments north america europe asia outlined north america europe asia accounted 779 194 27 net sales respectively twelve months ended june 30 1999 compared 782 187 31 respectively twelve months ended june 30 1998 companys net sales groups fiscal 1999 1998 follows 63099 63098 change north america 372220 348004 24216 europe 92631 82837 9794 asia 13018 13894 876 total 477869 444735 33134 increase net sales north america primarily due increased unit shipments increase europe due primarily acquisition cazzaniga companys gross profit increased 12541000 77 175124000 increased gross profit primarily attributable increased sales gross margin remained consistent 366 fiscal 1999 1998 selling general administrative expenses increased 7774000 67 123286000 increase attributable inclusion expenses cazzaniga increased variable selling expenses including commissions freight costs operating income continuing operations increased 4767000 101 47071000 51838000 primarily due increased gross profit companys operating income segment twelve months ended june 30 1999 1998 follows 63099 63098 change north america 54094 51456 2638 europe 11228 8258 2970 asia 1608 1984 376 corporate 15092 14627 465 total 51838 47071 4767 increase north america due increased net sales increased gross profit increase europe primarily due inclusion cazzaniga expense continuing operations increased 1256000 1688000 increase attributable companys share losses related equity investment jameco international llc increased minority interest expense resulting improved performance companys joint venture china also contributed increase expense income continuing operations increased 1331000 47 29454000 increase primarily attributable income generated acquired companies increased gross profit existing companies companys consolidated results operations impacted effect changes foreign exchange rates international subsidiaries operating results changes foreign exchange rates immaterial impact net income fiscal 1999 net income discontinued operations 6502000 024 per share fiscal 1999 compared 25246000 092 per share fiscal 1998 diluted basis fiscal 1999 results negatively impacted tax charge 6166000 spinoff related costs including professional fees facility relocation costs income tax costs associated reorganizing companys legal entity structure anticipation spinoff company also recorded charge discontinued operations 5000000 3000000 net tax legal expenses associated litigation involving james jones company james jones company subsidiary company municipal water works division september 1996 sold tyco international ltd see part item 1 product liability environmental litigation matters excluding charges discontinued operations would net income 15668000 058 per share fiscal 1999 net sales discontinued operations fiscal 1999 321711000 increase 33822000 117 fiscal 1998 increase net sales primarily attributable inclusion net sales acquired companies excluding impact acquisitions net sales domestic oil gas valves declined 298 net sales international oil gas valves declined 209 fiscal 1999 declining prices resulting increased competition reduced manufacturing levels resulting lower absorption fixed manufacturing costs negatively impacted operating profits fiscal 1999 additional details spinoff transaction provided notes consolidated financial statements note 3 liquidity capital resources twelve month period ended december 31 2000 company generated 57754000 cash flow continuing operations increase 15554000 369 comparable prior year period companys continued emphasis asset management increased free cash flow cash provided continuing operations less dividends capital expenditures twelve months ended december 31 2000 36409000 versus 8616000 comparable prior year period company also increased earnings interest taxes depreciation amortization ebitda continuing operations 70 78353000 twelve months ended december 31 2000 compared 73195000 twelve months ended december 31 1999 improvement cash flow enabled company reduce long term debt 21430000 completing funding acquisitions heatway spacemaker funding purchase 14238000 capital equipment paying cash dividends common shareholders capital expenditures primarily manufacturing machinery equipment part companys commitment continuously improve manufacturing capabilities companys capital expenditure budget twelve months ended december 31 2001 18100000 company maintains revolving line credit facility 100000000 expires march 2003 support companys acquisition program working capital requirements acquired companies general corporate purposes december 31 2000 company 5000000 outstanding line credit compliance banking covenants related facility december 31 2000 company maintained syndicated credit facility group european banks amount 23600000 euros credit facility several tranches provide credit company period september 2004 purpose credit facility fund acquisitions europe support working capital requirements acquired companies general corporate purposes december 31 2000 19000000 euros 17837000 borrowed line credit january 4 2001 company increased credit facility 40000000 euros increase utilized fund acquisition dumser metallbau gmbh co kg january 5 2001 dumser located landau germany european market leader manufacture distribution brass steel stainless steel manifolds used prime distribution device hydronic heating systems working capital december 31 2000 137142000 compared 141740000 december 31 1999 ratio current assets current liabilities 22 1 december 31 2000 23 1 december 31 1999 cash equivalents 15235000 december 31 2000 compared 13016000 december 31 1999 debt percentage total capital employed short term long term debt percentage sum short term long term debt plus equity 314 december 30 2000 compared 371 december 31 1999 company anticipates available funds provided current operations sufficient meet current operating requirements anticipated capital expenditures least next 24 months company time involved product liability environmental proceedings litigation proceedings incurs costs ongoing basis related matters exception charge related james jones litigation company incurred material expenditures fiscal 2000 connection matters see part item 1 product liability environmental litigation matters conversion euro january 1 1999 11 15 member countries european union adopted euro common legal currency established fixed conversion rates existing sovereign currencies euro trades currency exchanges available noncash transactions euro effects company manufacturing distribution facilities several member countries trades extensively across europe longterm competitive implications conversion currently assessed company however company experienced reduction risks associated foreign exchange time company anticipating significant costs incurred due introduction conversion euro company process implementing systems receive make payments euros company anticipates systems place january 1 2002 responsibility financial statements company responsible objectivity integrity accompanying consolidated financial statements prepared conformity accounting principles generally accepted united states financial statements necessity include companys estimates judgments relating matters concluded yearend financial information contained elsewhere annual report form 10k consistent included financial statements company maintains system internal accounting controls although inherent limitations effectiveness system accounting controls company believes system provides reasonable absolute assurance assets safeguarded unauthorized use disposition accounting records sufficiently reliable permit preparation financial statements conform material respects accounting principles generally accepted united states kpmg llp independent auditors engaged render independent opinion regarding fair presentation financial statements companys financial condition operating results report appears page 27 examination made accordance auditing standards generally accepted united states included review system internal accounting controls extent considered necessary determine audit procedures required support opinion audit committee board directors composed solely independent directors defined new york stock exchange committee meets periodically privately independent auditors financial officers company deems necessary review quality financial reporting company internal accounting controls committee also reviews compliance companys relationship independent auditors addition committee responsible recommending appointment companys independent auditors report form 10k may include statements historical facts considered forward looking within meaning private securities litigation reform act 1995 forward looking statements reflect watts industries current views future events financial performance investors rely forward looking statements subject variety risks uncertainty factors could cause actual results differ materially watts industries expectations watts industries expressly undertake duty update forward looking statements factors include limited following loss market share competition introduction competing products companies pressure prices competitors suppliers andor customers regulatory obstacles lack acceptance new products changes plumbing heating markets changes global demand companys products changes distribution companys products interest rates foreign exchange fluctuations cyclicality industries company markets certain products general economic factors markets companys products sold manufactured marketed changes status current litigations including james jones case factors discussed companys report filed securities exchange commission certain factors affecting future results report includes forward looking statements reflect watts industries current views future events financial performance forward looking statements relate strictly historical current facts may identified use words like plan believe expect anticipate estimate words similar meaning investors rely forward looking statements subject variety risks uncertainties factors could cause actual results differ materially expectations important factors could cause actual results differ materially projected forward looking statements follows economic cycles particularly reduced levels housing starts remodeling adverse affect business revenues businesses customers particularly plumbing heating wholesalers home improvement retailers cyclical therefore level companys business activity cyclical fluctuating economic cycles particular housing starts remodeling levels housing starts remodeling turn heavily influenced mortgage interest rates consumer debt levels changes disposable income employment growth consumer confidence short term basis weather conditions assurance downturn factors affecting housing starts remodeling occur housing remodeling starts materially reduced likely reduction would material adverse effect company due reduced revenue economic political risks associated international sales operations could adversely affect business since sell products worldwide business subject risks associated business internationally sales outside north america percentage total sales 22 2000 accordingly future results could harmed variety factors including changes foreign currency exchange rates changes specific countrys regions political economic conditions particularly emerging markets trade protection measures import export licensing requirements potentially negative consequences changes tax laws difficulty staffing managing widespread operations differing labor regulations differing protection intellectual property unexpected changes regulatory requirements reductions supply raw materials increases prices raw materials could adversely affect operating results require substantial amounts raw materials bronze brass cast iron substantially raw materials require purchased outside sources availability prices raw materials may subject curtailment change due among things new laws regulations suppliers allocations purchasers interruptions production suppliers changes exchange rates worldwide price levels change supply price raw materials could adversely affect operating results fluctuations foreign exchange rates could materially affect reported results exchange rates united states dollar results reported local currency countries provide many services may fluctuate quarter since report interim annual results united states dollars subject risk currency fluctuations dollar appreciates applicable local currency reporting period actual earnings generated services country diminished conversion exposed fluctuations foreign currencies significant portion revenue certain costs assets liabilities denominated currencies us dollars approximately 22 revenue 2000 sales outside north america twelve months ended december 31 2000 depreciation euro us dollar adverse impact revenue 15958000 earnings per share 05 share revenue nondollar denominated currencies may continue increase future periods offer assurance exchange rate fluctuations material adverse effect results operations financial condition face intense competition encounter intense competition areas business additionally customers products attempting reduce number vendors purchase order reduce size diversity inventory remain competitive need invest continuously manufacturing marketing customer service support distribution networks anticipate may adjust prices products stay competitive cannot assure sufficient resources continue make investments maintain competitive position environmental compliance costs liabilities could adversely affect financial condition operations properties subject increasingly stringent laws regulations relating environmental protection including laws regulations governing air emissions water discharges waste management workplace safety laws regulations impose substantial fines sanctions violations require installation costly pollution control equipment operational changes limit pollution emissions andor decrease likelihood accidental hazardous substance releases must conform operations properties laws adapt regulatory requirements countries requirements change experienced expect continue experience operating costs comply environmental laws regulations addition new laws regulations stricter enforcement existing laws regulations discovery previously unknown contamination imposition new clean requirements could require us incur costs become basis new increased liabilities could material adverse effect business financial condition results operations third parties may infringe intellectual property may expend significant resources enforcing rights suffer competitive injury success depends part proprietary technology rely combination patents copyrights trademarks trade secrets confidentiality provisions licensing arrangements establish protect proprietary rights fail successfully enforce intellectual property rights competitive position could suffer could harm operating results may required spend significant resources monitor police intellectual property rights cannot continue operating manufacturing facilities current higher levels results operations could adversely affected operate number manufacturing facilities production products equipment management systems necessary operations may break perform poorly fail resulting fluctuations manufacturing efficiencies fluctuations may affect ability deliver products customers timely basis could material adverse effect business financial condition results operations experience delays introducing new products existing new products achieve maintain market acceptance revenues may decrease industry characterized intense competition changes enduser requirements technically complex products evolving product offerings introductions believe future success depend part ability anticipate adapt factors offer timely basis products meet customer demands failure develop new innovative products custom design existing products could result loss existing customers competitors inability attract new business either may adversely affect revenues implementation acquisition strategy may successful could affect ability increase revenues reduce profitability one strategies increase revenues expand markets acquisitions provide us complementary water related products expect spend significant time effort expanding existing businesses identifying completing integrating acquisitions expect face competition acquisition candidates may limit number acquisition opportunities available us may result higher acquisition prices cannot certain able identify acquire profitably manage additional companies successfully integrate additional companies without substantial costs delays problems also assurance companies acquired future achieve revenues profitability cash flows justify investment addition acquisitions may involve number special risks including adverse shortterm effects reported operating results diversion managements attention loss key personnel acquired companies unanticipated management operational problems legal liabilities special risks could material adverse effect business financial condition results operations fail manufacture deliver high quality products may lose customers product quality performance priority customers products used control temperature pressure water well water quality safety applications require products meet stringent performance safety standards fail maintain enforce quality control testing procedures products meet stringent performance safety standards substandard products would seriously harm reputation resulting loss current customers competitors damage ability attract new customers could material adverse effect business financial condition results operations face risks product liability lawsuits may adversely affect business like manufacturers distributors products designed control regulate water face inherent risk exposure product liability claims event use products results personal injury property damage business interruption customers may subjected various product liability claims including among others products include inadequate improper instructions use installation inadequate warnings concerning effects failure products although maintain strict quality controls procedures including testing raw materials safety testing selected finished products cannot certain products completely free defect addition certain cases rely thirdparty manufacturers products components products although liability insurance coverage cannot certain insurance coverage continue available us reasonable cost available adequate cover liabilities one particular products liability case company defendant los angeles department water power ex rel nora armenta v james jones company et al company recorded charge 71 million tax quarter ended december 31 2000 managements estimate tax cost bring case resolution charge represents tax impact companys current estimate based available information litigation inherently uncertain actual liability company fully resolve litigation could materially higher estimate see item 1 part product liability environmental litigation matters one shareholders exercise substantial influence company february 15 2001 timothy p horne chairman chief executive beneficially owned 352 outstanding shares common stock 812 total outstanding voting power result mr horne effectively controls matters affecting us long mr horne controls shares representing least majority total voting power outstanding stock mr horne able unilaterally determine outcome stockholder votes stockholders able affect outcome stockholder vote mr horne sell significant amount common stock public market trading price common stock could decline see part iii item 12 security ownership certain beneficial owners management foregoing list sets forth many factors could impact upon ability achieve results described forward looking statements investors cautioned place undue reliance statements speak date made investors also understand possible predict identify factors list considered complete statement potential risks uncertainties investors also realize underlying assumptions prove inaccurate unknown risks uncertainties materialize actual results could vary materially projections undertake obligation update forward looking statements result future events developments new accounting pronouncements june 1998 statement financial accounting standards sfas 133 accounting derivative instruments hedging activities issued company adopted sfas 133 amended sfas 137 sfas 138 january 1 2001 adoption sfas 133 material impact companys financial position overall trends results operations resulted significant changes financial risk management practices however adoption sfas 133 could result pronounced quarterly fluctuations income expense december 1999 securities exchange commission issued staff accounting bulletin sab 101 revenue recognition amendment june 2000 delayed effective date fourth quarter 2000 adoption sab 101 material impact consolidated financial statements may 2000 financial accounting standards boards emerging issues task force eitf reached consensus issue 0014 accounting certain sales incentives issue addresses recognition measurement income statement classification various types sales incentives including discounts coupons rebates free products november 2000 eitf revised transition date company must adopt eitf 0014 later second quarter 2001 company adopt consensus second quarter 2001 expected material impact companys financial statements july september 2000 eitf reached consensus issue 0010 accounting shipping handling fees costs issue addresses income statement classification shipping handling fees costs company adopted consensus fourth quarter 2000 adoption eitf issue 0010 material impact consolidated financial statements item 7aitem 7 managements discussion analysis financial condition results operations overview leading supplier products use water quality water safety water flow control water conservation markets north america europe emerging presence china 130 years designed manufactured products promote comfort safety people quality conservation water used commercial residential applications earn revenue income almost exclusively sale products principal product lines include •water quality products including backflow preventers check valves preventing reverse flow within water lines fire protection systems pointofuse water filtration reverse osmosis systems commercial residential applications •a wide range water pressure regulators commercial residential applications •water supply drainage products commercial residential applications •temperature pressure relief valves water heaters boilers associated systems •thermostatic mixing valves tempering water commercial residential applications •systems underfloor radiant applications hydraulic pump groups gas boiler manufacturers renewable energy applications including solar heat pump control packages •flexible stainless steel connectors natural liquid propane gas commercial food service residential applications •large diameter butterfly valves use chinas water infrastructure business reported three geographic segments north america europe china distribute products three primary distribution channels wholesale doityourself diy original equipment manufacturers oems interest rates indirect effect demand products due effect rates number new residential commercial construction starts remodeling projects three activities impact levels sales earnings additional factor effect sales fluctuation foreign currencies portion sales certain portions costs assets liabilities denominated currencies us dollar believe factors relating future growth include ability continue make selective acquisitions core markets well new complementary markets regulatory requirements relating quality conservation water increased demand clean water continued enforcement plumbing building codes healthy economic environment completed 31 acquisitions since divesting industrial oil gas business 1999 acquisition strategy focuses businesses manufacture preferred brand name products address themes water quality water conservation water safety water flow control related complementary markets target businesses provide us one following entry new markets increase shelf space existing customers new improved technology expansion breadth water quality water conservation water safety water flow control products residential commercial markets 2007 2006 sales acquisitions contributed approximately 39 209 total sales growth prior year products representing majority sales subject regulatory standards code enforcement typically require products meet stringent performance criteria together commissioned manufacturers representatives consistently advocated development enforcement plumbing codes focused maintaining stringent quality control testing procedures manufacturing facilities order manufacture products compliance code requirements take advantage resulting demand compliant products believe product development product testing capability investment plant equipment needed manufacture products compliance code requirements represent barrier entry competitors believe increasing demand among consumers products ensure water quality creates growth opportunities products require substantial amounts raw materials produce products including bronze brass cast iron steel plastic substantially raw materials require purchased outside sources experienced increases costs certain raw materials particularly copper bronze brass copperbased alloys spot price copper increased approximately 41 december 31 2005 december 31 2007 risk face ability deal effectively increases raw material costs manage risk monitoring related market prices working suppliers achieve maximum level stability costs related pricing seeking alternative supply sources necessary implementing cost reduction programs passing increases costs customers additionally time may use commodity futures contracts limited basis manage risk able predict whether long cost increases continue cost increases continue able reduce eliminate effect cost increases reducing production costs implementing price increases profit margins could decrease another risk face areas business competition consider brand preference engineering specifications code requirements price technological expertise delivery times breadth product offerings primary competitive factors mentioned previously believe product development product testing capability investment plant equipment needed manufacture products compliance code requirements represent barrier entry competitors committed maintaining capital equipment level consistent current technologies thus spent approximately 378 million 2007 447 million 2006 including approximately 180 million related purchase subsequent saleleaseback building italy recent developments february 5 2008 declared quarterly dividend eleven cents 011 per share outstanding share class common stock class b common stock increase 001 per share compared dividend paid comparable period last year december 3 2007 entered equity transfer agreement joint venture partners purchase remaining 40 outstanding ownership interest tianjin tanggu watts valve company limited twt already purchase price approximately 52 million payable certain closing conditions met including approval agreement local chinese authorities expect occur end second quarter 2008 expect record approximately 37 million goodwill acquisition part agreement joint venture partners obligated reimburse approximately 20 million twt closing relocation costs including lost land use rights costs previously guaranteed joint venture partners part original joint venture contract twt lost future use land use rights local chinese government decreed land twts facility located would taken eminent domain since 2006 twt accelerated amortization land use rights assets coincide expected move twt incurred incur relocation costs move operations twt previously recorded receivable reimbursement amount collectibility amount original joint venture contract certain 20 million reimbursement recorded agreement finalized equity infusion joint venture partners cost move twts operations included restructuring program announced october 2007 november 9 2007 acquired assets business topway global inc topway located brea california approximately 184 million 03 million transaction costs remain paid topway manufactures wide variety water softeners point entry filter units point use drinking water systems residential commercial industrial applications november 9 2007 announced board directors authorized repurchase 30 million shares class common stock february 22 2008 repurchased 22 million shares stock total cost 632 million results operations year ended december 31 2007 compared year ended december 31 2006 net sales business reported three geographic segments north america europe china net sales segments years ended december 31 2007 2006 follows increase net sales attributable following organic growth net sales north america primarily due increased unit selling prices increased unit sales certain product lines wholesale market sales wholesale market 2007 excluding sales acquisition calflex topway grew 77 compared 2006 primarily due increased sales backflow products sales north american diy market 2007 decreased 44 compared 2006 primarily due discontinuing certain lower margin product lines partially offset price increases new product rollouts acquired growth net sales north america due inclusion net sales calflex acquired june 2 2006 topway acquired november 9 2007 organic sales growth europe broadbased especially eastern europe oem market partially offset weak german market sales wholesale oem markets 2007 excluding sales acquisitions ats kimsafe teknigas grew 31 44 respectively compared 2006 acquired growth net sales europe due inclusion net sales ats acquired may 19 2006 kimsafe acquired june 7 2006 teknigas acquired august 14 2006 organic sales growth china primarily due increased export sales europe increased sales domestic chinese markets elimination onemonth reporting lag two chinese entities acquired growth net sales china due inclusion net sales changsha acquired april 26 2006 increases net sales due foreign exchange north america europe china primarily due appreciation canadian dollar euro yuan respectively us dollar cannot predict whether currencies continue appreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact net sales gross profit gross profit gross profit percent net sales gross margin 2007 2006 follows gross margin decreased 2007 compared 2006 primarily due increased material costs writeoff inventory related discontinuance certain product lines increase workers compensation reserve primarily due change estimate north american margin 2007 affected charge related discontinuance certain product lines cost increases copperbased alloys stainless steel products exceeded realized sales price increases year european margin remained relatively flat primarily due higher margins contributed price increases offset increased material costs shift sales lower margin products primarily oem market china segments gross margin decreased primarily due higher material costs underutilized capacity certain locations primarily due relocation joint venture facility charge related discontinuance certain product lines value added tax increases shift product mix 2007 undertook review certain product lines overall manufacturing capacity based review initiated global restructuring program approved board directors october 30 2007 also discontinued certain product lines program expected include shutdown five manufacturing facilities rightsizing sixth facility including relocation joint venture facility china previously disclosed restructuring program charges certain product line discontinuances include pretax charges totaling approximately 129 million charges primarily severance 43 million relocation costs 28 million asset writedowns expected net losses asset disposals 20 million result elimination approximately 330 positions worldwide pretax charge 2007 43 million relates primarily product line discontinuances 38 million total net aftertax charges program expected approximately 94 million 44 million noncash costs incurred early 2010 expect spend approximately 134 million capital expenditures consolidate operations fund approximately 80 million amount proceeds sale buildings assets disposed part restructuring program annual cash savings net tax estimated 45 million fully realized second half 2009 following table presents total estimated pretax charges incurred global restructuring program product line discontinuances initiated 2007 reportable segments selling general administrative expenses selling general administrative expenses sga expenses 2007 increased 325 million 108 compared 2006 increase sga expenses attributable following organic increase sga expenses primarily due increased product liability costs increased stockbased compensation costs increased variable selling expenses due increased sales volumes partially offset decreased incentive compensation costs increase sga expenses foreign exchange primarily due appreciation euro canadian dollar yuan us dollar increase sga expenses acquisitions due inclusion changsha ats calflex ningbo kimsafe teknigas topway total sga expenses percentage sales 241 2007 compared 244 2006 restructuring income charges 2007 recorded 32 million asset writedowns accelerated depreciation severance north america china 2006 recorded income 57 million primarily due gain approximately 82 million related sale two buildings italy partially offset charge 25 million primarily severance costs related european restructuring programs operating income operating income geographic segment 2007 2006 follows change operating income attributable following decrease organic operating income north america primarily due increased material costs partially offset unit price increases net increase workers compensation reserve primarily due change estimate increased product liability costs partially offset decreased incentive compensation costs 2007 recorded charge 31 million related discontinuance certain product lines 04 million primarily severance costs related global restructuring program acquired decrease primarily due amortization certain costs associated acquisition topway europes organic growth operating income due ability leverage sga expenses increased selling prices partially offset increased material costs shift sales lower margin products primarily oem market 2007 record costs associated restructuring compared gain 60 million period 2006 recorded gain 82 million building sales italy partially offset 22 million primarily severance costs acquired growth europe due inclusion operating income ats kimsafe teknigas decrease organic operating income china primarily attributable decreased production levels wholly owned manufacturing plants acquired growth china due inclusion operating income changsha ningbo 2007 recorded 33 million asset writedowns accelerated depreciation severance related global restructuring program 07 million related discontinuance certain product lines elimination onemonth reporting lag two chinese entities material impact chinas operating income decrease organic operating income corporate primarily attributable increased stockbased compensation costs legal costs partially offset decreased incentive compensation costs net increase operating income foreign exchange primarily due appreciation euro canadian dollar yuan us dollar cannot predict whether currencies continue appreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact operating income interest income interest income increased 95 million 1900 2007 compared 2006 primarily due investment net proceeds approximately 2190 million public offering 575 million shares class common stock november 2006 interest expense interest expense increased 48 million 217 2007 compared 2006 primarily due april 27 2006 issuance 2250 million 585 senior notes due 2016 increase average variable rates charged revolving credit facility partially offset decreased debt levels acquisitions effective july 1 2005 entered interest rate swap notional amount €250 million outstanding revolving credit facility swapped adjustable rate three month euribor plus 06 fixed rate 302 recorded reduction interest expense approximately 07 million recognize fair value swap 2006 swap terminated october 3 2006 income expense income expense increased 32 million 3556 2007 compared 2006 primarily due currency movements losses forward currency contracts foreign currency losses recorded europe canada china 2007 whereas foreign currency gains recorded 2006 minority interest minority interest increased 10 million 556 2007 compared 2006 primarily due credit recorded 40 liability joint venture partners share recording 24 million twt restructuring costs income taxes effective tax rate continuing operations decreased 318 2007 336 2006 decrease primarily due onetime benefit associated refund withholding taxes italy 2006 recording higher taxes sale two buildings decrease partially offset recording 32 million valuation allowance deferred tax assets 60 owned chinese joint venture income continuing operations income continuing operations 2007 increased 05 million 06 776 million 199 per common share 771 million 229 per common share 2006 case diluted basis income continuing operations 2007 includes tax refund 19 million 005 per common share income continuing operations 2007 2006 included costs net tax restructuring plan product line discontinuances 51 million 013 per common share included income net tax 15 million 004 per share respectively 2006 gains sales buildings italy resulted aftertax gain 51 million 015 per share appreciation euro chinese yuan canadian dollar us dollar resulted positive impact income continuing operations 009 per common share 2007 compared comparable period last year cannot predict whether euro canadian dollar yuan appreciate depreciate us dollar future periods whether future foreign exchange rate fluctuations positive negative impact net income additionally november 2006 company completed public offering 575 million shares class common stock received net proceeds approximately 2190 million interest earned net proceeds provided approximately 71 million aftertax income 2007 issuance additional 575 million shares dilutive impact earnings per share 011 per share 2007 considering interest income net proceeds loss discontinued operations loss discontinued operations 2007 2006 02 million 001 per common share 34 million 010 per common share diluted basis comparable period losses 2007 2006 primarily attributable increased deductible costs 2006 legal fees associated james jones litigation described part item 1 businessproduct liability environmental litigation matters 2007 loss partially offset reserve adjustments year ended december 31 2006 compared year ended december 31 2005 net sales business reported three geographic segments north america europe china net sales segments years ended december 31 2006 2005 follows increase net sales attributable following organic growth net sales north america due increased price unit sales certain product lines wholesale diy markets wholesale market 2006 excluding sales acquisitions alamo savard calflex flexflow core dormont grew 97 compared 2005 primarily due increased sales water pressure regulators relief valves backflow preventer units well plumbing underfloor radiant heating product lines sales north american diy market 2006 increased 54 compared 2005 primarily due increased sales fittings supply lines plumbing underfloor radiant heating product lines partially offset fewer new retail product introductions 2006 2005 acquired growth net sales north america due inclusion net sales alamo acquired june 20 2005 savard acquired july 8 2005 flexflow acquired november 4 2005 core acquired december 2 2005 dormont acquired december 28 2005 calflex acquired june 2 2006 organic sales growth europe broadbased markets channels exhibiting improvement sales wholesale oem markets 2006 excluding sales acquisitions electro controls microflex ats kimsafe teknigas grew 185 164 respectively compared 2005 acquired growth net sales europe due inclusion net sales electro controls acquired may 11 2005 microflex acquired july 5 2005 ats acquired may 19 2006 kimsafe acquired june 7 2006 teknigas acquired august 14 2006 organic sales growth china due increased sales domestic export markets partially offset decreased sales due approximately four week work stoppage jointventure facility tianjin additionally yuan strengthened us dollar acquired growth net sales china due inclusion net sales changsha acquired april 26 2006 ningbo acquired june 2 2006 increases net sales due foreign exchange north america europe china primarily due appreciation canadian dollar euro yuan respectively us dollar gross profit gross profit gross margin 2006 2005 follows gross margin 2006 decreased slightly 2005 raw materials cost increases predominantly offset increased sales prices exception north american retail market certain markets europe particular price increases difficult pass along customers germany margins also negatively affected sales lower margin products sold core european acquisition costs north american gross margin percentage decreases partially offset favorable sales mix toward higher margin wholesale sales margins also negatively affected 2006 increased charges related manufacturing restructuring efforts recorded 47 million cost sales primarily severance costs 2006 compared 18 million 2005 accelerated depreciation costs selling general administrative expenses selling general administrative expenses sga expenses 2006 increased 708 million 308 compared 2005 increase sga expenses attributable following organic increase sga expenses primarily due increased variable selling expenses due increased sales volumes increased insurance costs increased compensation costs corporate administration costs including costs incurred compliance fas 123r partially offset lower costs complying section 404 sarbanesoxley act 2002 sox lower earnout costs related prior acquisition increase sga expenses foreign exchange primarily due appreciation euro canadian dollar yuan us dollar increase sga expenses acquisitions due inclusion electro controls alamo microflex savard flexflow core dormont changsha ats calflex ningbo kimsafe teknigas restructuring income charges restructuring income charges 2006 decreased 64 million primarily due gain approximately 82 million related sale two buildings italy partially offset charge 25 million primarily severance costs related european restructuring plans 2005 recorded 07 million primarily severance costs related european restructuring plans operating income operating income geographic segment 2006 2005 follows change operating income attributable following organic growth north america primarily due increased gross profit price increases favorable sales mix towards wholesale market benefits resulting completed manufacturing restructuring projects product outsourcing partially offset increased net sga expense inventory writedowns 2006 record costs associated manufacturing restructuring plan compared costs 10 million 2005 acquired growth due inclusion operating income alamo savard flexflow core dormont calflex organic growth europe primarily due increased gross profit price unit increases wholesale oem markets benefits resulting completed manufacturing restructuring projects partially offset increased net sga expense 2006 recorded net gain 60 million associated manufacturing restructuring plan compared charge 15 million 2005 recorded gain 82 million building sales italy partially offset 22 million primarily severance costs acquired growth europe due inclusion operating income electro controls microflex ats kimsafe teknigas increase organic growth china attributable sales volume increase favorable material purchases improved manufacturing efficiencies associated wholly owned manufacturing plants partially offset increased net sga expense acquired growth china due inclusion operating income changsha ningbo 2006 recorded 51 million severance accelerated depreciation costs associated planned move chinese joint venture facility record costs associated manufacturing restructuring plan 2005 decrease organic operating income corporate primarily attributable incremental administration charges variable compensation including costs incurred compliance fas 123r increased audit costs increased pension costs partially offset lower costs incurred sox compliance net increase operating income foreign exchange primarily due appreciation euro canadian dollar yuan us dollar interest income interest income increased 38 million 3070 2006 compared 2005 primarily due investment residual proceeds private placement 2250 million 585 senior notes april 2006 net proceeds public offering 575 million shares class common stock november 2006 interest expense interest expense increased 117 million 1139 2006 compared 2005 primarily due interest expense associated 2250 million 585 senior notes increased debt levels acquisitions made 2005 2006 increase average variable rates charged revolving credit facility effective july 1 2005 entered interest rate swap notional amount €250 million outstanding revolving credit facility swapped adjustable rate three month euribor plus 06 fixed rate 302 recorded reduction interest expense approximately 07 million recognize fair value swap 2006 swap terminated october 3 2006 income expense income expense increased 02 million 276 2006 compared 2005 primarily due gains settlements officers life insurance policies minority interest minority interest increased 21 million 6223 2006 compared 2005 primarily due credit recorded 40 liability joint venture partners share recording 51 million manufacturing restructuring costs income taxes effective tax rate continuing operations decreased 336 2006 359 2005 decrease primarily due higher earnings european china segments shift mix earnings segments causes rate decrease segments lower effective tax rates worldwide average effect european earnings mix partially offset higher effective tax gain sales italian facilities able claim tax credits based qualified fixed asset purchases china helped reduce worldwide rate income continuing operations income continuing operations 2006 increased 221 million 401 771 million 229 per common share 550 million 167 per common share 2005 case diluted basis income continuing operations 2006 2005 includes income net tax restructuring plan 15 million 004 per share costs 16 million 005 per share respectively gains sales buildings italy resulted aftertax gain 51 million 015 per share appreciation canadian dollar euro chinese yuan us dollar resulted positive impact income continuing operations 13 million 004 per share 2006 compared 2005 loss discontinued operations recorded charge net tax discontinued operations 2006 2005 34 million 010 per common share 04 million 001 per common share respectively case diluted basis third quarter 2006 recorded pretax charge 50 million due recent federal appellate court decision affirmed arbitration panel could decide deductible agreements watts zurich american insurance company zurich would control zurichs reimbursement claim defense costs paid james jones case charges primarily attributable legal fees associated james jones litigation described part item 1 businessproduct liability environmental litigation matters liquidity capital resources generated 917 million cash continuing operations 2007 experienced increases inventory north america china increases primarily due increased raw material costs also decrease accounts payable accrued expenses liabilities primarily europe north america europe accounts payable declined 2007 due decline inventory north america payments cash compensation increased 2007 also cash payments cover income tax obligations greater 2007 accounts receivable decreased three segments used 874 million net cash investing activities 2007 invested 378 million capital equipment part ongoing commitment improve manufacturing capabilities invested 275 million investment grade auction rate securities used 181 million fund acquisitions topway paid 45 million additional acquisition costs related prior years acquisitions expect invest approximately 350 capital equipment 2008 recent distress markets adverse impact market activities including among things volatility security prices diminished liquidity rating downgrades certain investments declining valuations others assessed implications factors current business determined significant impact financial position results operations liquidity 2007 used 665 million net cash financing activities 2007 primarily due payments debt payments stock repurchase program dividend payments partially offset increased borrowings line credit tax benefits exercise stock awards april 2006 amended revolving credit facility syndicate banks provide multicurrency unsecured borrowings standby letters credit 3500 million extend maturity date april 2011 revolving credit facility used support acquisition program working capital requirements general corporate purposes outstanding indebtedness revolving credit facility bears interest rate determined type loan plus applicable margin determined debt rating depending applicable base rate bond rating 2007 average interest rate revolving credit facility eurobased borrowings approximately 46 us dollar borrowings december 31 2007 revolving credit facility includes operational financial covenants customary facilities type including among others restrictions additional indebtedness liens investments maintenance certain leverage ratios december 31 2007 compliance covenants related revolving credit facility 2344 million unused potentially available credit revolving credit facility 818 million eurobased borrowings outstanding 338 million standby letters credit outstanding revolving credit facility generated 01 million net cash discontinued operations 2007 paid approximately 05 million defense costs approximately 05 million legal costs incurred james jones litigation also received 10 million indemnity payments working capital defined current assets less current liabilities december 31 2007 6670 million compared 6530 million december 31 2006 increase primarily due increase inventories lower accounts payable partially offset increase accrued expenses cash equivalents decreased 2903 million december 31 2007 compared 3430 million december 31 2006 primarily due cash used repurchase stock fund capital expenditures investments ratio current assets current liabilities 33 1 december 31 2007 compared 32 1 december 31 2006 generated 830 million cash continuing operations 2006 experienced increase inventory accounts receivable north america europe china increase accounts receivable 170 million primarily due increased sales volume selling prices increase inventory 373 million primarily due increased cost raw materials planned increases european safety stocks increase inventory accounts receivable partially offset increased accounts payable accrued expenses liabilities 295 million used 1192 million net cash investing activities 2006 used 911 million fund acquisitions changsha ats calflex ningbo kimsafe teknigas 19 million additional costs related 2005 acquisitions 04 million complete planned increase ownership stern invested 118 million investment grade auction rate securities 447 million capital equipment capital expenditures consisted approximately 267 million manufacturing machinery equipment approximately 180 million purchase land building infrastructure improvements site italy subsequently entered saleleaseback transaction respect building received proceeds 319 million primarily included 160 million related saleleaseback italy 134 million sales two facilities northern italy also received proceeds two buildings held sale totaling approximately 25 million 2006 generated 3313 million net cash financing activities 2006 november 21 2006 completed public offering 575 million shares newly issued class common stock 4000 per share net proceeds approximately 2186 million taking account underwriting discounts expenses associated transaction additionally generated cash completion 2250 million private placement 585 notes april 2006 increased borrowings line credit use europe proceeds exercise stock options partially offset payments debt dividend payments debt issue costs generated 09 million net cash operations discontinued operations 2006 also received approximately 28 million cash reimbursement defense costs related james jones litigation 2006 paid approximately 06 million defense costs approximately 05 million indemnity costs incurred james jones litigation generated 531 million cash continuing operations 2005 experienced increase accounts receivable north america europe china totaling 165 million increase primarily due increased sales volume additionally experienced increase inventories north america europe china totaling 203 million portion overall increase inventory due increased costs raw materials increase inventory europe primarily due increased finished goods support delivery requirements oem customers europe increase safety stocks restructuring north american china inventories increased primarily due incremental volume products sourced extended china supply chain increase inventory accounts receivable partially offset increased accounts payable approximately 143 million used 1832 million net cash investing activities 2005 used 1914 million fund acquisitions dormont core flexflow savard microflex alamo electro controls hf sea tech also invested 186 million capital equipment generated 266 million sale investment securities generated 1117 million net cash financing activities 2005 primarily increased borrowings us europe acquisitions proceeds exercise stock options offset dividend payments debt paid 38 million debt owed former shareholders hunter innovations used 11 million net cash discontinued operations 2005 received approximately 05 million cash settlement payment indemnification costs incurred james jones case offsetting liability recorded december 31 2005 possibility might reimburse insurance company ultimately successful future appeal also received approximately 21 million cash reimbursement defense costs related james jones case 2005 paid approximately 25 million defense costs 06 million legal costs approximately 10 million indemnity costs incurred james jones case free cash flow 545 million nongaap financial measure defined net cash provided continuing operations minus capital expenditures plus proceeds sale assets year ended december 31 2007 versus free cash flow 702 million 2006 decrease 2007 compared 2006 primarily due proceeds sale property plant equipment partially offset growth cash generated operations net debt capitalization ratio defined short longterm interestbearing liabilities less cash equivalents percentage sum short long term interestbearing liabilities less cash equivalents plus total stockholders equity increased 135 2007 114 2006 increase resulted increase net debt partially offset increase stockholders equity free cash flow 702 million year ended december 31 2006 versus free cash flow 352 million 2005 increase 2006 compared 2005 primarily due growth cash generated operations less net capital expenditures believe free cash flow appropriate supplemental measure operating performance provides investors measure ability generate cash repay debt fund acquisitions may comparable companies may define free cash flow differently free cash flow represent cash generated operating activities accordance gaap therefore considered alternative net cash provided operations indication performance free cash flow also considered alternative net cash provided operations defined gaap reconciliation net cash provided continuing operations free cash flow provided net debt capitalization ratio also nongaap financial measure used management believes appropriate supplemental measure helps investors understand ability meet financing needs basis evaluate financial structure computation may comparable companies may define net debt capitalization differently reconciliation longterm debt including current portion net debt net debt capitalization ratio provided reconciliation capitalization provided anticipate available funds current operations existing cash revolving credit facility sources liquidity sufficient meet current operating requirements anticipated capital expenditures least next 12 months however may consider external sources financing large future acquisitions contractual obligations december 31 2007 presented following table aas recognized consolidated balance sheet bassumes balance revolving credit facility remains 818 million interest rate remains approximately 54 presented periods cincludes commodity capital expenditure commitments benefits december 31 2007 maintain letters credit guarantee performance payment third parties accordance specified terms conditions amounts outstanding approximately 450 million december 31 2007 496 million december 31 2006 letters credit primarily associated insurance coverage lesser extent foreign purchases generally expire within one year issuance instruments may exist expire without drawn therefore necessarily represent future cash flow obligations period january 1 2008 february 22 2008 repurchased 14 million shares class common stock total cost 382 million february 22 2008 08 million shares remain repurchased november 2007 stock repurchase program although obligation repurchase shares estimate total cost repurchase remaining 08 million shares would approximately 200 million offbalance sheet arrangements except operating lease commitments offbalance sheet arrangements reasonably likely current future effect financial condition changes financial condition revenues expenses results operations liquidity capital expenditures capital resources material investors application critical accounting policies key estimates preparation consolidated financial statements accordance us gaap requires management make judgments assumptions estimates affect amounts reported critical accounting estimate assumption highly uncertain matters could material effect consolidated financial statements another also reasonable amount used change estimate reasonably likely period base assumptions historical experience estimates believe reasonable circumstances actual results could differ significantly estimates except net increase workers compensation reserves second quarter 2007 primarily due change estimate changes accounting policies significant changes accounting estimates 2007 periodically discuss development selection disclosure estimates audit committee management believes following critical accounting policies reflect significant estimates assumptions revenue recognition recognize revenue following criteria met 1 entered binding agreement 2 product shipped title passed 3 sales price customer fixed determinable 4 collectibility reasonably assured recognize revenue based upon determination criteria revenue recognition met based majority shipping terms considered occurred upon shipment finished product shipping terms require goods received customer title passes instances revenues recognized customer received goods record estimated reductions revenue customer returns allowances customer programs provisions returns allowances made time sale derived historical trends form portion allowance doubtful accounts customer programs primarily annual volume incentive plans allow customers earn credit attaining agreed upon purchase targets us record estimated reductions revenue made time sale customer programs based estimated purchase targets allowance doubtful accounts allowance doubtful accounts established represent best estimate net realizable value outstanding accounts receivable development allowance doubtful accounts varies region general based review past due amounts historical writeoff experience well aging trends affecting specific accounts general operational factors affecting accounts north america management specifically analyzes individual accounts receivable establishes specific reserves financially troubled customers addition factors developed utilizing historical trends bad debts returns allowances ratio factors sales rolling twelvemonth basis applied total outstanding receivables net accounts specifically identified establish reserve europe management develops bad debt allowance aging analysis accounts china management specifically analyzes individual accounts receivable establishes specific reserves needed addition waterworks customers whose payment terms generally extended reserve majority accounts receivable excess one year invoice date uniformly consider current economic trends changes customer payment terms evaluating adequacy allowance doubtful accounts also aggressively monitor creditworthiness largest customers periodically review customer credit limits reduce risk circumstances relating specific customers change unanticipated changes occur general business environment estimates recoverability receivables could adjusted inventory valuation inventories stated lower cost market costs determined primarily firstin firstout basis utilize specific product identification historical product demand basis determining excess obsolete inventory reserve identify inventories exceed range one four years sales determined comparing current inventory balance unit sales trailing twelve months new products added inventory within past twelve months excluded analysis portion products contain recoverable materials therefore excess obsolete reserve established net recoverable amounts changes market conditions lower expected customer demand changes technology features could result additional obsolete inventory saleable could require additional inventory reserve provisions certain countries additional inventory reserves maintained potential shrinkage experienced manufacturing process reserve established based prior years inventory losses adjusted change gross inventory balance goodwill intangibles goodwill intangible assets indefinite lives tested annually impairment accordance provisions financial accounting standards board statement 142 goodwill intangible assets fas 142 use judgment assessing whether assets may become impaired annual impairment tests concluded impairment existed october 28 2007 time latest annual review perform annual test indicators goodwill nonamortizable intangible assets impairment fourth quarter fiscal year sooner indicators impairment exist intangible assets purchased technology generally recorded connection business acquisition values assigned intangible assets determined independent valuation firm based estimates judgments regarding expectations success life cycle products technology acquired since adoption fas 142 valuations greater carrying value goodwill intangibles believe estimates future cash flows reasonable different assumptions regarding factors future sales volume selling price changes material cost changes cost savings programs capital expenditures could significantly affect valuations changes may affect valuations include limited product acceptances regulatory approval actual product acceptance differs significantly estimates may required record impairment charge write assets realizable value severe decline market value could result unexpected impairment charge goodwill could material impact results operations financial position product liability workers compensation costs retention requirements associated insurance policies generally selfinsured potential product liability claims workers compensation costs associated workplace accidents product liability cases us management estimates expected settlement costs utilizing loss reports provided thirdparty administrators well developing internal historical trend factors based specific claims experience management utilizes internal trend factors reflect final expected settlement costs countries maintain insurance coverage relatively high deductible payments product liability claims tend smaller experienced us changes nature claims actual settlement amounts could affect adequacy estimate require changes provisions liability estimate ultimate liability may less reported workers compensation liabilities us recognized claims incurred including claims incurred reported changes status individual case reserves time workers compensation claim filed liability estimated settle claim liability workers compensation claims determined based managements estimates nature severity claims based analysis provided third party administrators various state statutes reserve requirements developed trend factors based specific claims experience countries workers compensation costs applicable maintain insurance coverage limited deductible payments liability estimate ultimate liability may less reported determine trend factors product liability workers compensation liabilities based consultation outside actuaries maintain excess liability insurance outside insurance carriers minimize risks related catastrophic claims excess selfinsured positions material change aforementioned factors could adverse impact operating results legal contingencies defendant numerous legal matters including involving environmental law product liability discussed part item 1 businessproduct liability environmental litigation matters required financial accounting standards board statement 5 accounting contingencies fas 5 determine whether estimated loss contingency accrued assessing whether loss deemed probable loss amount reasonably estimated net applicable insurance proceeds estimates potential outcomes contingencies developed consultation outside counsel assessment based upon available information litigation inherently uncertain actual liability fully resolve litigation cannot predicted assurance accuracy final settlement matters could possibly result significant effects results operations cash flows financial position pension benefits account pension plans accordance financial accounting standards board statement 87 employers accounting pensions fas 87 financial accounting standards board statement 158 employers accounting defined benefit pension postretirement plansan amendment fasb statements 87 88 106 132r fas 158 applying fas 87 fas 158 assumptions made regarding valuation benefit obligations performance plan assets primary assumptions follows •weighted average discount ratethis rate used estimate current value future benefits rate adjusted based movement longterm interest rates •expected longterm rate return assetsthis rate used estimate future growth investments investment earnings expected return based upon combination historical market performance anticipated future returns portfolio reflecting mix equity debt investments indicative plan assets •rates increase compensation levelsthis rate used estimate projected annual pay increases used determine wage base used project employees pension benefits retirement determine assumptions based consultation outside actuaries investment advisors variance assumptions could significant impact future recognized pension costs assets liabilities income taxes estimate use expected annual effective income tax rates accrue income taxes effective tax rates determined based budgeted earnings taxes including best estimate permanent items affect effective rate year management periodically reviews rates outside tax advisors changes made material variances expectations identified recognize deferred taxes expected future consequences events reflected consolidated financial statements accordance rules financial accounting standards board statement 109 accounting income taxes fas 109 fas 109 deferred tax assets liabilities determined based differences book values tax bases particular assets liabilities using tax rates effect years differences expected reverse valuation allowance provided offset net deferred tax assets based upon available evidence likely deferred tax assets realized consider estimated future taxable income ongoing prudent tax planning strategies assessing need valuation allowance january 1 2007 adopted provisions financial accounting standards board fasb interpretation 48 accounting uncertainty income taxes fin 48 purpose fin 48 increase comparability financial reporting income taxes fin 48 requires order tax benefit booked income statement item question must meet morelikelythannot greater 50 likelihood sustained upon examination taxing authorities threshold adoption fin 48 material effect financial statements cumulative effect booked beginning retained earnings adoption date gross unrecognized tax benefits approximately 48 million approximately 42 million recognized would affect effective tax rate difference amount unrecognized tax benefits amount would affect effective tax rate consists federal tax benefit state income tax items 2007 reduced unrecognized tax benefits approximately 06 million tax issue italy result conclusion state income tax audits reasonably possible total amount unrecognized tax benefits change next twelve months estimate reasonably possible approximately 05 million currently remaining unrecognized tax benefit may recognized end 2008 result conclusion audits notwithstanding expect significant changes amounts unrecognized tax benefits within next twelve months december 31 2007 gross unrecognized tax benefits approximately 37 million approximately 32 million recognized would affect effective tax rate difference amount unrecognized tax benefits amount would impact effective tax rate consists federal tax benefit state income tax items new accounting standards december 2007 fasb issued financial accounting standards board statement fas 141 r business combinations fas 141r requires identifiable assets liabilities noncontrolling interests goodwill acquired business combination recorded full fair value fas 141r business combinations accounted acquisition method significant changes among others current guidance resulting fas 141r includes requirement contingent assets liabilities contingent consideration shall recorded estimated fair value acquisition date subsequent changes fair value charged credited earnings acquisitionrelated costs expensed rather treated part acquisition fas 141r effective periods beginning december 15 2008 expect adoption fas 141r increase costs charged operations december 2007 fasb issued fas 160 noncontrolling interests consolidated financial statements amendment arb 151 fas 160 requires noncontrolling interests previously referred minority interest treated separate component equity liability current practice fas 160 applies noncontrolling interests transactions noncontrolling interest holders consolidated financial statements fas 160 effective periods beginning december 15 2008 currently evaluating effect fas 160 consolidated financial statements february 2007 fasb issued fas 159 fair value option financial assets financial liabilitiesincluding amendment fas 115 fas 159 permits entities choose measure many financial instruments certain items fair value fas 159 effective financial statements issued fiscal years beginning november 15 2007 interim periods within fiscal years earlier application encouraged expect measure financial instruments fair value therefore expect adoption fas 159 material impact consolidated financial statements september 2006 securities exchange commission issued staff accounting bulletin 108 considering effects prior year misstatements quantifying misstatements current year financial statements sab 108 provides interpretive guidance effects carryover reversal prior year misstatements considered quantifying current year misstatement sab 108 effective fiscal years ending november 15 2006 impact sab 108 material consolidated financial statements september 2006 fasb issued fas 158 employers accounting defined benefit pension postretirement plansan amendment fasb statements 87 88 106 132r fas 158 requires employer recognize statement financial position asset plans overfunded status liability plans underfunded status b measure plans assets obligations determine funded status end employers fiscal year c recognize changes funded status defined benefit postretirement plan year changes occur changes reported comprehensive income requirement recognize funded status benefit plan disclosure requirements effective end fiscal year ending december 15 2006 companies publicly traded equity securities requirement measure plan assets benefit obligations date employers fiscal yearend statement financial position effective fiscal years ending december 15 2008 although earlier adoption permitted result requirement recognize funded status benefit plans december 31 2006 recorded increase pension liability approximately 83 million decrease approximately 13 million assets net decrease accumulated comprehensive income approximately 58 million net tax earlyadopted measurement date provisions fas 158 effective january 1 2007 pension plans previously used september 30 measurement date plans measured december 31 consistent fiscal year end noncash effect adoption measurement date provisions fas 158 material effect results operations september 2006 fasb issued fas 157 fair value measurements fas 157 defines fair value establishes framework measuring fair value generally accepted accounting principles expands disclosures fair value measurements financial assets liabilities fas 157 effective financial statements issued fiscal years beginning november 15 2007 interim periods within fiscal years nonfinancial assets liabilities fas 157 effective financial statements issued fiscal years beginning november 15 2008 interim periods within fiscal years earlier application encouraged provided reporting company yet issued financial statements fiscal year including financial statements interim period within fiscal year expect adoption fas 157 material impact consolidated financial statements july 2006 fasb issued financial interpretation 48 accounting uncertainty income taxes fin 48 clarifies accounting uncertainty income taxes recognized financial statements accordance sfas 109 accounting income taxes fin 48 provides tax benefit uncertain tax position may recognized likely position sustained upon examination based technical merits interpretation also provides guidance measurement derecognition classification interest penalties accounting interim periods disclosure transition adopted provisions fin 48 january 1 2007 impact material consolidated financial statements march 2006 fasb issued fas 156 accounting servicing financial assetsan amendment fasb statement 140 fas 156 fas 156 amends fas statement 140 accounting transfers servicing financial assets extinguishments liabilities respect accounting separately recognized servicing assets servicing liabilities fas 156 addresses recognition measurement separately recognized servicing assets liabilities provides approach simplify efforts obtain hedgelike offset accounting adopted fas 156 january 1 2007 impact material consolidated financial statements february 2006 fasb issued fas 155 accounting certain hybrid financial instrumentsan amendment fasb statements 133 140 fas 155 fas 155 amends fas 133 accounting derivatives hedging activities fas 140 accounting transfers servicing financial assets extinguishments liabilities allows entity remeasure fair value hybrid financial instrument contains embedded derivative otherwise would require bifurcation host holder irrevocably elects account whole instrument fair value basis subsequent changes fair value instrument would recognized earnings adopted fas 155 january 1 2007 impact material consolidated financial statements may 2005 fasb issued fas 154 accounting changes error correction replacement apb opinion 20 fasb statement 3 fas 154 fas 154 replaces apb opinion 20 accounting changes apb 20 fasb statement 3 reporting accounting changes interim financial statements changes requirements accounting reporting change accounting principle apb 20 previously required voluntary changes accounting principle recognized including net income period change cumulative effect changing new accounting principle fas 154 requires retrospective application prior periods financial statements changes accounting principle fas 154 defines retrospective application different accounting principle prior accounting periods principle always used fas 154 also requires change depreciation amortization depletion method longlived nonfinancial assets accounted change accounting estimate affected change accounting principle impact fas 154 material consolidated financial statements december 2004 fasb issued fas 153 exchanges nonmonetary assets amendment apb opinion 29 accounting nonmonetary transactions fas 153 amendments made fas 153 based principle exchanges nonmonetary assets measured based fair value assets exchanged amendments eliminate narrow exception nonmonetary exchanges similar productive assets replace broader exception exchanges nonmonetary assets commercial substance previously opinion 29 required accounting exchange productive asset similar productive asset equivalent interest similar productive asset based recorded amount asset relinquished statement effective nonmonetary asset exchanges occurring fiscal periods beginning june 15 2005 earlier application permitted nonmonetary asset exchanges occurring fiscal periods beginning date issuance impact fas 153 material consolidated financial statements november 2004 fasb issued fas 151 inventory costs fas 151 fas 151 amends guidance accounting research bulletin 43 chapter 4 inventory pricing clarify accounting inventory costs provisions statement effective fiscal years beginning june 15 2005 impact fas 151 material consolidated financial statements item 7a nannannannanitem 7a quantitative qualitative disclosures market risk company uses derivative financial instruments primarily reduce exposure adverse fluctuations foreign exchange rates company enter derivative financial instruments trading purposes matter policy derivative positions used reduce risk hedging underlying economic exposure derivatives company uses straightforward instruments liquid markets company manages foreign currency exposures consolidated basis company identifies known exposures part process natural hedges identified company nets natural hedges gross exposures companys consolidated earnings subject fluctuations due changes foreign currency exchange rates however overall exposure fluctuations reduced diversity foreign operating locations encompass number different european locations canada china companys foreign subsidiaries transact business including certain intercompany transactions foreign currencies transactions principally material purchases sales denominated european currencies us canadian dollar company uses foreign currency forward exchange contracts manage risk related intercompany purchases occur course fiscal year certain open foreign currency denominated commitments sell products third parties june 30 1998 1997 significant amounts open foreign currency forward exchange contracts related unrealized gains losses watts historically low exposure changes interest rates additionally company historically strong cash flows amounts variable rate debt could paid cash generated operations june 30 1998 company primarily exposed eurodollar interest rate outstanding borrowings line credit facility information companys longterm debt including principal amounts related interest rates appears note 8 consolidated financial statements included herein company purchases significant amounts bronze ingot brass rod stainless steel cast iron carbon steel utilized manufacturing many product lines companys operating results adversely affected changes commodity prices unable pass related price increases customers company manages risk monitoring related market prices working suppliers achieve maximum level stability costs related pricing seeking alternative supply sources necessary passing increases commodity costs customers maximum extent possible occur company use derivative financial instruments manage risk item 8item 7a quantitative qualitative disclosures market risk company uses derivative financial instruments primarily reduce exposure adverse fluctuations foreign exchange rates interest rates prices certain raw materials used manufacturing process company enter derivative financial instruments trading purposes matter policy derivative positions used reduce risk hedging underlying economic exposure derivatives company uses straightforward instruments liquid markets company manages foreign currency exposures consolidated basis company identifies known exposures part process natural hedges identified company nets natural hedges gross exposures companys consolidated earnings subject fluctuations due changes foreign currency exchange rates however overall exposure fluctuations reduced diversity foreign operating locations encompass number different european locations canada china companys foreign subsidiaries transact business including certain intercompany transactions foreign currencies transactions principally purchases sales materials denominated european currencies us canadian dollar company uses foreign currency forward exchange contracts manage risk related intercompany purchases occur course fiscal year certain open foreign currency denominated commitments sell products third parties december 31 1999 company forward contracts buy foreign currencies unrealized gains losses see note 15 notes consolidated financial statements company historically low exposure changes interest rates interest rate swaps used mitigate impact interest rate fluctuations certain variable rate debt instruments information companys longterm debt including principal amounts related interest rates appears note 10 consolidated financial statements included herein company purchases significant amounts bronze ingot brass rod cast iron utilized manufacturing many product lines companys operating results adversely affected changes commodity prices unable pass related price increases customers company manages risk monitoring related market prices working suppliers achieve maximum level stability costs related pricing seeking alternative supply sources necessary passing increases commodity costs customers maximum extent possible occur additionally limited basis company uses commodity futures contracts manage risk see note 15 notes consolidated financial statements item 8item 7a quantitative qualitative disclosures market risk company uses derivative financial instruments primarily reduce exposure adverse fluctuations foreign exchange rates interest rates prices certain raw materials used manufacturing process company enter derivative financial instruments trading purposes matter policy derivative positions used reduce risk hedging underlying economic exposure derivatives company uses instruments liquid markets companys consolidated earnings reported united states dollars subject translation risks due changes foreign currency exchange rates risk concentrated exchange rate us dollar euro us dollar canadian dollar us dollar chinese remnimbi companys foreign subsidiaries transact business including certain intercompany transactions foreign currencies transactions principally purchases sales materials denominated european currencies us canadian dollar company uses foreign currency forward exchange contracts manage risk related intercompany purchases occur course fiscal year certain open foreign currency denominated commitments sell products third parties december 31 2001 company forward contracts buy foreign currencies unrealized gains losses see note 16 notes consolidated financial statements company historically low exposure changes interest rates interest rate swaps used mitigate impact interest rate fluctuations certain variable rate debt instruments reduce interest expense certain fixed rate instruments information companys longterm debt including principal amounts related interest rates appears note 11 notes consolidated financial statements included herein company purchases significant amounts bronze ingot brass rod cast iron utilized manufacturing many product lines companys operating results adversely affected changes commodity prices unable pass related price increases customers company manages risk monitoring related market prices working suppliers achieve maximum level stability costs related pricing seeking alternative supply sources necessary passing increases commodity costs customers maximum extent possible occur additionally limited basis company uses commodity futures contracts manage risk see note 16 notes consolidated financial statements item 8item 7a quantitative qualitative disclosures market risk use derivative financial instruments primarily reduce exposure adverse fluctuations foreign exchange rates interest rates prices certain raw materials used manufacturing process enter derivative financial instruments trading purposes matter policy derivative positions used reduce risk hedging underlying economic exposure derivatives use instruments liquid markets consolidated earnings reported united states dollars subject translation risks due changes foreign currency exchange rates risk concentrated exchange rate us dollar euro us dollar canadian dollar us dollar chinese rmb foreign subsidiaries transact business including certain intercompany transactions foreign currencies transactions principally purchases sales materials denominated european currencies us canadian dollar use foreign currency forward exchange contracts manage risk related intercompany purchases occur course fiscal year certain open foreign currency denominated commitments sell products third parties december 31 2002 forward contracts buy foreign currencies unrealized gains losses see note 16 notes consolidated financial statements historically low exposure changes interest rates interest rate swaps used mitigate impact interest rate fluctuations certain variable rate debt instruments reduce interest expense certain fixed rate instruments information longterm debt including principal amounts related interest rates appears note 11 notes consolidated financial statements included herein purchase significant amounts bronze ingot brass rod cast iron utilized manufacturing many product lines operating results adversely affected changes commodity prices unable pass related price increases customers manage risk monitoring related market prices working suppliers achieve maximum level stability costs related pricing seeking alternative supply sources necessary passing increases commodity costs customers maximum extent possible occur additionally limited basis use commodity futures contracts manage risk 2002 see note 16 notes consolidated financial statements item 8item 7a quantitative qualitative disclosures market risk use derivative financial instruments primarily reduce exposure adverse fluctuations foreign exchange rates interest rates costs certain raw materials used manufacturing process enter derivative financial instruments trading purposes matter policy derivative positions used reduce risk hedging underlying economic exposure derivatives use instruments liquid markets consolidated earnings reported united states dollars subject translation risks due changes foreign currency exchange rates risk concentrated exchange rate us dollar euro us dollar canadian dollar us dollar chinese rmb foreign subsidiaries transact business including certain intercompany transactions foreign currencies transactions principally purchases sales materials denominated european currencies us canadian dollar use foreign currency forward exchange contracts manage risk related intercompany purchases occur course year certain open foreign currency denominated commitments sell products third parties december 31 2003 forward contracts buy foreign currencies unrealized gains losses historically low exposure cost debt changes interest rates interest rate swaps used mitigate impact interest rate fluctuations certain variable rate debt instruments reduce interest expense certain fixed rate instruments information longterm debt including principal amounts related interest rates appears note 11 notes consolidated financial statements included herein purchase significant amounts bronze ingot brass rod cast iron steel plastic utilized manufacturing many product lines operating results adversely affected changes commodity prices unable pass related price increases customers manage risk monitoring related market prices working suppliers achieve maximum level stability costs related pricing seeking alternative supply sources necessary passing increases commodity costs customers maximum extent possible occur additionally limited basis use commodity futures contracts manage risk 2003 item 8item 7a quantitative qualitative disclosures market risk use derivative financial instruments primarily reduce exposure adverse fluctuations foreign exchange rates interest rates costs certain raw materials used manufacturing process enter derivative financial instruments trading purposes matter policy derivative positions used reduce risk hedging underlying economic exposure derivatives use instruments liquid markets consolidated earnings reported united states dollars subject translation risks due changes foreign currency exchange rates risk concentrated exchange rate us dollar euro us dollar canadian dollar us dollar chinese rmb foreign subsidiaries transact business including certain intercompany transactions foreign currencies transactions principally purchases sales materials denominated european currencies us canadian dollar use foreign currency forward contracts options manage risk related intercompany purchases occur course year certain open foreign currency denominated commitments sell products third parties amounts recorded comprehensive income change fair value contracts canadian operations immaterial 2004 2003 historically low exposure cost debt changes interest rates interest rate swaps used mitigate impact interest rate fluctuations certain variable rate debt instruments reduce interest expense certain fixed rate instruments interest rate market risk interest rate swap immaterial 2004 2003 information longterm debt including principal amounts related interest rates appears note 11 notes consolidated financial statements purchase significant amounts bronze ingot brass rod cast iron steel plastic utilized manufacturing many product lines operating results adversely affected changes commodity prices unable pass related price increases customers manage risk monitoring related market prices working suppliers achieve maximum level stability costs related pricing seeking alternative supply sources necessary passing increases commodity costs customers maximum extent possible occur additionally limited basis use commodity futures contracts manage risk use contracts 2004 2003 item 8item 7a quantitative qualitative disclosures market risk use derivative financial instruments primarily reduce exposure adverse fluctuations foreign exchange rates interest rates costs certain raw materials used manufacturing process enter derivative financial instruments trading purposes matter policy derivative positions used reduce risk hedging underlying economic exposure derivatives use instruments liquid markets consolidated earnings reported united states dollars subject translation risks due changes foreign currency exchange rates risk concentrated exchange rate us dollar euro us dollar canadian dollar us dollar chinese yuan foreign subsidiaries transact business including certain intercompany transactions foreign currencies transactions principally purchases sales materials denominated european currencies us canadian dollar use foreign currency forward exchange contracts manage risk related intercompany purchases occur course year certain open foreign currency denominated commitments sell products third parties 2006 amounts recorded income change fair value contracts immaterial historically low exposure cost debt changes interest rates interest rate swaps used mitigate impact interest rate fluctuations certain variable rate debt instruments reduce interest expense certain fixed rate instruments information longterm debt including principal amounts related interest rates appears note 11 notes consolidated financial statements annual report form 10k year ended december 31 2006 purchase significant amounts bronze ingot brass rod cast iron steel plastic utilized manufacturing many product lines operating results adversely affected changes commodity prices unable pass related price increases customers manage risk monitoring related market prices working suppliers achieve maximum level stability costs related pricing seeking alternative supply sources necessary passing increases commodity costs customers maximum extent possible occur item 8item 7a quantitative qualitative disclosures market risk use derivative financial instruments primarily reduce exposure adverse fluctuations foreign exchange rates interest rates costs certain raw materials used manufacturing process enter derivative financial instruments trading purposes matter policy derivative positions used reduce risk hedging underlying economic exposure derivatives use instruments liquid markets consolidated earnings reported united states dollars subject translation risks due changes foreign currency exchange rates risk concentrated exchange rate us dollar euro us dollar canadian dollar us dollar chinese yuan foreign subsidiaries transact business including certain intercompany transactions foreign currencies transactions principally purchases sales materials denominated european currencies us canadian dollar use foreign currency forward exchange contracts manage risk related intercompany purchases occur course year certain open foreign currency denominated commitments sell products third parties 2009 amounts recorded income change fair value contracts immaterial historically low exposure cost debt changes interest rates information longterm debt including principal amounts related interest rates appears note 11 notes consolidated financial statements annual report form 10k year ended december 31 2009 purchase significant amounts bronze ingot brass rod cast iron steel plastic utilized manufacturing many product lines operating results adversely affected changes commodity prices unable pass related price increases customers manage risk monitoring related market prices working suppliers achieve maximum level stability costs related pricing seeking alternative supply sources necessary passing increases commodity costs customers maximum extent possible occur 2008 entered series copper swap contracts fix price per pound copper one customer expired 2009 swaps classified economic hedges fully explained note 16 notes consolidated financial statements period ended december 31 2009 2008 recorded 03 million gain 16 million loss respectively associated copper swaps expense used discounted cash flow model determining value ars ubs rights active market ars rights nontransferable believe discounted cash flow model gives best estimate fair value december 31 2009 2008 model includes assumptions fully explained note 16 notes consolidated financial statements sensitive assumptions illiquidity spread engaged valuation experts develop models illiquidity spread increases discount rate thereby decreasing estimated fair value rights issued ubs used discounted cash flow model estimate fair value based assumption exercise option earliest convenience believe assumptions used consistent current market view ars reasonable different assumptions could significantly affect valuation ars item 8item 7a quantitative qualitative disclosures market risk use derivative financial instruments primarily reduce exposure adverse fluctuations foreign exchange rates interest rates costs certain raw materials used manufacturing process enter derivative financial instruments trading purposes matter policy derivative positions used reduce risk hedging underlying economic exposure derivatives use instruments liquid markets consolidated earnings reported united states dollars subject translation risks due changes foreign currency exchange rates risk concentrated exchange rate us dollar euro us dollar canadian dollar us dollar chinese yuan foreign subsidiaries transact business including certain intercompany transactions foreign currencies transactions principally purchases sales materials denominated european currencies us canadian dollar use foreign currency forward exchange contracts manage risk related intercompany purchases occur course year certain open foreign currency denominated commitments sell products third parties 2010 recorded 05 million gain income associated change fair value contracts historically low exposure cost debt changes interest rates information longterm debt including principal amounts related interest rates appears note 11 notes consolidated financial statements annual report form 10k year ended december 31 2010 purchase significant amounts bronze ingot brass rod cast iron steel plastic utilized manufacturing many product lines operating results adversely affected changes commodity prices unable pass related price increases customers manage risk monitoring related market prices working suppliers achieve maximum level stability costs related pricing seeking alternative supply sources necessary passing increases commodity costs customers maximum extent possible occur 2008 entered series copper swap contracts fix price per pound copper one customer expired 2009 swaps classified economic hedges fully explained note 16 notes consolidated financial statements year ended december 31 2009 recorded 03 million gain associated copper swaps expense item 8item 7a quantitative qualitative disclosures market risk use derivative financial instruments primarily reduce exposure adverse fluctuations foreign exchange rates interest rates costs certain raw materials used manufacturing process enter derivative financial instruments trading purposes matter policy derivative positions used reduce risk hedging underlying economic exposure derivatives use instruments liquid markets see note 15 notes consolidated financial statements annual report form 10k year ended december 31 2011 consolidated earnings reported united states dollars subject translation risks due changes foreign currency exchange rates risk concentrated exchange rate us dollar euro us dollar canadian dollar us dollar chinese yuan foreign subsidiaries transact business including certain intercompany transactions foreign currencies transactions principally purchases sales materials denominated european currencies us canadian dollar use foreign currency forward exchange contracts manage risk related intercompany purchases occur course year certain open foreign currency denominated commitments sell products third parties 2011 recorded 06 million gain income associated change fair value contracts historically low exposure cost debt changes interest rates information longterm debt including principal amounts related interest rates appears note 11 notes consolidated financial statements annual report form 10k year ended december 31 2011 purchase significant amounts bronze ingot brass rod cast iron steel plastic utilized manufacturing many product lines operating results adversely affected changes commodity prices unable pass related price increases customers manage risk monitoring related market prices working suppliers achieve maximum level stability costs related pricing seeking alternative supply sources necessary passing increases commodity costs customers maximum extent possible occur item 8item 7a quantitative qualitative disclosures market risk use derivative financial instruments primarily reduce exposure adverse fluctuations foreign exchange rates interest rates costs certain raw materials used manufacturing process enter derivative financial instruments trading purposes matter policy derivative positions used reduce risk hedging underlying economic exposure derivatives use instruments liquid markets see note 15 notes consolidated financial statements annual report form 10k year ended december 31 2012 consolidated earnings reported united states dollars subject translation risks due changes foreign currency exchange rates risk concentrated exchange rate us dollar euro us dollar canadian dollar us dollar chinese yuan foreign subsidiaries transact business including certain intercompany transactions foreign currencies transactions principally purchases sales materials denominated european currencies us canadian dollar use foreign currency forward exchange contracts manage risk related intercompany purchases occur course year certain open foreign currency denominated commitments sell products third parties 2012 recorded 01 million loss income associated change fair value contracts historically low exposure cost debt changes interest rates information longterm debt including principal amounts related interest rates appears note 10 notes consolidated financial statements annual report form 10k year ended december 31 2012 purchase significant amounts bronze ingot brass rod cast iron steel plastic utilized manufacturing many product lines operating results adversely affected changes commodity prices unable pass related price increases customers manage risk monitoring related market prices working suppliers achieve maximum level stability costs related pricing seeking alternative supply sources necessary passing increases commodity costs customers maximum extent possible occur item 8item 7a quantitative qualitative disclosures market risk use derivative financial instruments primarily reduce exposure adverse fluctuations foreign exchange rates interest rates costs certain raw materials used manufacturing process enter derivative financial instruments trading purposes matter policy derivative positions used reduce risk hedging underlying economic exposure derivatives use instruments liquid markets see note 15 notes consolidated financial statements annual report form 10k year ended december 31 2014 consolidated earnings reported united states dollars subject translation risks due changes foreign currency exchange rates risk concentrated exchange rate us dollar euro us dollar canadian dollar us dollar chinese yuan foreign subsidiaries transact business including certain intercompany transactions foreign currencies transactions principally purchases sales materials denominated european currencies us canadian dollar use foreign currency forward exchange contracts time manage risk related intercompany purchases occur course year certain open foreign currency denominated commitments sell products third parties december 31 2014 open forward exchange contracts historically low exposure cost debt changes interest rates information longterm debt including principal amounts related interest rates appears note 10 notes consolidated financial statements annual report form 10k year ended december 31 2014 purchase significant amounts bronze ingot brass rod cast iron stainless steel plastic utilized manufacturing many product lines operating results adversely affected changes commodity prices unable pass related price increases customers manage risk monitoring related market prices working suppliers achieve maximum level stability costs related pricing seeking alternative supply sources necessary passing increases commodity costs customers maximum extent possible occur item 8item 7a quantitative qualitative disclosures market risk use derivative financial instruments primarily reduce exposure adverse fluctuations foreign exchange rates interest rates costs certain raw materials used manufacturing process enter derivative financial instruments trading purposes matter policy derivative positions used reduce risk hedging underlying economic exposure derivatives use instruments liquid markets see note 15 notes consolidated financial statements annual report form 10k consolidated earnings reported united states dollars subject translation risks due changes foreign currency exchange rates risk concentrated exchange rate us dollar euro us dollar canadian dollar us dollar chinese yuan hong kong dollar euro foreign subsidiaries transact business including certain intercompany transactions foreign currencies transactions principally purchases sales materials denominated european currencies us canadian dollar use foreign currency forward exchange contracts time manage risk related intercompany purchases occur course year certain open foreign currency denominated commitments sell products third parties december 31 2016 one open forward exchange contract entered manage foreign currency rate exposure hong kong dollar euro regarding intercompany loan forward contract markedtomarket changes fair value recorded earnings prior 2016 generally low exposure cost debt changes interest rates february 12 2016 company entered new credit agreement “credit agreement” pursuant received funding commitment term loan 300 million entire 300 million drawn revolving commitment “revolver” 500 million 162 million drawn december 31 2016 facilities mature february 12 2021 facility company choose either adjusted libor alternative base rate “abr” accordingly company’s earnings cash flows exposed interest rate risk changes adjusted libor order manage company’s exposure changes cash flows attributable fluctuations liborindexed interest payments related floating rate debt company entered two interest rate swaps interest rate swap company receives threemonth usdlibor subject 0 floor pays fixed rate 131375 notional amount 2250 million information longterm debt including principal amounts related interest rates appears note 10 notes consolidated financial statements annual report form 10k year ended december 31 2016 purchase significant amounts bronze ingot brass rod cast iron stainless steel plastic utilized manufacturing many product lines operating results adversely affected changes commodity prices unable pass related price increases customers manage risk monitoring related market prices working suppliers achieve maximum level stability costs related pricing seeking alternative supply sources necessary passing increases commodity costs customers maximum extent possible occur item 8item 7a quantitative qualitative disclosures market risk use derivative financial instruments primarily reduce exposure adverse fluctuations foreign exchange rates interest rates costs certain raw materials used manufacturing process enter derivative financial instruments trading purposes matter policy derivative positions used reduce risk hedging underlying economic exposure derivatives use instruments liquid markets see note 16 notes consolidated financial statements details consolidated earnings reported united states dollars subject translation risks due changes foreign currency exchange rates risk concentrated exchange rate us dollar euro us dollar canadian dollar us dollar chinese yuan nonus subsidiaries transact business including certain intercompany transactions foreign currencies transactions principally purchases sales materials denominated european currencies us canadian dollar use foreign currency forward exchange contracts time manage risk related intercompany loans intercompany purchases occur course year certain open foreign currency denominated commitments sell products third parties third quarter 2017 renew two forward exchange contracts entered manage foreign currency rate exposure hong kong dollar euro regarding two intercompany loans settled forward contracts markedtomarket changes fair value recorded earnings throughout 2017 prior 2016 generally low exposure cost debt changes interest rates february 12 2016 company entered new credit agreement pursuant received funding commitment term loan 300 million 2775 million outstanding revolving commitment 500 million 1470 million drawn december 31 2017 facilities mature february 12 2021 facility choose either adjusted libor alternative base rate “abr” accordingly earnings cash flows exposed interest rate risk changes adjusted libor order manage exposure changes cash flows attributable fluctuations liborindexed interest payments related floating rate debt entered two interest rate swaps interest rate swap company receives threemonth usdlibor subject 0 floor pays fixed rate 131375 notional amount 2250 million information longterm debt including principal amounts related interest rates appears note 11 notes consolidated financial statements purchase significant amounts bronze ingot brass rod cast iron stainless steel plastic utilized manufacturing many product lines operating results adversely affected changes commodity prices unable pass related price increases customers manage risk monitoring related market prices working suppliers achieve maximum level stability costs related pricing seeking alternative supply sources necessary passing increases commodity costs customers maximum extent possible occur item 8item 7a quantitative qualitative disclosures market risk use derivative financial instruments primarily reduce exposure adverse fluctuations foreign exchange rates interest rates costs certain raw materials used manufacturing process enter derivative financial instruments trading purposes matter policy derivative positions used reduce risk hedging underlying economic exposure derivatives use instruments liquid markets see note 17 notes consolidated financial statements details consolidated earnings reported united states dollars subject translation risks due changes foreign currency exchange rates risk concentrated exchange rate us dollar euro us dollar canadian dollar us dollar chinese yuan nonus subsidiaries transact business including certain intercompany transactions foreign currencies transactions principally purchases sales materials denominated european currencies us canadian dollar use foreign currency forward exchange contracts time manage risk related intercompany loans intercompany purchases occur course year certain open foreign currency denominated commitments sell products third parties beginning first quarter 2018 entered forward exchange contracts settle quarterly hedge approximately 70 forecasted intercompany purchases one canadian us operating subsidiaries rolling twelvemonth period record effective portion designated foreign currency hedge contracts comprehensive income inventory turns sold thirdparty transaction occurs associated hedged forecasted transaction effective portion related gain loss designated foreign currency hedge reclassified earnings fair value designated foreign hedge contracts outstanding december 31 2018 03 million facility credit agreement choose either adjusted libor alternative base rate “abr” accordingly company’s earnings cash flows exposed interest rate risk changes adjusted libor order manage exposure changes cash flows attributable fluctuations liborindexed interest payments related floating rate debt february 2016 entered two interest rate swaps interest rate swap receive threemonth usdlibor subject 0 floor pay fixed rate 131375 notional amount 2250 million information longterm debt including principal amounts related interest rates appears note 12 notes consolidated financial statements purchase significant amounts bronze ingot brass rod cast iron stainless steel plastic utilized manufacturing many product lines operating results adversely affected changes commodity prices unable pass related price increases customers manage risk monitoring related market prices working suppliers achieve maximum level stability costs related pricing seeking alternative supply sources necessary passing increases commodity costs customers maximum extent possible occur item 8item 7a quantitative qualitative disclosures market risk use derivative financial instruments primarily reduce exposure adverse fluctuations foreign exchange rates interest rates costs certain raw materials used manufacturing process enter derivative financial instruments trading purposes matter policy derivative positions used reduce risk hedging underlying economic exposure derivatives use instruments liquid markets see note 16 notes consolidated financial statements details consolidated earnings reported united states dollars subject translation risks due changes foreign currency exchange rates risk concentrated exchange rate us dollar euro us dollar canadian dollar us dollar chinese yuan nonus subsidiaries transact business including certain intercompany transactions foreign currencies transactions principally purchases sales materials denominated european currencies us canadian dollar use foreign currency forward exchange contracts time manage risk related intercompany loans intercompany purchases intercompany sales occur course year certain open foreign currency denominated commitments sell products third parties beginning first quarter 2018 entered forward exchange contracts settle quarterly hedge approximately 70 80 forecasted intercompany purchases one canadian subsidiaries us operating subsidiaries next twelve months beginning first quarter 2019 entered forward exchange contracts hedge 60 forecasted intercompany sales transactions one chinese subsidiaries one us operating subsidiaries next twelve months record effective portion designated foreign currency hedge contracts comprehensive income inventory turns sold thirdparty transaction occurs associated hedged forecasted transaction effective portion related gain loss designated foreign currency hedge reclassified earnings fair value designated foreign hedge contracts outstanding december 31 2019 liability balance 02 million credit agreement choose either adjusted libor alternative base rate “abr” accordingly company’s earnings cash flows exposed interest rate risk changes adjusted libor order manage exposure changes cash flows attributable fluctuations liborindexed interest payments related floating rate debt entered two interest rate swaps interest rate swap receive threemonth usdlibor subject 0 floor pay fixed rate 131375 notional amount 2250 million information longterm debt including principal amounts related interest rates appears note 11 notes consolidated financial statements purchase significant amounts bronze ingot brass rod cast iron stainless steel plastic materials utilized manufacturing many product lines operating results adversely affected changes commodity prices unable pass related price increases customers manage risk monitoring related market prices working suppliers achieve maximum level stability costs related pricing seeking alternative supply sources necessary passing increases commodity costs customers maximum extent possible occur item 8item 7a quantitative qualitative disclosures market risk use derivative financial instruments primarily reduce exposure adverse fluctuations foreign exchange rates interest rates costs certain raw materials used manufacturing process enter derivative financial instruments trading purposes matter policy derivative positions used reduce risk hedging underlying economic exposure derivatives use instruments liquid markets see note 16 notes consolidated financial statements details consolidated earnings reported united states dollars subject translation risks due changes foreign currency exchange rates risk concentrated exchange rate us dollar euro us dollar canadian dollar us dollar chinese yuan nonus subsidiaries transact business including certain intercompany transactions foreign currencies transactions principally purchases sales materials denominated european currencies us canadian dollar use foreign currency forward exchange contracts time manage risk related intercompany loans intercompany purchases intercompany sales occur course year certain open foreign currency denominated commitments sell products third parties entered forward exchange contracts settle quarterly hedge 85 forecasted intercompany purchases one canadian subsidiaries us operating subsidiaries next twelve months also entered forward exchange contracts hedge 60 forecasted intercompany sales transactions one chinese subsidiaries one us operating subsidiaries next twelve months record effective portion designated foreign currency hedge contracts comprehensive income inventory turns sold thirdparty transaction associated hedged forecasted transaction occurs effective portion related gain loss designated foreign currency hedge reclassified cost goods sold within earnings fair value designated foreign hedge contracts outstanding december 31 2020 liability balance 01 million prior credit agreement could choose either adjusted libor alternative base rate “abr” accordingly earnings cash flows exposed interest rate risk changes adjusted libor order manage exposure changes cash flows attributable fluctuations liborindexed interest payments related floating rate debt entered two interest rate swaps interest rate swap receive threemonth usdlibor subject 0 floor pay fixed rate 131375 notional amount 2250 million prior executing new credit agreement effective portion fair value interest rate swaps recorded comprehensive income result entering new credit agreement interest rate swaps longer effective offsetting changes cash flow hedged item critical terms new credit agreement match hedged item subsequently began recognizing marktomarket fair value adjustments monthly basis consolidated statement operations continued expiration date swaps february 12 2021 balance outstanding revolving credit facility december 31 2020 notional amount interest rate swaps therefore balance previously effective portion fair value interest rate swaps recorded comprehensive income reclassified earnings within interest expense december 31 2020 information longterm debt including principal amounts related interest rates appears note 11 notes consolidated financial statements information interest rate swaps appears note 16 notes consolidated financial statements purchase significant amounts bronze ingot brass rod cast iron stainless steel plastic utilized manufacturing many product lines operating results adversely affected changes commodity prices unable pass related price increases customers manage risk monitoring related market prices working suppliers achieve maximum level stability costs related pricing seeking alternative supply sources necessary passing increases commodity costs customers maximum extent possible occur item 8item 7a quantitative qualitative disclosures market risk use derivative financial instruments primarily reduce exposure adverse fluctuations foreign exchange rates interest rates costs certain raw materials used manufacturing process enter derivative financial instruments trading purposes matter policy derivative positions used reduce risk hedging underlying economic exposure derivatives use instruments liquid markets consolidated earnings reported united states dollars subject translation risks due changes foreign currency exchange rates risk concentrated exchange rate us dollar euro us dollar canadian dollar us dollar chinese yuan foreign subsidiaries transact business including certain intercompany transactions foreign currencies transactions principally purchases sales materials denominated european currencies yuan us canadian dollar use foreign currency forward exchange contracts manage risk related intercompany purchases occur course year certain open foreign currency denominated commitments sell products third parties 2005 2004 amounts recorded comprehensive income change fair value contracts immaterial historically low exposure cost debt changes interest rates interest rate swaps used mitigate impact interest rate fluctuations certain variable rate debt instruments reduce interest expense certain fixed rate instruments information longterm debt including principal amounts related interest rates appears note 11 notes consolidated financial statements annual report form 10k year ended december 31 2005 purchase significant amounts bronze ingot brass rod cast iron steel plastic utilized manufacturing many product lines operating results adversely affected changes commodity prices unable pass related price increases customers manage risk monitoring related market prices working suppliers achieve maximum level stability costs related pricing seeking alternative supply sources necessary passing increases commodity costs customers maximum extent possible occur additionally limited basis use commodity futures contracts manage risk use contracts 2005 2004 item 8item 7a quantitative qualitative disclosures market risk use derivative financial instruments primarily reduce exposure adverse fluctuations foreign exchange rates interest rates costs certain raw materials used manufacturing process enter derivative financial instruments trading purposes matter policy derivative positions used reduce risk hedging underlying economic exposure derivatives use instruments liquid markets consolidated earnings reported united states dollars subject translation risks due changes foreign currency exchange rates risk concentrated exchange rate us dollar euro us dollar canadian dollar us dollar chinese yuan foreign subsidiaries transact business including certain intercompany transactions foreign currencies transactions principally purchases sales materials denominated european currencies us canadian dollar use foreign currency forward exchange contracts manage risk related intercompany purchases occur course year certain open foreign currency denominated commitments sell products third parties 2008 amounts recorded income change fair value contracts immaterial historically low exposure cost debt changes interest rates information longterm debt including principal amounts related interest rates appears note 11 notes consolidated financial statements annual report form 10k year ended december 31 2008 purchase significant amounts bronze ingot brass rod cast iron steel plastic utilized manufacturing many product lines operating results adversely affected changes commodity prices unable pass related price increases customers manage risk monitoring related market prices working suppliers achieve maximum level stability costs related pricing seeking alternative supply sources necessary passing increases commodity costs customers maximum extent possible occur 2008 entered series copper swap contracts fix price per pound copper one customer swaps classified economic hedges fully explained note 16 notes consolidated financial statements period ended december 31 2008 recorded 18 million losses associated copper swaps expense believe copper prices continue decrease open copper swap contracts result additional losses may occur period different cost recovered customer company used discounted cash flow model determining value ars ubs rights active market ars rights nontransferable believe discounted cash flow model gives best estimate fair value december 31 2008 model includes assumptions fully explained note 16 notes consolidated financial statements sensitive assumptions illiquidity spread engaged valuation experts develop models illiquidity spread increases discount rate thereby decreasing estimated fair value rights issued ubs used discounted cash flow model estimate fair value ars rights value rights determined looking difference ars determined compared ars rights believe assumptions used consistent current market view ars reasonable different assumptions could significantly affect valuation ars item 8item 7a quantitative qualitative disclosures market risk use derivative financial instruments primarily reduce exposure adverse fluctuations foreign exchange rates interest rates costs certain raw materials used manufacturing process enter derivative financial instruments trading purposes matter policy derivative positions used reduce risk hedging underlying economic exposure derivatives use instruments liquid markets see note 15 notes consolidated financial statements annual report form 10k year ended december 31 2013 consolidated earnings reported united states dollars subject translation risks due changes foreign currency exchange rates risk concentrated exchange rate us dollar euro us dollar canadian dollar us dollar chinese yuan foreign subsidiaries transact business including certain intercompany transactions foreign currencies transactions principally purchases sales materials denominated european currencies us canadian dollar use foreign currency forward exchange contracts manage risk related intercompany purchases occur course year certain open foreign currency denominated commitments sell products third parties 2013 recorded 01 million loss income associated change fair value contracts historically low exposure cost debt changes interest rates information longterm debt including principal amounts related interest rates appears note 10 notes consolidated financial statements annual report form 10k year ended december 31 2013 purchase significant amounts bronze ingot brass rod cast iron steel plastic utilized manufacturing many product lines operating results adversely affected changes commodity prices unable pass related price increases customers manage risk monitoring related market prices working suppliers achieve maximum level stability costs related pricing seeking alternative supply sources necessary passing increases commodity costs customers maximum extent possible occur item 8item 7a quantitative qualitative disclosures market risk use derivative financial instruments primarily reduce exposure adverse fluctuations foreign exchange rates interest rates costs certain raw materials used manufacturing process enter derivative financial instruments trading purposes matter policy derivative positions used reduce risk hedging underlying economic exposure derivatives use instruments liquid markets see note 16 notes consolidated financial statements annual report form 10k year ended december 31 2015 consolidated earnings reported united states dollars subject translation risks due changes foreign currency exchange rates risk concentrated exchange rate us dollar euro us dollar canadian dollar us dollar chinese yuan foreign subsidiaries transact business including certain intercompany transactions foreign currencies transactions principally purchases sales materials denominated european currencies us canadian dollar use foreign currency forward exchange contracts time manage risk related intercompany purchases occur course year certain open foreign currency denominated commitments sell products third parties december 31 2015 open forward exchange contracts historically low exposure cost debt changes interest rates information longterm debt including principal amounts related interest rates appears note 11 notes consolidated financial statements annual report form 10k year ended december 31 2015 purchase significant amounts bronze ingot brass rod cast iron stainless steel plastic utilized manufacturing many product lines operating results adversely affected changes commodity prices unable pass related price increases customers manage risk monitoring related market prices working suppliers achieve maximum level stability costs related pricing seeking alternative supply sources necessary passing increases commodity costs customers maximum extent possible occur item 8item 7a quantitative qualitative disclosures market risk company uses derivative financial instruments primarily reduce exposure adverse fluctuations foreign exchange rates interest rates prices certain raw materials used manufacturing process company enter derivative financial instruments trading purposes matter policy derivative positions used reduce risk hedging underlying economic exposure derivatives company uses instruments liquid markets company manages foreign currency exposures consolidated basis company identifies known exposures part process natural hedges identified company nets natural hedges gross exposures companys consolidated earnings reported united states dollar subject translation risks due changes foreign currency exchange rates however overall exposure fluctuations reduced diversity foreign operating locations encompass number different european locations canada china companys foreign subsidiaries transact business including certain intercompany transactions foreign currencies transactions principally purchases sales materials denominated european currencies us canadian dollar company uses foreign currency forward exchange contracts manage risk related intercompany purchases occur course fiscal year certain open foreign currency denominated commitments sell products third parties december 31 2000 company forward contracts buy foreign currencies unrealized gains losses see note 16 notes consolidated financial statements company historically low exposure changes interest rates interest rate swaps used mitigate impact interest rate fluctuations certain variable rate debt instruments information companys longterm debt including principal amounts related interest rates appears note 11 notes consolidated financial statements included herein company purchases significant amounts bronze ingot brass rod cast iron utilized manufacturing many product lines companys operating results adversely affected changes commodity prices unable pass related price increases customers company manages risk monitoring related market prices working suppliers achieve maximum level stability costs related pricing seeking alternative supply sources necessary passing increases commodity costs customers maximum extent possible occur additionally limited basis company uses commodity futures contracts manage risk see note 16 notes consolidated financial statements item 8item 7a quantitative qualitative disclosures market risk use derivative financial instruments primarily reduce exposure adverse fluctuations foreign exchange rates interest rates costs certain raw materials used manufacturing process enter derivative financial instruments trading purposes matter policy derivative positions used reduce risk hedging underlying economic exposure derivatives use instruments liquid markets consolidated earnings reported united states dollars subject translation risks due changes foreign currency exchange rates risk concentrated exchange rate us dollar euro us dollar canadian dollar us dollar chinese yuan foreign subsidiaries transact business including certain intercompany transactions foreign currencies transactions principally purchases sales materials denominated european currencies us canadian dollar use foreign currency forward exchange contracts manage risk related intercompany purchases occur course year certain open foreign currency denominated commitments sell products third parties 2007 amounts recorded income change fair value contracts immaterial historically low exposure cost debt changes interest rates information longterm debt including principal amounts related interest rates appears note 11 notes consolidated financial statements annual report form 10k year ended december 31 2007 purchase significant amounts bronze ingot brass rod cast iron steel plastic utilized manufacturing many product lines operating results adversely affected changes commodity prices unable pass related price increases customers manage risk monitoring related market prices working suppliers achieve maximum level stability costs related pricing seeking alternative supply sources necessary passing increases commodity costs customers maximum extent possible occur item 8 item 8 financial statements supplementary data consolidated financial statements company set forth pages 10 21 annual report stockholders fiscal year ended june 30 1994 incorporated herein reference item 9item 8 financial statements supplementary data consolidated financial statements company set forth pages 15 25 annual report stockholders fiscal year ended june 30 1995 incorporated herein reference item 9item 8 financial statements supplementary data index financial statements included page 19 report item 9item 8 financial statements supplementary data index financial statements included page 12 report item 9item 8 financial statements supplementary data index financial statements included page 14 report item 9item 8 financial statements supplementary data index financial statements included page 16 report item 9item 8 financial statements supplementary data index financial statements included page 27 report item 9item 8 financial statements supplementary data index financial statements included page 40 report item 9item 8 financial statements supplementary data index financial statements included page 45 report item 9item 8 financial statements supplementary data index financial statements included page 47 report item 9item 8 financial statements supplementary data documents listed index financial statements page 55 report incorporated herein reference item 9item 8 financial statements supplementary data financial statements listed section 1 part iv item 15 exhibits financial statement schedules annual report incorporated herein reference item 9item 8 financial statements supplementary data financial statements listed section 1 part iv item 15 exhibits financial statement schedules annual report incorporated herein reference item 9item 8 financial statements supplementary data financial statements listed section 1 part iv item 15 exhibits financial statement schedules annual report incorporated herein reference item 9item 8 financial statements supplementary data financial statements listed section 1 part iv item 15 exhibits financial statement schedules annual report incorporated herein reference item 9item 8 financial statements supplementary data financial statements listed section 1 part iv item 15 exhibits financial statement schedules annual report incorporated herein reference item 9item 8 financial statements supplementary data financial statements listed section 1 “part iv item 15 exhibits financial statement schedules” annual report incorporated herein reference item 9item 8 financial statements supplementary data financial statements listed section 1 “part iv item 15 exhibits financial statement schedules” annual report incorporated herein reference item 9item 8 financial statements supplementary data financial statements listed section 1 “part iv item 15 exhibits financial statement schedules” annual report incorporated herein reference item 9item 8 financial statements supplementary data financial statements listed section 1 “part iv item 15 exhibits financial statement schedules” annual report incorporated herein reference item 9item 8 financial statements supplementary data financial statements listed section 1 “part iv item 15 exhibits financial statement schedules” annual report incorporated herein reference item 9item 8 financial statements supplementary data index financial statements included page 52 report incorporated herein reference item 9item 8 financial statements supplementary data financial statements listed section 1 part iv item 15 exhibits financial statement schedules annual report incorporated herein reference item 9item 8 financial statements supplementary data financial statements listed section 1 part iv item 15 exhibits financial statement schedules annual report incorporated herein reference item 9item 8 financial statements supplementary data financial statements listed section 1 part iv item 15 exhibits financial statement schedules annual report incorporated herein reference item 9item 8 financial statements supplementary data index financial statements included page 23 report item 9item 8 financial statements supplementary data financial statements listed section 1 part iv item 15 exhibits financial statement schedules annual report incorporated herein reference item 9 nannannannannannannanitem 15 exhibits financial statement schedules reports form 8k a1 financial statements following financial statements included separate section report commencing page numbers specified schedules provision made applicable accounting regulations securities exchange commission included notes consolidated financial statements required related instructions inapplicable therefore omitted a3 exhibits 101107 109 1017 1023 1027 constitute management contracts compensation plans arrangements company required filed exhibits annual report upon written request stockholder chief financial officer companys principal executive office company provide exhibits listed exhibit description location 21 distribution agreement watts industries inc circor international inc20 31 restated certificate incorporation amended12 32 amended restated bylaws amended july 24 20021 91 horne family voting trust agreement1991 dated october 31 19912 amendments dated november 19 199618 february 24 199718 june 5 199718 august 26 199718 october 17 199721 extension amendment dated october 25 200127 extension amendment dated september 3 2002 92 amended restated george b horne voting trust agreement1997 dated september 14 199922 101 supplemental compensation agreement effective september 1 1996 registrant timothy p horne14 amendment 1 dated july 25 200023 amendment 2 dated october 23 2002 102 deferred compensation agreement registrant timothy p horne amended4 103 indemnification agreement registrant timothy p horne dated august 7 2002 104 1996 stock option plan dated october 15 199615 first amendment dated february 28 2003 105 1989 nonqualified stock option plan3 106 watts industries inc retirement plan salaried employees dated december 30 1994 amended restated effective january 1 199412 amendment 114 amendment 214 amendment 314 amendment 4 dated september 4 199618 amendment 5 dated january 1 1998 amendment 6 dated may 3 199922 amendment 7 dated june 7 199922 107 watts industries inc pension plan amended restated effective january 1 1997 first amendment dated october 25 2002 108 registration rights agreement dated july 25 19865 109 executive incentive bonus plan amended12 1010 indenture dated december 1 1991 registrant first national bank boston trustee including form 838 note due 20038 1011 amended restated stock restriction agreement dated october 30 19912 amendment dated august 26 199718 1012 watts industries inc 1991 nonemployee directors nonqualified stock option plan7 amendment 114 1013 watts industries inc 2003 nonemployee directors stock option plan 1014 letters credit relating retrospective paid loss insurance programs10 1015 form stock restriction agreement management stockholders5 1016 loan agreement dated september 1987 related mortgage nv sallandsche bank6 1017 agreement sale shares intermes spa riaf holding ag participations multiscope due srl dated november 6 19929 1018 revolving credit agreement dated february 28 2002 among registrant watts regulator co watts industries europe bv lenders listed therein fleet national bank administrative agent24 1019 watts industries inc management stock purchase plan dated october 17 199513 amendment 1 dated august 5 199718 amendment 2 dated november 1 1999 amendment 3 dated march 1 2001 1020 stock purchase agreement dated june 19 1996 among mueller co tyco valves limited watts investment company tyco international ltd watts industries inc16 1021 guaranty dated february 28 2002 among registrant watts investment company watts spacemaker inc watts distribution company inc andersonbarrows metals corporation watts drainage products inc webster valve inc jameco industries inc favor fleet national bank lenders revolving credit agreement dated february 28 2002 revolving credit agreement2425 1022 promissory note dated may 9 2002 issued watts regulator company watts industries inc borrowers26 1023 separation release agreement registrant michael fifer dated december 30 2002 statement regarding computation earnings per common share19 subsidiaries consent kpmg llp 991 certification pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 992 certification pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 1incorporated reference relevant exhibit registrants form 10q quarter ended september 30 2002 2incorporated reference relevant exhibit registrants form 8k dated november 14 1991 3incorporated reference relevant exhibit registrants form 10k year ended june 30 1989 4incorporated reference relevant exhibit registrants form s1 336515 dated june 17 1986 5incorporated reference relevant exhibit registrants form s1 336515 part second amendment form s1 dated august 21 1986 6incorporated reference relevant exhibit registrants form s1 3327101 dated february 16 1989 7incorporated reference relevant exhibit registrants amendment 1 form 10k year ended june 30 1992 8incorporated reference relevant exhibit registrants form 10k year ended june 30 1992 9incorporated reference relevant exhibit registrants amendment 2 dated february 22 1993 form 8k dated november 6 1992 10incorporated reference relevant exhibit registrants form 10k year ended june 30 1993 11intentionally omitted 12incorporated reference relevant exhibit registrants form 10k year ended june 30 1995 13incorporated reference relevant exhibit registrants form s8 3364627 dated november 29 1995 14incorporated reference relevant exhibit registrants form 10k year ended june 30 1996 15incorporated reference relevant exhibit registrants form s8 33332685 dated august 1 1997 16incorporated reference relevant exhibit registrants form 8k dated september 4 1996 17intentionally omitted 18incorporated reference relevant exhibit registrants form 10k year ended june 30 1997 19incorporated reference notes consolidated financial statements note 2 report 20incorporated reference exhibit 21 circor international inc amendment 1 registration statement form 10 filed september 22 1999 file 00026961 21incorporated reference relevant exhibit registrants form 10k year ended june 30 1998 22incorporated reference relevant exhibit registrants form 10k year ended june 30 1999 23incorporated reference relevant exhibit registrants form 10q quarter ended september 30 2000 24incorporated reference relevant exhibit registrants form 10q quarter ended march 31 2002 25this guaranty substantially similar material respects guaranties entered watts cazzaniga spa watts ocean bv 26this note substantially similar material respects notes issued shareholders hunter innovations inc 27incorporated reference relevant exhibit registrants form 10k year ended december 31 2001 filed exhibit annual report securities exchange commission b reports form 8k reports filed form 8k quarter ending december 31 2002 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated signature title date patrick okeefe patrick okeefe chief executive officer president director march 26 2003 william c mccartney william c mccartney chief financial officer treasurer principal financial accounting officer secretary march 26 2003 gordon w moran gordon w moran chairman board march 26 2003 timothy p horne timothy p horne director march 26 2003 kenneth j mcavoy kenneth j mcavoy director march 26 2003 daniel j murphy iii daniel j murphy iii director march 26 2003 roger young roger young director march 26 2003 watts industries inc certification pursuant section 302 sarbanesoxley act 2002 certifications patrick okeefe certify 1 reviewed annual report form 10k watts industries inc 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4 registrants certifying officers responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared b evaluated effectiveness registrants disclosure controls procedures date within 90 days prior filing date annual report evaluation date c presented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5 registrants certifying officers disclosed based recent evaluation registrants auditors audit committee registrants board directors persons performing equivalent function significant deficiencies design operation internal controls could adversely affect registrants ability record process summarize report financial data identified registrants auditors material weaknesses internal controls b fraud whether material involves management employees significant role registrants internal controls 6 registrants certifying officers indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses date march 26 2003 patrick okeefe patrick okeefe chief executive officer watts industries inc certification pursuant section 302 sarbanesoxley act 2002 certifications william c mccartney certify 1 reviewed annual report form 10k watts industries inc 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4 registrants certifying officers responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared b evaluated effectiveness registrants disclosure controls procedures date within 90 days prior filing date annual report evaluation date c presented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5 registrants certifying officers disclosed based recent evaluation registrants auditors audit committee registrants board directors persons performing equivalent function significant deficiencies design operation internal controls could adversely affect registrants ability record process summarize report financial data identified registrants auditors material weaknesses internal controls b fraud whether material involves management employees significant role registrants internal controls 6 registrants certifying officers indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses date march 26 2003 william c mccartney william c mccartney chief financial officer treasurer independent auditors report board directors stockholders watts industries inc audited accompanying consolidated balance sheets watts industries inc subsidiaries december 31 2002 2001 related consolidated statements operations stockholders equity cash flows years threeyear period ended december 31 2002 consolidated financial statements responsibility companys management responsibility express opinion consolidated financial statements based audits conducted audits accordance auditing standards generally accepted united states america standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position watts industries inc subsidiaries december 31 2002 2001 results operations cash flows years threeyear period ended december 31 2002 conformity accounting principles generally accepted united states america discussed note 2 financial statements effective january 1 2002 company changed method accounting goodwill intangible assets based adoption financial accounting standards 142 goodwill intangible assets boston massachusetts february 12 2003 except note 19 march 25 2003 watts industries inc subsidiaries consolidated statements operations amounts thousands except per share information accompanying notes integral part consolidated financial statements watts industries inc subsidiaries consolidated balance sheets amounts thousands except share information accompanying notes integral part consolidated financial statements watts industries inc subsidiaries consolidated statements stockholders equity amounts thousands except share information accompanying notes integral part consolidated financial statements watts industries inc subsidiaries consolidated statements cash flows amounts thousands accompanying notes integral part consolidated financial statements watts industries inc subsidiaries notes consolidated financial statements 1 description business watts industries inc company designs manufactures sells extensive line valves products water quality water safety water flow control water conservation markets located predominantly north america europe asia 2 accounting policies principles consolidation consolidated financial statements include accounts company majority wholly owned subsidiaries upon consolidation significant intercompany accounts transactions eliminated cash equivalents cash equivalents consist highly liquid investments maturities three months less date original issuance allowance doubtful accounts allowance doubtful accounts accounted analyzing aging accounts receivable individual accounts receivable historical bad debts allowances concentration receivables customer credit worthiness current economic trends changes customer payment terms concentration credit company sells products diversified customer base therefore significant concentrations credit risk except approximately 102 companys total sales 2002 home depot inc inventories stated lower cost firstin firstout method market value determined replacement cost net realizable value historical experience used basis determining value excess obsolete inventories goodwill intangible assets goodwill represents excess cost fair value net assets businesses acquired company adopted financial accounting standards board statement 141 business combinations fas 141 fiscal 2001 financial accounting standards board statement 142 goodwill intangible assets fas 142 january 1 2002 fas 141 requires purchase method accounting used business combinations initiated june 30 2001 fas 141 also specifies criteria intangible assets acquired purchase method business combination must meet order recognized reported apart goodwill fas 142 requires goodwill intangible assets indefinite useful lives longer amortized instead tested impairment least annually fas 142 also requires intangible assets definite useful lives amortized respective estimated useful lives estimated residual values reviewed impairment accordance financial accounting standards board statement 144 accounting impairment disposal longlived assets fas 144 fas 142 requires company perform assessment whether indication remaining recorded goodwill impaired date adoption assessment involves twostep transitional impairment test accomplish company must identify reporting units determine carrying value reporting unit assigning assets liabilities including existing goodwill intangible assets reporting units january 1 2002 extent reporting units carrying amount exceeds fair value indication exists reporting units goodwill may impaired company must perform second step transitional impairment test transitional impairment loss recognized cumulative effect change accounting principle connection adoption fas 142 company completed first step transitional goodwill impairment test requires company compare fair value reporting units carrying value net assets respective reporting units january 1 2002 based analysis company concluded impairment existed time adoption accordingly company recognized transitional impairment loss fas 142 also requires goodwill tested annually annual tests events occur circumstances change would likely reduce fair value reporting unit carrying amount company elected perform annual tests indications goodwill impairment end fiscal october year company performed fiscal 2002 annual test october 27 2002 concluded impairment existed effect adoption standard prior period earnings excluding goodwill amortization expense net tax follows changes carrying amount goodwill twelve months ended december 31 2002 follows amortized intangible assets include following presented assets consolidated balance sheet aggregate amortization expense amortized intangible assets twelve months ended december 31 2002 477000 additionally future amortization expense intangible assets approximates 597000 fiscal 2003 542000 fiscal 2004 521000 fiscal 2005 2006 2007 prior adoption fas 141 fas 142 goodwill amortized 40 years using straightline method also company previously assessed recoverability intangible assets determining whether intangible asset balance recovered undiscounted cash flows acquired businesses amount impairment measured based projected discounted future operating cash flows using discount rate reflecting companys average cost funds property plant equipment property plant equipment recorded cost depreciation provided straightline basis estimated useful lives assets range 10 40 years buildings improvements 3 15 years machinery equipment income taxes income taxes accounted asset liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases operating loss tax credit carry forwards deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized income period includes enactment date foreign currency translation financial statements subsidiaries located outside united states generally measured using local currency functional currency balance sheet accounts including goodwill foreign subsidiaries translated united states dollars fiscal year end exchange rates income expense items translated weighted average exchange rates period net translation gains losses included comprehensive income separate component stockholders equity company provide us income taxes foreign currency translation adjustments since provide taxes undistributed earnings foreign subsidiaries gains losses foreign currency transactions subsidiaries included net earnings stock based compensation company accounts stock based compensations accordance accounting principles board opinion 25 accounting stock issued employees apb 25 related interpretations company records stock based compensation expense associated management stock purchase plan due discount market price stockbased compensation expense amortized expense straightline basis vesting period following table illustrates effect reported net income earnings per common share company applied fair value method measured stockbased compensation described fully note 13 required disclosure provisions financial accounting standards board 123 accounting stockbased compensationfas 123 amended financial accounting standards board 148 accounting stockbased compensation transition disclosurefas 148 net income per common share basic net income per common share calculated dividing net income weighted average number common shares outstanding calculation diluted earnings per share assumes conversion dilutive securities see note 13 net income number shares used compute net earnings per share continuing operations basic assuming full dilution reconciled derivative financial instruments normal course business company manages risks associated commodity prices foreign exchange rates interest rates variety strategies including use hedging transactions executed accordance policies companys hedging transactions include limited use various derivative financial commodity instruments matter policy company use derivative instruments unless underlying exposure change value derivative instruments would substantially offset opposite change value underlying hedged items company use derivative instruments trading speculative purposes using qualifying criteria defined financial accounting standards board statement 133 accounting derivative instruments hedging activities fas 133 derivative instruments designated accounted either hedge recognized asset liability fair value hedge forecasted transaction cash flow hedge fair value hedge effective ineffective portions change fair value derivative instrument along adjustment carrying amount hedged item fair value changes attributable hedged risk recognized earnings cash flow hedge changes fair value derivative instrument highly effective deferred accumulated comprehensive income loss underlying hedged item recognized earnings ineffective portion fair value changes qualifying hedges recognized earnings immediately fair value cash flow hedge cease qualify hedge accounting terminated would continue carried balance sheet fair value settled hedge accounting would discontinued prospectively forecasted transaction longer probable occurring amounts previously deferred accumulated comprehensive income would recognized immediately earnings occasion company may enter derivative instrument hedge accounting required entered offset changes fair value underlying transaction required recognized earnings natural hedge instruments reflected consolidated balance sheet fair value changes fair value recognized earnings certain forecasted transactions primarily intercompany sales united states canada assets exposed foreign currency risk company monitors foreign currency exposures ongoing basis maximize overall effectiveness foreign currency hedge positions fiscal year 2002 company used foreign currency forward contracts means hedging exposure foreign currency risks companys foreign currency forwards designated qualify cash flow hedges criteria fas 133 fas 133 requires changes fair value derivatives qualify cash flow hedges recognized comprehensive income ineffective portion derivatives change fair value recognized immediately earnings company also uses interest rate swaps hedges certain forecasted interest costs shipping handling shipping handling costs included selling general administrative expense amounted 20900000 21002000 19492000 fiscal years ended december 31 2002 2001 2000 respectively revenue recognition company recognizes revenue following criteria met product shipped title passes sales price customer fixed determinable collectability price reasonably assured provisions estimated returns allowances made time sale presented allowance doubtful accounts consolidated balance sheet sales incentives 2000 financial accounting standards boards emerging issues task force eitf added agenda various revenue recognition issues could impact income statement classification certain promotional payments may 2002 eitf reached consensus issue 0014 accounting certain sales incentiveseitf 0014 eitf 0014 addresses recognition income statement classification various sales incentives consensus became effective first quarter 2002 material companys consolidated financial statements effective january 1 2002 company adopted eitf issue 019 accounting consideration given vendor customer reseller vendors products eitf 019 material impact company historically accounted type consideration reduction revenue advertising company records advertising expense incurred basis presentation certain amounts fiscal years 2001 2000 reclassified permit comparison 2002 presentation estimates preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates new accounting standards august 2001 financial accounting standards board fasb issued financial accounting standards board statement 143 accounting asset retirement obligations fas 143 requires companies record fair value asset retirement obligation liability period incurs legal obligation associated retirement tangible longlived assets result acquisition construction development andor normal use assets company must also record corresponding increase carrying value related longlived asset depreciate cost remaining useful life asset liability must increased period passage time offset recorded operating expense liability must also adjusted changes estimated future cash flows underlying initial fair value measurement companies must also recognize gain loss settlement liability provisions fas 143 effective fiscal years beginning june 15 2002 date adoption fas 143 companies required recognize liability existing asset retirement obligations associated asset retirement costs company adopted fas 143 adoption material consolidated financial statements effective january 1 2002 company also adopted fas 144 addresses accounting reporting impairment disposal longlived assets fas 144 supercedes fas 121 retains many fundamental provisions fas 121 fas 144 also supercedes accounting reporting provisions accounting principles board opinion 30 reporting results operationsreporting effects disposal segment business extraordinary unusual infrequently occurring events transactions apb 30 disposal segment business however fas 144 retains requirements apb 30 report discontinued operations separately extends reporting requirement components entity either disposed classified held sale fas 144 excludes goodwill intangibles amortized scope companys former distribution center german market closed fiscal 2002 due companys manufacturing restructuring plan building actively marketed company expects building sold fiscal 2003 accordance fas 144 company classified asset held sale consolidated balance sheet december 31 2002 carrying asset fair value less costs sell april 2002 fasb issued financial accounting standards board statement 145 rescission fasb statements 4 44 64 amendment fasb statement 13 technical corrections fas 145 fas 145 rescinds fas 4 fas 64 related classification gains losses debt extinguishment debt extinguishment gains losses longer classified extraordinary fas 145 also amends fas 13 respect salesleaseback transactions company adopted provisions fas 145 effective april 1 2002 adoption material consolidated financial statements july 2002 fasb issued financial accounting standards board statement 146 accounting costs associated exit disposal activities fas 146 principal difference statement issue 943 relates requirements recognition liability cost associated exit disposal activity statement requires liability cost associated exit disposal activity recognized liability incurred issue 943 liability exit cost defined issue 943 recognized date entitys commitment exit plan provisions statement effective exit disposal activities initiated december 31 2002 company currently evaluating effect adoption fas 146 results operations financial position december 2002 fasb issued financial accounting standards board statement 148 accounting stockbased compensationtransition disclosure fas 148 statement effective fiscal years ending december 15 2002 amends fas 123 provides alternative methods transition voluntary change fair value based method accounting stockbased compensation addition fas 148 amends disclosure requirements fas 123 regardless accounting method used account stockbased compensation company chosen continue account stockbased compensation employees using fair value method prescribed apb 25 however enhanced disclosure provisions defined fas 148 effective december 31 2002 adopted company november 2002 fasb issued financial accounting standards board interpretation 45 guarantors accounting disclosure requirements guarantees including indirect guarantees indebtedness others fin 45 requires liability recorded guarantors balance sheet upon issuance guarantee addition fin 45 requires disclosures guarantees entity issued including rollforward entitys product warranty liabilities company apply recognition provisions fin 45 prospectively guarantees issued december 31 2002 company adopted disclosure provisions fin 45 effective december 31 2002 company offer warranties returns warranty immaterial warranty reserve part sales returns allowances component companys allowance doubtful accounts company currently process evaluating potential impact adoption fin 45 consolidated financial position results operations january 2003 fasb issued financial accounting standards board interpretation 46 consolidation variable interest entities fin 46 requires consolidation variable interest entities primary beneficiary entity equity investors entity characteristics controlling financial interest sufficient equity risk entity finance activities without additional subordinated financial support parties fin 46 effective new variable interest entities created acquired january 31 2003 variable interest entities created acquired prior february 1 2003 provisions fin 46 must applied first interim annual period beginning june 15 2003 q3 fiscal 2003 company currently evaluating effect adoption fin 46 results operations financial condition company currently evaluating whether would required consolidate jameco international llc fiscal 2003 financial statements jameco international llc imports sells vitreous china imported faucets faucet parts imported bathroom accessories north american retail market jameco international llc formed november 14 1996 company 49 interest jameco international llc involved operations daily basis loan amounts totaling 2231000 included carrying amount upon jameco international llc accrues pays interest company agreement provides 70 net income 500000 allocated company amounts thereafter allocated accordance membership interest annual sales twelve months ended december 31 2002 16685000 assets 3821000 less liabilities 1971000 excludes loan company jameco international llc sufficient substantially cover carrying amount 2009000 classified assets consolidated balance sheet assets comprised primarily accounts receivable inventory company believes collectable saleable respectively within normal course business 3 discontinued operations september 1996 company divested municipal water group businesses included henry pratt james jones company edward barber company ltd costs expenses related municipal water group fiscal 2000 relate legal settlement costs associated james jones litigation see note 15 condensed operating statement data discontinued operations summarized 4 restructuring charges company process implementing plan consolidate several manufacturing plants north america europe time expanding manufacturing capacity china low cost areas world implementation manufacturing restructuring plan began fourth quarter fiscal 2001 projects charges recorded fourth quarter fiscal 2001 essentially complete 2002 company decided expand scope manufacturing restructuring plan transfer certain production low cost manufacturing plants tunisia bulgaria expanded plan expected completed end fiscal 2003 company recorded pretax manufacturing restructuring costs 5831000 fourth quarter fiscal 2001 4089000 fiscal 2002 manufacturing restructuring costs recorded 2001 2002 consist primarily severance costs asset writedowns accelerated depreciation severance costs recorded restructuring 38 employees manufacturing administration groups 26 terminated december 31 2002 asset writedowns consist primarily writeoffs inventory related product lines company discontinued part restructuring plan recorded cost goods sold accelerated depreciation based shorter remaining estimated useful lives certain fixed assets recorded cost goods sold costs consist primarily removal shipping costs associated relocation manufacturing equipment recorded cost goods sold details manufacturing restructuring costs december 31 2002 follows 5 business acquisitions july 29 2002 whollyowned subsidiary company acquired fr foerster rothmann gmbh fr located neuenburg rhein germany approximately 23 million cash less assumed net debt 08 million fr manufactures distributes line gauges predominately french german oem markets frs annual revenue prior acquisition approximately 4 million euro december 31 2002 consolidated balance sheet company contains purchase price allocation consistent guidelines fas 141 july 15 2002 whollyowned subsidiary company acquired adev electronic sa adev located rosieres france closely affiliated distributor ek eminent ab eminent located gothenburg sweden approximately 129 million cash less assumed net debt 35 million adev also low cost manufacturing facility located tunisia adev manufactures distributes electronic systems predominantly oem market product lines include thermostats controls heating ventilation air conditioning control systems hydronic electric floor warming systems controls residential applications eminent distributes electronic controls mechanical thermostats electric control related products throughout european nordic countries two companies combined annual revenue preceding acquisition approximately 30 million euro december 31 2002 consolidated balance sheet company contains purchase price allocation consistent guidelines fas 141 may 9 2002 whollyowned subsidiary company acquired hunter innovations sacramento california 25 million approximately 10 million paid cash closing balance interest bearing notes payable equal installments next four years hunter innovations founded 1995 developed line large backflow prevention devices represent significant advance technology improved product features important backflow prevention markets include lighter weight compact design better flow characteristics improved serviceability multiple endconnection shutoff valve options hunter innovations sales twelve months preceding acquisition approximately 15 million unlike acquisitions hunter significant historical revenues earnings nonetheless purchase price based projected revenues earnings utilized acquisitions quarter ending september 30 2002 company obtained thirdparty valuation allocate purchase price consistent guidelines fas 141 allocation goodwill approximately 168 million approximately 117 million intangibles classified assets companys consolidated balance sheet december 31 2002 117 million acquired intangible assets 92 million assigned unpatented technology currently subject amortization 25 million patents twentyyear useful life 168 million goodwill assigned north american segment none deductible tax purposes march 5 2002 company entered joint venture yuhuan county cheng guan metal hose factory cheng guan located taizhou zhejiang province peoples republic china cheng guan annual sales prior transaction approximately 15 million manufacturer variety plumbing products sold chinese domestic market export markets product lines contributed joint venture include hose connectors multilayer tubing stainless steel braided hose joint venture owned 60 company 40 chinese partner company invest 78 million obtain 60 interest 50 million paid december 31 2002 december 31 2002 consolidated balance sheet company contains purchase price allocation joint venture allocation goodwill approximately 3 million approximately 2 million amortizable intangibles classified assets companys consolidated balance sheet december 31 2002 september 28 2001 whollyowned subsidiary company acquired assets powers process controls division mark controls corporation subsidiary crane co located skokie illinois mississauga ontario canada approximately 13 million cash powers designs manufactures thermostatic mixing valves personal safety process control applications commercial institutional facilities also manufactures control valves commercial plumbing brass products including shower valves lavatory faucets june 13 2001 whollyowned subsidiary company acquired premier manufactured systems inc located phoenix arizona approximately 5 million cash premier manufactures water filtration systems residential commercial applications filtration products including underthecounter ultraviolet filtration well variety sediment carbon filters june 1 2001 whollyowned subsidiary company acquired fimet srl fabbrica italiana manometri e termometri located milan italy whollyowned subsidiary mtb ad located bulgaria approximately 6 million acquired business manufactures pressure temperature gauges use hvac market january 5 2001 whollyowned subsidiary company acquired dumser metallbau gmbh co kg located landau germany approximately 20 million cash main products dumser include brass steel stainless steel manifolds used prime distribution device hydronic heating systems dumsers annualized sales prior acquisition approximately 24 million dumser 51 controlling share stern rubinetti stern rubinetti italian manufacturing company producing brass components located brescia italy august 30 2000 whollyowned subsidiary company acquired certain assets chiles power supply bask llc located springfield missouri approximately 3 million cash acquired business operating name watts radiant manufactures distributes complete line hydronic electric radiant heating snow melting systems may 12 2000 whollyowned subsidiary company acquired mccraney inc located santa ana california approximately 7 million cash mccraney business spacemaker manufactures complete line seismic restraint straps water heaters well water heater stands enclosures 6 allowance doubtful trade accounts receivable activity allowance doubtful trade accounts receivable including reserves estimated returns follows 7 inventories consist following 8 property plant equipment property plant equipment consists following 9 income taxes significant components companys deferred income tax liabilities assets follows provision income taxes continuing operations based following pretax income provision income taxes continuing operations consists following actual income taxes reported continuing operations different would computed applying federal statutory tax rate income continuing operations income taxes reasons difference follows december 31 2002 company net operating loss carryforwards 123 million income tax purposes 107 million net operating losses foreign losses carried forward indefinitely remainder us losses expiring fiscal 2022 company valuation allowance 07 million 06 million december 31 2002 2001 respectively portion net operating loss carryforwards undistributed earnings companys foreign subsidiaries amounted approximately 781 million december 31 2002 555 million december 31 2001 573 million december 31 2000 earnings considered indefinitely reinvested accordingly provision us federal state income taxes recorded thereon upon distribution earnings form dividends otherwise company subject withholding taxes payable various foreign countries determination amount us income tax liability would incurred practicable complexities associated hypothetical calculation however unrecognized foreign tax credits would available reduce portion us income tax liability withholding taxes approximately 34 million would payable upon remittance previously unremitted earnings december 31 2002 company made income tax payments 164 million fiscal year ended december 31 2002 197 million fiscal year ended december 31 2001 184 million fiscal year ended december 31 2000 company believes likely able recover deferred tax assets subject valuation allowance 10 accrued expenses liabilities accrued expenses liabilities consist following 11 financing arrangements longterm debt consists following principal payments next five fiscal years due follows thousands 200382211 20044628 200546066 20064261 2007409 interest paid periods presented accompanying consolidated financial statements approximates interest expense february 28 2002 company entered revolving credit facility syndicate banks revolving credit facility replaced companys 100 million us facility 39350000 euro facility revolving credit facility provides borrowings 150 million us includes 100 million tranche us dollar borrowings 50 million tranche euro based borrowings matures february 2005 approximately 46 million borrowings revolving credit facility used repay amounts outstanding prior facilities revolving credit facility used support companys acquisition program working capital requirements general corporate purposes letters credit purchased guarantees ensure companys performance payment third parties accordance specified terms conditions amounts outstanding approximately 19522000 december 31 2002 14997000 december 31 2001 instruments may exist expire without drawn therefore necessarily represent future cash flow obligations certain companys loan agreements contain covenants require among items maintenance certain financial ratios limit companys ability enter secured borrowing arrangements 12 common stock since fiscal 1997 companys board directors authorized repurchase 4380200 shares companys common stock open market private purchases since inception repurchase program 3716000 shares companys common stock repurchased retired class common stock class b common stock equal dividend liquidation rights share companys class common stock entitled one vote matters submitted stockholders share class b common stock entitled ten votes matters shares class b common stock convertible shares class common stock onetoone basis option holder december 31 2002 company reserved total 4079910 class common stock issuance stockbased compensation plans 8185224 shares conversion class b stock class common stock 13 stockbased compensation company several stock option plans key employees outside directors granted incentive isos nonqualified nsos options purchase companys class common stock generally options become exercisable five year period rate 20 per year expire ten years date grant isos nsos granted plans exercise prices less 100 50 fair market value common stock date grant respectively december 31 2002 2392418 shares class common stock authorized future grants options companys stock option plans following summary stock option activity related information following table summarizes information options outstanding december 31 2002 company management stock purchase plan allows granting restricted stock units rsus key employees purchase 1000000 shares class common stock 67 fair market value date grant rsus vest annually three year period date grant difference rsu price fair market value date award amortized compensation expense ratably vesting period december 31 2002 232511 rsus outstanding dividends declared rsus remain unpaid december 31 2002 total 56260 company elected follow apb 25 related interpretations accounting stockbased compensation addition company provides proforma disclosure stockbased compensation measured fair value requirements fas 123 proforma disclosures calculated awards granted june 30 1995 provided footnote 2 required fas 148 weighted average grant date fair value options granted 443 674 467 years ending december 31 2002 2001 2000 respectively also weighted average grant date fair value rsus related management stock purchase plan 240 416 367 years ending december 31 2002 2001 2000 respectively fair value companys stockbased awards employees management stock purchase plan used reconciliation footnote 2 estimated using blackscholes option pricing model following assumptions 14 employee benefit plans company sponsors defined benefit pension plans covering substantially domestic employees benefits based primarily years service employees compensation funding policy company plans contribute annual amount exceed maximum amount deducted federal income tax purposes components pension plans follows funded status defined benefit plan amounts recognized balance sheet follows additionally substantially companys domestic employees eligible participate 401k savings plan company matches specified percentage employee contributions subject certain limitations companys match expense years ended december 31 2002 2001 2000 330000 324000 225000 respectively weighted average assumptions used determining obligations pension benefit plans shown pension intangible asset recorded accordance financial accounting standards board statement 87 employers accounting pensions fas 87 states minimum additional liability required unfunded accumulated benefit obligation exists asset recognized prepaid pension cost b liability already recognized unfunded accrued pension cost less unfunded accumulated benefit obligation c accrued prepaid pension cost recognized december 31 2002 company unfunded accrued pension cost less unfunded accumulated benefit obligation accordingly minimum additional liability required approximately 75 million additional minimum liability recognized pursuant fas 87 equal amount recognized intangible asset provided asset recognized exceed amount unrecognized prior service cost december 31 2002 unrecognized prior service cost 11 million accordingly related intangible asset 11 million companys case additional minimum liability exceeded unrecognized prior service cost almost 64 million accordingly additional liability excess unrecognized prior service cost represents net loss yet recognized net periodic pension cost reported separate component comprehensive income stockholders equity net tax benefits result considering losses timing differences accordance financial accounting standards board statement 109 accounting income taxes fas 109 deferred tax component minimum additional liability 24 million underlying reason companys large minimum additional liability lies performing capital markets united states company entered supplemental compensation agreement timothy p horne september 1 1996 per agreement upon ceasing employee company mr horne must make available requested board work minimum 300 500 hours per year consultant return certain annual compensation long physically able mr horne complies consulting provisions agreement shall receive supplemental compensation annual basis 400000 per year exchange services performed long physically able event physical disability subsequent commencing consulting services company mr horne continue receive 400000 annually payment consulting services provided mr horne expensed incurred company mr horne retired effective december 31 2002 therefore supplemental compensation period began january 1 2003 accordance financial accounting standards board statement 106 employers accounting post retirement benefits pensions company accrue future postretirement disability benefits period january 1 2003 time mr horne becomes physically unable perform consulting services period disability benefits earned 15 contingencies environmental remediation contingencies april 1998 company became aware complaint filed seal state california alleging violations california false claims act complaint alleges former subsidiary company james jones company sold products utilized municipal water systems failed meet contractually specified standards falsely certified standards met complaint alleges municipal entities suffered damages result defective products seeks treble damages reimbursement legal costs penalties original complaint amended total number named plaintiffs 161 14 intervened 47 ordered excluded case june 2001 company defendants reached proposed settlement los angeles department water power one plaintiffs james jones case approved california superior court october 31 2001 los angeles city council december 14 2001 plaintiffs remain company vigorously contesting matter case nora armenta relator sued james jones companywatts industries inc formerly owned james jones mueller co tyco international us california superior court los angeles county relator seeks three times unspecified amount actual damages alleges municipalities suffered hundreds millions dollars damages relator also seeks civil penalties 10000 false claim alleges defendants responsible tens thousands false claims company settled city los angeles far significant city 57 million plus relators statutory share attorneys fees codefendants contribute 20 million toward settlement court required relator select cities strongest claims tried first company settled city los angeles relator made offer settle balance case 1219 million company rejected company reserve amount 105 million aftertax respect james jones litigation consolidated balance sheet december 31 2002 company believes basis available information reserve adequate cover probable reasonably estimable losses resulting james jones litigation however litigation inherently uncertain company believes exists reasonable possibility may ultimately incur losses james jones litigation excess amount accrued company currently unable make estimate range additional losses february 14 2001 company filed complaint california superior court insurers coverage claims armenta case james jones company filed similar complaint cases consolidated october 30 2001 california superior court made summary adjudication ruling zurich american insurance company must pay reasonable defense costs incurred company armenta case since april 23 1998 well companys future defense costs case final resolution september 5 2002 compliance october 30 2001 ruling subsequent california superior court order zurich paid company approximately 95 million defense costs 10 interest company previously submitted zurich payment october 24 2002 california superior court made another summary adjudication ruling zurich must indemnify pay company amounts company must pay settlement agreement city los angeles january 16 2003 zurich paid company 27 million compliance order zurich asserted amounts paid subject reimbursement deductible agreements company zurich recorded income associated payments management counsel anticipate company still challenged ultimately prevail issue zurich sought appellate review orders requiring pay 95 million defense costs indemnify company settlement city los angeles california court appeal agreed review orders require payment defense costs company currently unable predict outcome litigation relating los angeles indemnification coverage company intends continue contest vigorously armenta case related litigation environmental remediation company named potentially responsible party respect limited number identified contaminated sites level contamination varies significantly site related levels remediation efforts environmental liabilities recorded based probable cost known estimated minimum cost remediation companys accrued estimated environmental liabilities based assumptions subject number factors uncertainties circumstances affect reliability precision estimates include identification additional sites environmental regulations level cleanup required technologies available number financial condition contributors remediation time period remediation may occur company recognizes changes estimates new remediation requirements defined new information becomes available company estimates accrued environmental remediation liabilities likely paid next five ten years several years new york attorney general nyag threatened bring suit approximately 16 potentially responsible parties prps including watts jameco incurred remediation costs operation maintenance costs incurred connection cleanup landfill site babylon long island nyag identified recovery numbers 19 million 24 million early know final recovery number final number prps proportion final costs may allocated company asbestos litigation december 31 2002 company defendant approximately 60 actions filed mississippi new jersey state courts alleging injury death result exposure asbestos filings typically name multiple defendants filed behalf many plaintiffs identify particular products source asbestos exposure reason conclude filings material effect companys liquidity financial condition results operations litigation lawsuits proceedings claims arising ordinary course operations also pending threatened company subsidiaries based facts currently known company believe ultimate outcome litigation matters material adverse effect financial condition results operation 16 financial instruments fair value carrying amounts cash equivalents trade receivables trade payables approximate fair value short maturity financial instruments fair value companys 838 notes due december 2003 based quoted market prices fair value companys variable rate debt approximates carrying value carrying amount estimated fair market value companys longterm debt including current portion follows derivative instruments company uses foreign currency forward exchange contracts reduce impact currency fluctuations certain anticipated intercompany purchase transactions expected occur within fiscal year certain foreign currency transactions related gains losses recognized incomeexpense contracts expire generally period underlying foreign currency denominated transaction contracts subject company significant market risk exchange movement offset gains losses related foreign currency denominated transactions december 31 2002 2001 2000 company outstanding forward contracts buy foreign currencies company uses commodity futures contracts fix price certain portion certain raw materials used manufacturing process contracts highly correlate actual purchases commodity contract values reflected cost commodity actually purchased june 30 1999 company outstanding contracts notional value 35 million fair value 02 million december 1999 contacts sold company realized gain approximately 05 million gain deferred december 31 1999 offset costs january february 2000 raw material purchases hedged original transaction commodity contracts outstanding december 31 2002 2001 2000 december 31 2001 company outstanding interest rate swap converted 20 million euro borrowings variable rate euro line credit fixed rate borrowings 43 swap agreement expired march 2002 value impact companys results material december 31 2002 september 2001 company entered interest rate swap 75 million notes company swapped fixed interest rate 838 floating libor plus 374 august 5 2002 company sold swap received 2315000 cash accordance fas 133 based company terminating hedge transaction adjustment fair value amortized 2003 term notes reduction interest expense value 1420000 december 31 2002 leases company leases certain manufacturing facilities sales offices warehouses equipment generally leases carry renewal provisions require company pay maintenance costs future minimum payments december 31 2002 follows 17 segment information following table presents certain operating segment information operating segment individually managed separate financial results reviewed companys chief operating decisionmaker corporate expenses primarily compensation expense professional fees including legal audit expenses product liability general liability insurances goodwill amounts 163226000 102862000 reported north american segment 60364000 reported european segment intercompany transactions eliminated intersegment revenues significant 18 quarterly financial information unaudited 19 subsequent events company maintains 60 interest joint venture tianjin tanggu watts valve company limited twt company operating tianjin china joint ventures tianjin municipality historically required tianjian local regulations establish chinese employee account purpose account disburse funds chinese employees joint venture items wages fringe benefits pertaining employment joint ventures responsibility fund account essentially places funds trust chinese employees account funded joint venture records reduction cash records associated expenses reporting period therefore funds account included balance sheet joint venture funds historically placed account twt benefit employees appears joint venture appropriately recorded expenses results operations chinese party representatives joint venture responsible appropriate disbursement funds employees twt specific control account properly approved funded twt subsequent year end certain unauthorized activities noted pertaining companys chinese joint venture partners handling account certain payments benefited twt chinese joint venture partners others improperly made account payments benefited twt properly reflected results operations additionally certain funds received account pertaining twt appropriately reflected results operations twt identified items impacting results operations pertaining account recorded twt included accompanying financial statements items amounted charge net tax approximately 164000 companys consolidated financial statements based interest twt new chinese legislation joint ventures tianjin longer required maintain wage benefit account chinese employees legislation twt ability close account whereby funds remaining account 2007 consideration employee claims would revert back twt recorded twt statement operations watts management require twt close account accordance new legislation yearend 2002 account assets approximately 22 million based 60 ownership watts potential impact consolidated statement operations ranges pretax gain approximately 13 million pretax loss 12 million company able estimate liability fas 5 based facts noted result review activities noted also determined joint venture partners twt improperly established approximately 15 subsidiary branches twt china without approval twt board directors required chinese law terms joint venture agreement result twt could found legally responsible chinese law possible claims branches watts management currently unaware existing liabilities claims pertaining branches twt would responsible management believe contingencies relating either account branches result material impact companys financial statements part item 1 business item 2 properties item 3 legal proceedings item 4 submission matters vote security holders part ii item 5 market registrants common equity related stockholder matters item 6 selected financial data item 7 managements discussion analysis financial condition results operations item 7a quantitative qualitative disclosures market risk item 8 financial statements supplementary data item 9 changes disagreements accountants accounting financial disclosure part iii item 10 directors executive officers registrant item 11 executive compensation item 12 security ownership certain beneficial owners management item 13 certain relationships related transactions item 14 controls procedures part iv item 15 exhibits financial statement schedules reports form 8k signaturesitem 15 exhibits financial statement schedules reports form 8k a1 financial statements following financial statements included separate section report commencing page numbers specified a2 schedules provision made applicable accounting regulations securities exchange commission included notes consolidated financial statements required related instructions inapplicable therefore omitted a3 exhibits exhibit description 21 distribution agreement dated october 1 1999 registrant circor international inc 17 31 restated certificate incorporation amended 1 32 amended restated bylaws amended 1 91 amended restated george b horne voting trust agreement1997 dated september 14 1999 18 101 supplemental compensation agreement effective september 1 1996 registrant timothy p horne 11 amendment 1 dated july 25 2000 19 amendment 2 dated october 23 2002 3 102 deferred compensation agreement registrant timothy p horne amended 4 103 form indemnification agreement registrant certain directors officers registrant dated february 10 2004 104 1996 stock option plan dated october 15 1996 12 first amendment dated february 28 2003 3 105 1986 incentive stock option plan amended 106 watts industries inc retirement plan salaried employees dated december 30 1994 amended restated effective january 1 1994 9 amendment 1 11 amendment 2 11 amendment 3 11 amendment 4 dated september 4 1996 15 amendment 5 dated january 1 1998 18 amendment 6 dated may 3 1999 18 amendment 7 dated june 7 1999 18 107 watts industries inc pension plan amended restated effective january 1 1997 3 first amendment dated october 25 2002 3 108 registration rights agreement dated july 25 1986 5 109 executive incentive bonus plan amended 9 1010 amended restated stock restriction agreement dated october 30 1991 2 amendment dated august 26 1997 15 1011 watts industries inc 1991 nonemployee directors nonqualified stock option plan 6 amendment 1 11 1012 watts industries inc 2003 nonemployee directors stock option plan 3 1013 letter credit issued fleet national bank successor bankboston na benefit zurichamerican insurance company dated june 25 1999 amended january 22 2001 1014 form stock restriction agreement management stockholders 5 1015 letter credit issued fleet national bank benefit ace property casualty insurance company pacific employers insurance company dated january 23 2002 amended february 6 2003 1016 revolving credit agreement dated february 28 2002 among registrant watts regulator co watts industries europe bv lenders listed therein fleet national bank administrative agent 20 first amendment dated march 28 2003 7 second amendment dated july 25 2003 8 third amendment dated december 16 2003 1017 watts industries inc management stock purchase plan dated october 17 1995 10 amendment 1 dated august 5 1997 15 amendment 2 dated november 1 1999 14 amendment 3 dated march 1 2001 3 1018 stock purchase agreement dated june 19 1996 among mueller co tyco valves limited watts investment company tyco international ltd registrant 13 1019 guaranty dated february 28 2002 among registrant watts investment company watts spacemaker inc watts distribution company inc andersonbarrows metals corporation watts drainage products inc webster valve inc jameco industries inc favor fleet national bank lenders revolving credit agreement dated february 28 2002 20 ratification guaranty dated february 28 2002 7 1020 form promissory note dated may 9 2002 issued watts regulator company registrant borrowers former shareholders hunter innovations inc 21 1021 note purchase agreement dated may 15 2003 registrant purchasers named schedule thereto relating registrants 50000000 487 senior notes series due may 15 2010 75000000 547 senior notes series b due may 15 2013 7 1022 form 487 senior note due may 15 2010 7 1023 form 547 senior note due may 15 2013 7 1024 watts water technologies inc 2004 stock incentive plan statement regarding computation earnings per common share 16 subsidiaries consent kpmg llp 311 certification principal executive officer pursuant rule 13a14a rule 15d14a securities exchange act 1934 amended 312 certification principal financial officer pursuant rule 13a14a rule 15d14a securities exchange act 1934 amended 321 certification principal executive officer pursuant 18 usc section 1350 322 certification principal financial officer pursuant 18 usc section 1350 1incorporated reference registrants registration statement form s3 333105989 filed securities exchange commission june 10 2003 2incorporated reference registrants form 8k dated november 14 1991 3incorporated reference registrants annual report form 10k year ended december 31 2002 4incorporated reference registrants form s1 336515 dated june 17 1986 5incorporated reference registrants form s1 336515 part second amendment form s1 dated august 21 1986 6incorporated reference amendment 1 registrants annual report form 10k year ended june 30 1992 7incorporated reference registrants quarterly report form 10q quarter ended june 30 2003 8incorporated reference registrants quarterly report form 10q quarter ended september 30 2003 9incorporated reference registrants annual report form 10k year ended june 30 1995 10incorporated reference registrants form s8 3364627 dated november 29 1995 11incorporated reference registrants annual report form 10k year ended june 30 1996 12incorporated reference registrants form s8 33332685 dated august 1 1997 13incorporated reference registrants form 8k dated september 4 1996 14incorporated reference registrants annual report form 10k year ended december 31 2000 15incorporated reference registrants annual report form 10k year ended june 30 1997 16incorporated reference notes consolidated financial statements note 2 report 17incorporated reference exhibit 21 circor international inc amendment 1 registration statement form 10 filed september 22 1999 file 00026961 18incorporated reference registrants annual report form 10k year ended june 30 1999 19incorporated reference registrants quarterly report form 10q quarter ended september 30 2000 20incorporated reference registrants quarterly report form 10q quarter ended march 31 2002 21incorporated reference registrants quarterly report form 10q quarter ended june 30 2002 management contract compensatory plan arrangement b reports form 8k following current reports form 8k filed registrant quarter ended december 31 2003 1the registrant filed current report form 8k december 11 2003 reporting item 5 december 10 2003 registrant entered underwriting agreement sell 4000000 shares class common stock plus additional 600000 shares class common stock cover overallotments 2the registrant filed current report form 8k december 2 2003 reporting item 5 december 1 2003 registrant announced intention offer 4000000 shares class common stock plus additional 600000 shares class common stock cover overallotments pursuant effective shelf registration statement 3the registrant filed current report form 8k october 15 2003 reporting item 5 registrant changed name watts industries inc watts water technologies inc 4the registrant filed current report form 8k october 9 2003 reporting item 5 registrant would change name watts industries inc watts water technologies inc effective october 15 2003 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized watts water technologies inc patrick okeefe patrick okeefe chief executive officer president director dated march 12 2004 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated signature title date patrick okeefe patrick okeefe chief executive officer president director march 12 2004 william c mccartney william c mccartney chief financial officer treasurer principal financial accounting officer secretary march 12 2004 gordon w moran gordon w moran chairman board march 12 2004 timothy p horne timothy p horne director march 12 2004 kenneth j mcavoy kenneth j mcavoy director march 12 2004 daniel j murphy iii daniel j murphy iii director march 12 2004 roger young roger young director march 12 2004 john k mcgillicuddy john k mcgillicuddy director march 12 2004 independent auditors report board directors stockholders watts water technologies inc audited accompanying consolidated balance sheets watts water technologies inc subsidiaries december 31 2003 2002 related consolidated statements operations stockholders equity cash flows years threeyear period ended december 31 2003 connection audits consolidated financial statements also audited financial statement schedule consolidated financial statements financial statement schedule responsibility companys management responsibility express opinion consolidated financial statements financial statement schedule based audits conducted audits accordance auditing standards generally accepted united states america standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position watts water technologies inc subsidiaries december 31 2003 2002 results operations cash flows years threeyear period ended december 31 2003 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein discussed note 2 financial statements effective january 1 2002 company changed method accounting goodwill intangible assets based adoption financial accounting standards 142 goodwill intangible assets boston massachusetts february 3 2004 except first paragraph note 19 february 20 2004 watts water technologies inc subsidiaries consolidated statements operations amounts thousands except per share information accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated balance sheets amounts thousands except share information accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated statements stockholders equity amounts thousands except share information accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated statements cash flows amounts thousands accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries notes consolidated financial statements 1 description business watts water technologies inc company designs manufactures sells extensive line water safety flow control products water quality water safety water flow control water conservation markets located predominantly north america europe china october 15 2003 company changed name watts industries inc watts water technologies inc accurately reflect strategic focus providing solutions customers water based needs 2 accounting policies principles consolidation consolidated financial statements include accounts company majority wholly owned subsidiaries upon consolidation significant intercompany accounts transactions eliminated cash equivalents cash equivalents consist highly liquid investments maturities three months less date original issuance allowance doubtful accounts allowance doubtful accounts includes reserves bad debts sales returns allowances company analyzes aging accounts receivable individual accounts receivable historical bad debts concentration receivables customer credit worthiness current economic trends changes customer payment terms company specifically analyzes individual accounts receivable establishes specific reserves financially troubled customers addition factors developed certain regions utilizing historical trends sales returns allowances derive reserve returns allowances concentration credit company sells products diversified customer base therefore significant concentrations credit risk except approximately 106 102 companys total sales 2003 2002 respectively one company inventories stated lower cost firstin firstout method market value determined replacement cost net realizable value historical experience used basis determining reserve excess obsolete inventories goodwill intangible assets goodwill recorded consideration paid acquisitions exceeds fair value net tangible intangible assets acquired june 2001 financial accounting standards board fasb issued financial accounting standards board statement 141 business combinations fas 141 financial accounting standards board statement 142 goodwill intangible assets fas 142 fas 141 requires purchase method accounting used business combinations completed june 30 2001 fas 142 requires goodwill intangible assets indefinite useful lives longer amortized rather tested annually impairment prior adoption fas 142 goodwill amortized 40 years using straightline method also company previously assessed recoverability intangible assets determining whether intangible asset balance could recovered undiscounted cash flows acquired businesses amount impairment measured based projected discounted future operating cash flows using discount rate reflecting companys average cost funds impairment goodwill longlived assets goodwill intangible assets indefinite lives tested annually impairment accordance provisions fas 142 companys impairment review based discounted cash flow approach reporting unit level requires management judgment respect revenue expense growth rates changes working capital selection use appropriate discount rate company uses judgment assessing whether assets may become impaired annual impairment tests indicators unexpected adverse business conditions economic factors unanticipated technological change competitive activities loss key personnel acts governments courts may signal asset become impaired intangible assets estimable lives longlived assets reviewed impairment whenever events changes circumstances indicate carrying amount asset group may recoverable accordance financial accounting standards board statement 144 accounting impairment disposal longlived assets fas 144 recoverability intangible assets estimable lives longlived assets measured comparison carrying amount asset group future net undiscounted pretax cash flows expected generated asset group comparisons indicate asset recoverable impairment loss recognized amount carrying amount asset group exceeds related estimated fair value estimated fair value based either discounted future pretax operating cash flows appraised values depending nature asset company determines discount rate analysis based expected internal rate return related business allocate interest charges asset group measured judgment required estimate discounted future operating cash flows following table adjusts net income 2001 reflect would fas 142 adopted january 1 2001 changes carrying amount goodwill follows intangible assets include following presented assets consolidated balance sheets aggregate amortization expense amortized intangible assets year ended december 31 2003 2002 2001 763000 477000 484000 respectively additionally future amortization expense intangible assets approximates 517000 2004 511000 2005 472000 2006 2007 448000 2008 property plant equipment property plant equipment recorded cost depreciation provided straightline basis estimated useful lives assets range 10 40 years buildings improvements 3 15 years machinery equipment income taxes income taxes accounted asset liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases operating loss tax credit carry forwards deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized income period includes enactment date foreign currency translation financial statements subsidiaries located outside united states generally measured using local currency functional currency balance sheet accounts including goodwill foreign subsidiaries translated united states dollars yearend exchange rates income expense items translated weighted average exchange rates period net translation gains losses included comprehensive income separate component stockholders equity company provide us income taxes foreign currency translation adjustments since provide taxes undistributed earnings foreign subsidiaries gains losses foreign currency transactions subsidiaries included net earnings stock based compensation company accounts stock based compensations accordance accounting principles board opinion 25 accounting stock issued employees apb 25 related interpretations company records stock based compensation expense associated management stock purchase plan due discount market price stockbased compensation expense amortized expense straightline basis vesting period following table illustrates effect reported net income earnings per common share company applied fair value method measure stockbased compensation described fully note 13 required disclosure provisions financial accounting standards board 123 accounting stockbased compensation fas 123 amended financial accounting standards board 148 accounting stockbased compensation transition disclosure fas 148 net income per common share basic net income per common share calculated dividing net income weighted average number common shares outstanding calculation diluted earnings per share assumes conversion dilutive securities see note 13 net income number shares used compute net earnings per share basic assuming full dilution reconciled stock options purchase 706656 shares common stock outstanding december 31 2001 included computation diluted earnings per share options exercise price greater average market price common shares therefore effect would antidilutive none outstanding december 31 2003 2002 derivative financial instruments normal course business company manages risks associated commodity prices foreign exchange rates interest rates variety strategies including use hedging transactions executed accordance companys policies companys hedging transactions include limited use various derivative financial commodity instruments matter policy company use derivative instruments unless underlying exposure change value derivative instruments would substantially offset opposite change value underlying hedged items company use derivative instruments trading speculative purposes using qualifying criteria defined financial accounting standards board statement 133 accounting derivative instruments hedging activities fas 133 derivative instruments designated accounted either hedge recognized asset liability fair value hedge forecasted transaction cash flow hedge fair value hedge effective ineffective portions change fair value derivative instrument along adjustment carrying amount hedged item fair value changes attributable hedged risk recognized earnings cash flow hedge changes fair value derivative instrument highly effective deferred accumulated comprehensive income loss underlying hedged item recognized earnings ineffective portion fair value changes qualifying hedges recognized earnings immediately fair value cash flow hedge cease qualify hedge accounting terminated would continue carried balance sheet fair value settled hedge accounting would discontinued prospectively forecasted transaction longer probable occurring amounts previously deferred accumulated comprehensive income would recognized immediately earnings occasion company may enter derivative instrument hedge accounting required entered offset changes fair value underlying transaction required recognized earnings natural hedge instruments reflected consolidated balance sheets fair value changes fair value recognized earnings certain forecasted transactions primarily intercompany sales united states canada assets exposed foreign currency risk company monitors foreign currency exposures ongoing basis maximize overall effectiveness foreign currency hedge positions 2003 company used foreign currency forward contracts means hedging exposure foreign currency risks companys foreign currency forwards designated qualify cash flow hedges criteria fas 133 fas 133 requires changes fair value derivatives qualify cash flow hedges recognized comprehensive income ineffective portion derivatives change fair value recognized immediately earnings portions companys outstanding debt exposed interest rate risks company monitors interest rate exposures ongoing basis maximize overall effectiveness interest rates 2003 company entered interest rate swap means hedging exposure interest rate risks see note 11 companys swap designated cash flow hedge criteria fas 133 shipping handling shipping handling costs included selling general administrative expense amounted 22111000 20900000 21002000 years ended december 31 2003 2002 2001 respectively research development research development costs included selling general administrative expense amounted 9178000 9132000 6584000 years ended december 31 2003 2002 2001 respectively revenue recognition company recognizes revenue following criteria met company entered binding agreement product shipped title passes sales price customer fixed determinable collectability reasonably assured provisions estimated returns allowances made time sale recorded reduction sales included allowance doubtful accounts consolidated balance sheets company records provisions sales incentives primarily volume rebates adjustment net sales accordance financial accounting standards boards emerging issues task force eitf issue 0014 accounting certain sales incentiveseitf 0014 eitf issue 019 accounting consideration given vendor customer reseller vendors products advertising company records advertising expense incurred basis presentation certain amounts years 2002 2001 reclassified permit comparison 2003 presentation estimates preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates new accounting standards august 2001 financial accounting standards board fasb issued financial accounting standards board statement 143 accounting asset retirement obligations fas 143 requires companies record fair value asset retirement obligation liability period incurs legal obligation associated retirement tangible longlived assets result acquisition construction development andor normal use assets company must also record corresponding increase carrying value related longlived asset depreciate cost remaining useful life asset liability must increased period passage time offset recorded operating expense liability must also adjusted changes estimated future cash flows underlying initial fair value measurement companies must also recognize gain loss settlement liability provisions fas 143 effective fiscal years beginning june 15 2002 date adoption fas 143 companies required recognize liability existing asset retirement obligations associated asset retirement costs company adopted fas 143 effective january 1 2003 adoption material consolidated financial statements july 2002 fasb issued financial accounting standards board statement 146 accounting costs associated exit disposal activities fas 146 principal difference statement emergency issues task force eitf issue 943 liability recognition certain employee termination benefits costs exit activity including certain costs incurred restructuring issue 943 relates requirements recognition liability cost associated exit disposal activity statement requires liability cost associated exit disposal activity recognized liability incurred issue 943 liability exit cost recognized date entitys commitment exit plan provisions statement effective exit disposal activities initiated december 31 2002 company adopted fas 146 effective january 1 2003 adoption material consolidated financial statements november 2002 fasb issued financial accounting standards board interpretation 45 guarantors accounting disclosure requirements guarantees including indirect guarantees indebtedness others fin 45 fin 45 requires liability recorded guarantors balance sheet upon issuance certain guarantees addition fin 45 requires disclosures guarantees entity issued including rollforward entitys product warranty liabilities fin 45 required application recognition provisions fin 45 prospectively guarantees issued december 31 2002 company adopted disclosure provisions fin 45 effective december 31 2002 company offer warranties products returns warranty immaterial warranty reserve part sales returns allowances reserve component companys allowance doubtful accounts company adopted fin 45 effective january 1 2003 adoption material consolidated financial statements december 2002 fasb issued financial accounting standards board statement 148 accounting stockbased compensation transition disclosure fas 148 fas 148 provides alternative methods transition voluntary change fair value based method accounting stockbased employee compensation fas 148 also requires disclosures pro forma effect using fair value method accounting stockbased employee compensation displayed prominently tabular format additionally fas 148 requires disclosure pro forma effect interim financial statements additional disclosure requirements fas 148 effective fiscal years ended december 15 2002 company currently continues account stockbased compensation accordance accounting principles board opinion 25 company provided disclosures required fas 148 december 2002 eitf issued eitf 0021 accounting revenue arrangements multiple deliverables consensus provides guidance determining revenue arrangement multiple deliverables divided separate units accounting separation appropriate arrangement consideration allocated identified accounting units provisions eitf 0021 effective revenue arrangements entered fiscal periods beginning june 15 2003 company adopted eitf 0021 effective july 1 2003 adoption material consolidated financial statements january 2003 fasb issued financial accounting standards board interpretation 46 consolidation variable interest entities fin 46 requires consolidation variable interest entities vie primary beneficiary entity equity investors entity characteristics controlling financial interest sufficient equity risk entity finance activities without additional subordinated financial support parties fin 46 effective new vies created acquired january 31 2003 october 2003 fasb delayed effective date vies existed prior february 1 2003 provided reporting entity issued financial statements reporting vie accordance interpretation 46 fin 46 effective first interim annual period ending december 15 2003 december 2003 fasb issued revision fin 46 fin 46r revised provisions public entities required apply guidance entity interests vies commonly referred specialpurpose entities periods ending december 15 2003 company adopted fin 46r result consolidated jameco international llc effective october 1 2003 fourth quarter fiscal 2003 llc imports sells vitreous china imported faucets faucet parts imported bathroom accessories north american home improvement retail market annual sales twelve months ended december 31 2003 approximately 16079000 llc maintains line credit financial institution collateralized first security interest llcs assets creditors recourse company assets december 31 2003 3960000 comprised primarily accounts receivable inventory company believes collectable saleable respectively within normal course business company subordinated security interest assets llc pertaining loan receivable 2230680 december 31 2003 eliminates consolidation result application fin 46r prior adoption fin 46r company accounted investment 49 llc using equity method company also maintains another variable interest vie 2000 company entered agreement plumworldcouk ltd company maintains 20 interest plumbworld primarily ebusiness sells bathroom sanitary appliances well plumbing heating products tools plumbing consumables annualized sales approximately 7100000 company maintains notional amount approximately 500 investment plumbworld maintains loan receivable amount approximately 850000 plumbworld company continues account investment plumbworld using equity method april 2003 fasb issued financial accounting standards board statement 149 amendment statement 133 derivative instruments hedging activities fas 149 fas 149 amends clarifies financial accounting reporting derivative instruments including certain derivative instruments embedded contracts hedging activities fas 133 accounting derivative instruments hedging activities fas 133 fas 149 multiple effective date provisions depending nature amendments fas 133 including one contracts entered modified june 30 2003 company adopted fas 149 adoption material consolidated financial statements may 2003 fasb issued financial accounting standards board statement 150 accounting certain financial instruments characteristics liabilities equity fas 150 fas 150 establishes standards issuer classifies measures certain financial instruments characteristics liabilities equity fas 150 effective certain financial instruments entered modified may 31 2003 unmodified financial instruments existing may 31 2003 fas 150 effective beginning first interim period beginning june 15 2003 company adopted fas 150 apart deferral fasb staff position 1503 fas 1503 certain mandatorilly redeemable non controlling interests adoption material consolidated financial statements 3 discontinued operations september 1996 company divested municipal water group businesses included henry pratt james jones company edward barber company ltd costs expenses related municipal water group 2003 relate legal settlement costs associated james jones litigation see note 15 specifically 2003 settlement payment 13000000 company paid 11000000 made settle claims three cities santa monica san francisco east bay municipal water district chosen relator strongest claims settlement primarily expensed prior years legal fees required company record additional net tax charges year ended december 31 2003 2665000 company also recorded charge attributable payments made selling shareholders james jones company pursuant companys original purchase agreement year ended december 31 2003 company recorded net tax charge 446000 condensed operating statements balance sheets discontinued operations summarized 4 restructuring charges company continues implement plan consolidate several manufacturing plants north america europe time expanding manufacturing capacity china low cost areas world implementation manufacturing restructuring plan began fourth quarter 2001 projects charges recorded fourth quarter 2001 essentially complete 2002 company decided expand scope manufacturing restructuring plan transfer certain production low cost manufacturing plants tunisia bulgaria expanded plan essentially complete december 31 2003 company recorded pretax manufacturing restructuring costs 1655000 net recoveries year ended december 31 2003 manufacturing restructuring costs recorded consist primarily severance costs asset writedowns accelerated depreciation severance costs recorded restructuring 48 employees manufacturing administration groups company expects complete severance payments end first quarter 2004 asset writedowns consist primarily writeoffs inventory related product lines company discontinued part restructuring plan recorded cost goods sold accelerated depreciation based shorter remaining estimated useful lives certain fixed assets recorded cost goods sold costs consist primarily removal shipping costs associated relocation manufacturing equipment recorded cost goods sold expensed incurred details companys manufacturing restructuring plan december 31 2003 follows 5 business acquisitions july 30 2003 whollyowned subsidiary company acquired giuliani anello srl located cento bologna italy approximately 10600000 cash net acquired cash 1400000 giuliani anello manufactures distributes valves filters utilized heating applications including strainer filters solenoid valves flow stop valves stainless steel water filter elements steam cleaning filters april 18 2003 whollyowned subsidiary company acquired martin orgee uk ltd located kidderminster west midlands united kingdom approximately 1600000 cash martin orgee distributes line plumbing heating products wholesale commercial oem markets united kingdom southern ireland martin orgee also assembles pumping systems underfloor radiant heat applications july 29 2002 whollyowned subsidiary company acquired fr foerster rothmann gmbh fr located neuenburg rhein germany approximately 2300000 cash less assumed net debt 800000 fr manufactures distributes line gauges predominately french german oem markets july 15 2002 whollyowned subsidiary company acquired adev electronic sa adev located rosieres france closely affiliated distributor ek eminent ab eminent located gothenburg sweden approximately 12900000 cash less assumed net debt 3500000 adev also low cost manufacturing facility located tunisia adev manufactures distributes electronic systems predominantly oem market product lines include thermostats controls heating ventilation air conditioning control systems hydronic electric floor warming systems controls residential applications eminent distributes electronic controls mechanical thermostats electric control related products throughout european nordic countries may 9 2002 whollyowned subsidiary company acquired hunter innovations sacramento california 25000000 approximately 10000000 paid cash closing balance interest bearing notes payable equal annual installments 2006 hunter innovations founded 1995 developed line large backflow prevention devices represent significant advance technology improved product features important backflow prevention markets include lighter weight compact design better flow characteristics improved serviceability multiple endconnection shutoff valve options may 9 2003 company made additional payment approximately 3750000 first installment interest bearing notes march 5 2002 company entered joint venture yuhuan county cheng guan metal hose factory cheng guan located taizhou zhejiang province peoples republic china cheng guan manufacturer variety plumbing products sold chinese domestic market export markets product lines contributed joint venture include hose connectors multilayer tubing stainless steel braided hose joint venture owned 60 company 40 chinese partner january 29 2003 company made additional payment 3000000 associated cheng guan joint venture bringing aggregate cash investment 8000000 60 interest september 28 2001 whollyowned subsidiary company acquired assets powers process controls division mark controls corporation subsidiary crane co located skokie illinois mississauga ontario canada approximately 13000000 cash powers designs manufactures thermostatic mixing valves personal safety process control applications commercial institutional facilities also manufactures control valves commercial plumbing brass products including shower valves lavatory faucets june 13 2001 whollyowned subsidiary company acquired premier manufactured systems inc located phoenix arizona approximately 5000000 cash premier manufactures water filtration systems residential commercial applications filtration products including underthecounter ultraviolet filtration well variety sediment carbon filters june 1 2001 whollyowned subsidiary company acquired fimet srl fabbrica italiana manometri e termometri located milan italy whollyowned subsidiary mtb ad located bulgaria approximately 6000000 acquired business manufactures pressure temperature gauges use hvac market january 5 2001 whollyowned subsidiary company acquired dumser metallbau gmbh co kg located landau germany approximately 20000000 cash main products dumser include brass steel stainless steel manifolds used prime distribution device hydronic heating systems dumser 51 controlling share stern rubinetti stern rubinetti italian manufacturing company producing brass components located brescia italy acquisitions accounted utilizing purchase method accounting proforma results displayed combined results significant 6 comprehensive income loss comprehensive income loss consist following 7 inventories consist following finished goods 11015000 13774000 december 31 2003 2002 respectively consigned 8 property plant equipment property plant equipment consists following company also maintains assets held sale 1938000 2464000 december 31 2003 2002 respectively amounts primarily companys former distribution center german market closed 2002 due companys manufacturing restructuring plan accordance fas 144 company classified asset assets held sale consolidated balance sheets december 31 2003 2002 carrying asset estimated fair market value less costs sell company kept asset held sale beyond one year still actively marketing building 2003 company reduced asking price accordance fas 144 wrote asset estimated fair market value less costs sell 9 income taxes significant components companys deferred income tax liabilities assets follows provision income taxes continuing operations based following pretax income provision income taxes continuing operations consists following actual income taxes reported continuing operations different would computed applying federal statutory tax rate income continuing operations income taxes reasons difference follows december 31 2003 company net operating loss carryforwards 11500000 income tax purposes net operating losses foreign losses carried forward indefinitely net operating losses relate european operations company valuation allowance 557000 709000 december 31 2003 2002 respectively portion net operating loss carryforwards valuation allowance primarily attributable net operating losses generated locations company yet able determine certainty recoverability undistributed earnings companys foreign subsidiaries amounted approximately 100800000 december 31 2003 78100000 december 31 2002 55500000 december 31 2001 earnings considered indefinitely reinvested accordingly provision us federal state income taxes recorded thereon upon distribution earnings form dividends otherwise company subject withholding taxes payable various foreign countries determination amount us income tax liability would incurred practicable complexities associated hypothetical calculation however unrecognized foreign tax credits would available reduce portion us income tax liability withholding taxes approximately 3900000 would payable upon remittance previously unremitted earnings december 31 2003 company believes likely able recover deferred tax assets subject valuation allowance 10 accrued expenses liabilities accrued expenses liabilities consist following 11 financing arrangements longterm debt consists following principal payments next five years thereafter due follows thousands 200413251 200548357 20064194 2007867 2008244 thereafter125399 may 15 2003 company completed private placement 125000000 senior unsecured notes consisting 50000000 principal amount 487 senior notes due 2010 75000000 principal amount 547 senior notes due 2013 company used net proceeds private placement purchase treasury securities repay 75000000 principal amount 838 notes due december 2003 additional net proceeds used repay approximately 32000000 outstanding revolving credit facility balance net proceeds used general corporate purposes payment interest senior unsecured notes due semiannually may 15th november 15th year senior unsecured notes issued watts water technologies inc subordinated revolving credit facility subsidiary level senior unsecured notes allow company debt senior new notes amount 150000000 plus 5 stockholders equity ii debt pari passu junior senior unsecured notes extent company maintains compliance 200 100 fixed charge coverage ratio notes include prepayment provision might require makewhole payment note holders payment dependent upon level respective treasuries notes include customary terms conditions including events default february 28 2002 company entered revolving credit facility syndicate banks amended revolving credit facility revolving credit facility provides borrowings 150000000 includes 75000000 tranche eurobased borrowings matures february 2005 revolving credit facility used support companys acquisition program working capital requirements general corporate purposes effective july 1 2003 company entered interest rate swap notional amount 25000000 euro outstanding revolving credit facility company swapped variable rate revolving credit facility three month euribor plus 07 fixed rate 233 term swap two years company designated swap hedging instrument using cash flow method swap hedges cash flows associated interest payments first 25000000 euro revolving credit facility company marks market changes value swap comprehensive income ineffectiveness recorded income fair value swap recorded comprehensive income december 31 2003 46000 outstanding indebtedness revolving credit facility bears interest rate determined type currency loan plus applicable margin determined companys debt rating average interest rate borrowings revolving credit facility approximately 28 december 31 2003 revolving credit facility includes operational financial covenants customary facilities type including among others restrictions additional indebtedness liens investments maintenance certain leverage ratios december 31 2003 company compliance covenants related revolving credit facility company maintains letters credit guarantee performance payment third parties accordance specified terms conditions amounts outstanding approximately 29880000 december 31 2003 19522000 december 31 2002 companys letters credit primarily letters credit associated insurance coverage lesser extent foreign purchases companys letters credit generally expire within one year issuance increase primarily associated insurance coverage instruments may exist expire without drawn therefore necessarily represent future cash flow obligations 12 common stock since 1997 companys board directors authorized repurchase 4380200 shares companys common stock open market private purchases since inception repurchase program 3716000 shares companys common stock repurchased retired class common stock class b common stock equal dividend liquidation rights share companys class common stock entitled one vote matters submitted stockholders share class b common stock entitled ten votes matters shares class b common stock convertible shares class common stock onetoone basis option holder december 31 2003 company reserved total 3528825 class common stock issuance stockbased compensation plans 7605224 shares conversion class b common stock class common stock 13 stockbased compensation company maintains four stock option plans key employees outside directors granted incentive isos nonqualified nsos options purchase companys class common stock generally options become exercisable five year period rate 20 per year expire ten years date grant isos nsos granted plans exercise prices less 100 50 fair market value common stock date grant respectively december 31 2003 3528825 shares class common stock authorized future grants options companys stock option plans following summary stock option activity related information following table summarizes information options outstanding december 31 2003 company also management stock purchase plan allows granting restricted stock units rsus key employees purchase 1000000 shares class common stock 67 fair market value date grant rsus vest annually three year period date grant difference rsu price fair market value date grant amortized compensation expense ratably vesting period december 31 2003 200692 rsus outstanding dividends declared rsus remain unpaid december 31 2003 total 62172 company elected follow apb 25 related interpretations accounting stockbased compensation addition company provides proforma disclosure stockbased compensation measured fair value requirements fas 123 proforma disclosures calculated awards granted june 30 1995 provided footnote 2 required fas 148 weighted average grant date fair value options granted 448 443 674 years ending december 31 2003 2002 2001 respectively also weighted average grant date fair value rsus related management stock purchase plan 655 548 730 years ending december 31 2003 2002 2001 respectively fair value companys stockbased awards employees used reconciliation footnote 2 estimated using blackscholes option pricing model following assumptions fair value companys management stock purchase plan employees used reconciliation footnote 2 estimated using blackscholes option pricing model following assumptions 14 employee benefit plans company sponsors funded unfunded defined benefit pension plans covering substantially domestic employees benefits based primarily years service employees compensation funding policy company plans contribute annual amount exceed maximum amount deducted federal income tax purposes company uses september 30 measurement date plans funded status defined benefit plans amounts recognized balance sheet follows amounts recognized statement financial position follows information pension plans accumulated benefit obligation excess plan assets follows components net periodic benefit cost follows additional information assumptions weightedaverage assumptions used determine benefit obligations weightedaverage assumptions used determine net periodic benefit costs selecting expected longterm rate return assets company considers average rate earnings expected funds invested provide benefits plan includes considering trusts asset allocation expected returns likely earned life plan basis consistent prior year plan assets weighted average asset allocations asset category follows companys written retirement plan investment policy sets forth investment policy objectives constraints watts water technologies inc pension plan retirement plan investment policy set forth pension plan committee defines general investment principles directs investment management policy addressing preservation capital risk aversion adherence investment discipline investment managers make reasonable effort control risk evaluated quarterly commonly accepted benchmarks ensure risk assumed commensurate given investment style objectives portfolio designed achieve balanced return current income modest growth capital achieving returns excess rate inflation investment horizon order preserve purchasing power plan assets plan assets required invested liquid securities derivative investments allowed prohibited investments include limited following commodities futures contracts private placements options limited partnerships venturecapital investments real estate properties interestonly io principalonly po residual tranche cmos watts water technologies inc stock prohibited transactions include limited following short selling margin transactions allowable assets include cash equivalents fixed income securities equity securities mutual funds gics specific guidelines regarding allocation assets follows equities shall comprise 25 75 total portfolio fixed income shall comprise 30 65 investment performance monitored regular basis investments reallocated stay within specific guidelines equityfixed income allocation 5545 preferred securities one company government agency exceed 10 total fund 20 total fund invested one industry individual treasury securities may represent 50 total fund total allocation treasury bonds notes may represent 100 plans aggregate bond position cash flows information related companys pension funds cash flow follows contributions expected paid 2004 approximately 105000 additionally substantially companys domestic employees eligible participate 401k savings plan company matches specified percentage employee contributions subject certain limitations companys match expenses years ended december 31 2003 2002 2001 300000 330000 324000 respectively company entered supplemental compensation agreement timothy p horne september 1 1996 per agreement upon ceasing employee company mr horne must make available requested board work minimum 300 500 hours per year consultant return certain annual compensation long physically able mr horne complies consulting provisions agreement shall receive supplemental compensation annual basis 400000 per year exchange services performed long physically able event physical disability subsequent commencing consulting services company mr horne continue receive 400000 annually payment consulting services provided mr horne expensed incurred company mr horne retired effective december 31 2002 therefore supplemental compensation period began january 1 2003 accordance financial accounting standards board statement 106 employers accounting post retirement benefits pensions company accrue future postretirement disability benefits period january 1 2003 time mr horne becomes physically unable perform consulting services period disability benefits earned 15 contingencies environmental remediation contingencies april 1998 company became aware complaint armenta case filed nora armenta relator seal state california alleging violations california false claims act complaint alleges former subsidiary company james jones company sold products utilized municipal water systems failed meet contractually specified standards falsely certified standards met complaint alleges municipal entities suffered damages result defective products seeks treble damages reimbursement legal costs penalties original complaint amended total number named plaintiffs 161 11 intervened 47 ordered excluded case june 2001 company defendants reached proposed settlement los angeles department water power one plaintiffs james jones case approved california superior court october 31 2001 los angeles city council december 14 2001 plaintiffs remain company vigorously contesting matter case relator seeks three times unspecified amount actual damages alleges municipalities suffered hundreds millions dollars damages relator also seeks civil penalties 10000 false claim alleges defendants responsible tens thousands false claims company settled city los angeles far significant city 57 million plus relators statutory share attorneys fees codefendants contribute 20 million toward settlement august 2003 additional settlement payment made 13 million 11 million company 2 million james jones company settled claims three phase cities santa monica san francisco east bay municipal water district chosen relator strongest claims tried first settlement payment included relators statutory share claims three cities dismissed addition 13 million payment company obligated pay relators attorneys fees phase settlement court permitted company defendants select five additional cities contra costa corona santa ana santa cruz vallejo serve plaintiffs second trial phase case company james jones subsequently reached agreement settle city santa anas claims 45000 company responsible 38000 settlement amount santa ana submitted claim court approval march 2004 trial claims remaining phase ii cities scheduled september 2004 company reserve approximately 93 million respect james jones litigation consolidated balance sheet december 31 2003 company believes basis available information reserve adequate cover probable reasonably estimable losses resulting james jones litigation insurance coverage litigation zurich discussed company currently unable make estimate range additional losses february 14 2001 company filed complaint california superior court insurers coverage claims armenta case james jones company filed similar complaint cases consolidated october 30 2001 california superior court made summary adjudication ruling zurich american insurance company zurich must pay reasonable defense costs incurred company armenta case since april 23 1998 well companys future defense costs case final resolution october 24 2002 california superior court made another summary adjudication ruling zurich must indemnify pay company amounts company must pay settlement agreement city los angeles zurich asserted amounts defense costs indemnity amounts paid settlements paid company subject reimbursement deductible agreements company zurich however management counsel anticipate company ultimately prevail reimbursement issues zurich appealed orders requiring pay defense costs california court appeal accepted appeal currently pending zurich also sought appellate review order found coverage required zurich indemnify company settlement city los angeles march 26 2003 california court appeal denied zurichs petition appellate review order zurich still able appeal order end case company currently unable predict finality order indemnity los angeles settlement company recorded reimbursed indemnity settlement amounts reimbursed defense costs liability company intends contest vigorously armenta case related litigation based managements assessment company believe ultimate outcome james jones case would material adverse effect liquidity financial condition results operations assessment based available information litigation inherently uncertain actual liability company fully resolve litigation cannot predicted certainty exists reasonable possibility company may ultimately incur losses james jones litigation excess amount accrued company intends continue contest vigorously james jones case related litigation environmental remediation company named potentially responsible party prp respect limited number identified contaminated sites level contamination varies significantly site related levels remediation efforts environmental liabilities recorded based probable cost known estimated minimum cost remediation companys accrued estimated environmental liabilities based assumptions subject number factors uncertainties circumstances affect reliability precision estimates include identification additional sites environmental regulations level cleanup required technologies available number financial condition contributors remediation time period remediation may occur company recognizes changes estimates new remediation requirements defined new information becomes available company reserve approximately 25 million estimates accrued environmental remediation liabilities likely paid next five ten years based facts currently known company believe ultimate outcome claims material adverse effect companys liquidity financial condition results operations several years new york attorney general nyag threatened bring suit approximately 16 prps including watts water technologies inc successor jameco industries inc incurred remediation costs operation maintenance costs incurred connection cleanup landfill site babylon new york nyag identified recovery numbers 19 million 24 million early know final recovery number final number prps proportion final costs may allocated company 2003 139 prps identified companys defense group process invited join prps identified far nyag based facts currently known company believe ultimate outcome babylon matter material adverse effect companys liquidity financial condition results operations asbestos litigation company defendant approximately 115 actions filed primarily exclusively mississippi new jersey state courts alleging injury death result exposure asbestos filings typically name multiple defendants filed behalf many plaintiffs identify particular products company source asbestos exposure date company dismissed case scheduled trial date comes near based facts currently known company believe ultimate outcome claims material adverse effect companys liquidity financial condition results operations litigation march 26 2003 class action complain filed company north carolina hospitality group inc circuit court maryland prince georges county alleges certain commercial valve models contain design defect causes fail prematurely based companys extensive investigation evidence including physical evidence presented far plaintiff management believes allegations complaint without merit company intends defend lawsuit vigorously based facts currently known company believe ultimate outcome claims material adverse effect companys liquidity financial condition results operations lawsuits proceedings claims arising ordinary course operations also pending threatened company subsidiaries based facts currently known company believe ultimate outcome matters material adverse effect financial condition results operation however litigation inherently uncertain company believes exists reasonable possibility may ultimately incur losses litigation excess amount accrued 16 financial instruments fair value carrying amounts cash equivalents trade receivables trade payables approximate fair value short maturity financial instruments fair value companys 487 senior notes due 2010 547 senior notes due 2013 based quoted market prices fair value companys variable rate debt approximates carrying value carrying amount estimated fair market value companys longterm debt including current portion follows derivative instruments company uses foreign currency forward exchange contracts reduce impact currency fluctuations certain anticipated intercompany purchase transactions expected occur within year certain foreign currency transactions related gains losses recognized incomeexpense contracts expire generally period underlying foreign currency denominated transaction contracts subject company significant market risk exchange movement offset gains losses related foreign currency denominated transactions december 31 2003 2002 2001 company outstanding forward contracts buy foreign currencies company uses commodity futures contracts fix price certain portion certain raw materials used manufacturing process contracts highly correlate actual purchases commodity contract values reflected cost commodity actually purchased commodity contracts utilized years ended december 31 2003 2002 2001 effective july 1 2003 company entered interest rate swap notional amount 25000000 euro outstanding revolving credit facility company swapped variable rate revolving credit facility three month euribor plus 07 fixed rate 233 term swap two years company designated swap hedging instrument using cash flow method swap hedges cash flows associated interest payments first 25000000 euro revolving credit facility company marks market changes value swap comprehensive income ineffectiveness recorded income fair value recorded comprehensive income december 31 2003 46000 december 31 2001 company outstanding interest rate swap converted 20000000 euro borrowings variable rate euro line credit fixed rate borrowings 43 swap agreement expired march 2002 value impact companys results material december 31 2002 september 2001 company entered interest rate swap 75000000 838 notes company swapped fixed interest rate 838 floating libor plus 374 august 5 2002 company sold swap received 2315000 cash based company terminating hedge transaction adjustment fair value amortized term notes matured december 1 2003 leases company leases certain manufacturing facilities sales offices warehouses equipment generally leases carry renewal provisions require company pay maintenance costs future minimum lease payments capital leases noncancelable operating leases december 31 2003 follows 17 segment information criteria set forth financial accounting standards board no131 disclosure segments enterprise related information company operates three geographic segments north america europe china segments managed separately separate financial results reviewed companys chief operating decisionmaker sales region based upon location entity recording sale accounting policies segment described summary significant accounting policies see note 2 following summary significant accounts balances segment reconciled consolidated totals corporate expenses primarily compensation expense professional fees including legal audit expenses benefit administration costs allocated geographic segments viewed corporate functions support activities north american segment consists us net sales 443228000 422703000 393455000 years ended december 31 2003 2002 2001 respectively north american segment also consists longlived assets 67595000 73907000 81723000 years ended december 31 2003 2002 2001 respectively goodwill amounts 184901000 100017000 reported north american segment 81812000 reported european segment 3072000 reported chinese segment december 31 2003 intercompany transactions eliminated intersegment revenues significant 18 quarterly financial information unaudited 19 subsequent events february 20 2004 company entered agreement yuhuan county cheng guan metal hose factory acquire 40 equity interest taizhou shida plumbing manufacturing co ltd shida joint venture expected purchase price 3000000 assumption approximately 6000000 debt payment 3500000 connection threeyear noncompete agreement transaction company 100 shida closing transaction subject satisfaction certain closing conditions expected occur second quarter 2004 january 5 2004 whollyowned subsidiary company acquired substantially assets flowmatic systems inc located dunnellon florida approximately 16500000 cash flowmatic designs distributes complete line high quality reverse osmosis components filtration equipment product line includes stainless steel plastic housings filter cartridges storage tanks control valves well complete reverse osmosis systems residential commercial applications part ii part iii part iv signatures independent auditors report watts water technologies inc subsidiaries consolidated statements cash flows amounts thousandsitem 15 exhibits financial statement schedules reports form 8k a1 financial statements following financial statements included separate section report commencing page numbers specified report independent registered public accounting firm consolidated statements operations years ended december 31 2004 2003 2002 consolidated balance sheets december 31 2004 2003 consolidated statements stockholders’ equity years ended december 31 2004 2003 2002 consolidated statements cash flows years ended december 31 2004 2003 2002 notes consolidated financial statements 5788 a2 schedules schedule iivaluation qualifying accounts years ended december 31 2004 2003 2002 schedules provision made applicable accounting regulations securities exchange commission included notes consolidated financial statements required related instructions inapplicable therefore omitted a3 exhibits 105 1986 incentive stock option plan amended 17 106 watts industries inc retirement plan salaried employees dated december 30 1994 amended restated effective january 1 1994 8 amendment 1 9 amendment 2 9 amendment 3 9 amendment 4 dated september 4 1996 12 amendment 5 dated january 1 1998 15 amendment 6 dated may 3 1999 15 amendment 7 dated june 7 1999 15 107 watts industries inc pension plan amended restated effective january 1 1997 3 first amendment dated october 25 2002 3 108 registration rights agreement dated july 25 1986 5 109 executive incentive bonus plan amended restated 21 1010 amended restated stock restriction agreement dated october 30 1991 2 amendment dated august 26 1997 12 1011 watts industries inc 1991 nonemployee directors’ nonqualified stock option plan 6 amendment 1 9 1012 watts industries inc 2003 nonemployee directors’ stock option plan 3 1013 letter credit issued fleet national bank successor bankboston na benefit zurichamerican insurance company dated june 25 1999 amended january 22 2001 17 1014 form stock restriction agreement management stockholders 5 1015 credit agreement dated september 23 2004 among watts water technologies inc certain subsidiaries bank america na jp morgan chase bank wachovia bank national association key bank national association suntrust bank certain lenders 20 1016 watts water technologies inc management stock purchase plan amended restated 21 1017 stock purchase agreement dated june 19 1996 among mueller co tyco valves limited watts investment company tyco international ltd registrant 11 1018 relocation management agreement registrant cendant mobility services corporation dated april 6 2004 18 1019 note purchase agreement dated may 15 2003 registrant purchasers named schedule thereto relating registrant’s 50000000 487 senior notes series due may 15 2010 75000000 547 senior notes series b due may 15 2013 7 1020 form 487 senior note due may 15 2010 7 1021 form 547 senior note due may 15 2013 7 1022 watts water technologies inc 2004 stock incentive plan 17 1023 nonemployee director compensation arrangements 21 1024 watts water technologies inc supplemental employees retirement plan amended restated effective may 4 2004 19 1025 form incentive stock option agreement watts water technologies inc 2004 stock incentive plan 20 1026 form nonqualified stock option agreement watts water technologies inc 2004 stock incentive plan 20 1027 form restricted stock award agreement employees watts water technologies inc 2004 stock incentive plan 20 1028 form restricted stock award agreement employees watts water technologies inc 2004 stock incentive plan 20 1029 form restricted stock award agreement nonemployee directors watts water technologies inc 2004 stock incentive plan 20 statement regarding computation earnings per common share 13 subsidiaries consent kpmg llp 311 certification principal executive officer pursuant rule 13a14a rule 15d14a securities exchange act 1934 amended 312 certification principal financial officer pursuant rule 13a14a rule 15d14a securities exchange act 1934 amended 321 certification principal executive officer pursuant 18 usc section 1350 322 certification principal financial officer pursuant 18 usc section 1350 1 incorporated reference registrant’s registration statement form s3 333105989 filed securities exchange commission june 10 2003 2 incorporated reference registrant’s form 8k dated november 14 1991 3 incorporated reference registrant’s annual report form 10k year ended december 31 2002 4 incorporated reference registrant’s form s1 336515 dated june 17 1986 5 incorporated reference registrant’s form s1 336515 part second amendment form s1 dated august 21 1986 6 incorporated reference amendment 1 registrant’s annual report form 10k year ended june 30 1992 7 incorporated reference registrant’s quarterly report form 10q quarter ended june 30 2003 8 incorporated reference registrant’s annual report form 10k year ended june 30 1995 9 incorporated reference registrant’s annual report form 10k year ended june 30 1996 10 incorporated reference registrant’s form s8 33332685 dated august 1 1997 11 incorporated reference registrant’s form 8k dated september 4 1996 12 incorporated reference registrant’s annual report form 10k year ended june 30 1997 13 incorporated reference notes consolidated financial statements note 2 report 14 incorporated reference exhibit 21 circor international inc amendment 1 registration statement form 10 filed september 22 1999 file 00026961 15 incorporated reference registrant’s annual report form 10k year ended june 30 1999 16 incorporated reference registrant’s quarterly report form 10q quarter ended september 30 2000 17 incorporated reference registrant’s annual report form 10k year ended december 31 2003 18 incorporated reference registrant’s quarterly report form 10q quarter ended march 28 2004 19 incorporated reference registrant’s quarterly report form 10q quarter ended june 27 2004 20 incorporated reference registrant’s quarterly report form 10q quarter ended september 26 2004 21 incorporated reference registrant’s current report form 8k dated february 8 2005 management contract compensatory plan arrangement signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated report independent registered public accounting firm board directors stockholders watts water technologies inc audited accompanying consolidated balance sheets watts water technologies inc subsidiaries december 31 2004 2003 related consolidated statements operations stockholders’ equity cash flows years threeyear period ended december 31 2004 connection audits consolidated financial statements also audited financial statement schedule consolidated financial statements financial statement schedule responsibility company’s management responsibility express opinion consolidated financial statements financial statement schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position watts water technologies inc subsidiaries december 31 2004 2003 results operations cash flows years threeyear period ended december 31 2004 conformity us generally accepted accounting principles also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein discussed note 2 financial statements effective january 1 2002 company changed method accounting goodwill intangible assets based adoption financial accounting standards 142 “goodwill intangible assets” also audited accordance standards public company accounting oversight board united states effectiveness watts water technologies inc’s internal control financial reporting december 31 2004 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso report dated march 14 2004 expressed unqualified opinion management’s assessment effective operation internal control financial reporting boston massachusetts march 14 2005 watts water technologies inc subsidiaries consolidated statements operations amounts thousands except per share information accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated balance sheets amounts thousands except share information accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated statements stockholders’ equity amounts thousands except share information accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated statements cash flows amounts thousands accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries notes consolidated financial statements 1 description business watts water technologies inc company designs manufactures sells extensive line water safety flow control products water quality water safety water flow control water conservation markets located predominantly north america europe china october 15 2003 company changed name watts industries inc watts water technologies inc accurately reflect strategic focus providing solutions customers’ water based needs 2 accounting policies principles consolidation consolidated financial statements include accounts company majority wholly owned subsidiaries upon consolidation significant intercompany accounts transactions eliminated cash equivalents cash equivalents consist highly liquid investments maturities three months less date original issuance investment securities investment securities december 31 2004 2003 consist auction rate certificates whose underlying investments aaa rated municipal bonds certificates bought sold auction reset dates 35 days certificates traded par value approximates market value december 31 2004 2003 company classifies debt securities available sale availableforsale securities recorded fair value unrealized holding gains losses net related tax effect availableforsale securities excluded earnings reported separate component comprehensive income realized gains losses sale availableforsale securities determined specificidentification basis decline market value availableforsale security cost deemed otherthantemporary results reduction carrying amount fair value impairment charged earnings new cost basis security established determine whether impairment otherthantemporary company considers whether ability intent hold investment market price recovery considers whether evidence indicating cost investment recoverable outweighs evidence contrary evidence considered assessment includes reasons impairment severity duration impairment changes value subsequent yearend forecasted performance investee premiums discounts amortized accreted life related availableforsale security adjustment yield using effectiveinterest method dividend interest income recognized earned allowance doubtful accounts allowance doubtful accounts includes reserves bad debts sales returns allowances company analyzes aging accounts receivable individual accounts receivable historical bad debts watts water technologies inc subsidiaries notes consolidated financial statements continued concentration receivables customer credit worthiness current economic trends changes customer payment terms company specifically analyzes individual accounts receivable establishes specific reserves financially troubled customers addition factors developed certain regions utilizing historical trends sales returns allowances derive reserve returns allowances concentration credit company sells products diversified customer base therefore significant concentrations credit risk except approximately 99 107 102 company’s total sales 2004 2003 2002 respectively one company sales transacted within north american geographic segment inventories stated lower cost primarily firstin firstout method market value determined replacement cost net realizable value historical experience used basis determining reserve excess obsolete inventories goodwill intangible assets goodwill recorded consideration paid acquisitions exceeds fair value net tangible intangible assets acquired goodwill intangible assets indefinite useful lives amortized rather tested annually impairment test performed october 24 2004 impairment goodwill longlived assets goodwill intangible assets indefinite lives tested annually impairment accordance provisions fas 142 company’s impairment review based discounted cash flow approach reporting unit level requires management judgment respect revenue expense growth rates changes working capital selection use appropriate discount rate company uses judgment assessing whether assets may become impaired annual impairment tests indicators unexpected adverse business conditions economic factors unanticipated technological change competitive activities loss key personnel acts governments courts may signal asset become impaired intangible assets estimable lives longlived assets reviewed impairment whenever events changes circumstances indicate carrying amount asset group may recoverable accordance financial accounting standards board statement 144 “accounting impairment disposal longlived assets” fas 144 recoverability intangible assets estimable lives longlived assets measured comparison carrying amount asset group future net undiscounted pretax cash flows expected generated asset group comparisons indicate asset recoverable impairment loss recognized amount carrying amount asset group exceeds related estimated fair value estimated fair value based either discounted future pretax operating cash flows appraised values depending nature asset company determines discount rate analysis based expected internal rate return related business watts water technologies inc subsidiaries notes consolidated financial statements continued allocate interest charges asset group measured judgment required estimate discounted future operating cash flows changes carrying amount goodwill follows intangible assets include following presented “other assets “other” consolidated balance sheets aggregate amortization expense amortized intangible assets year ended december 31 2004 2003 2002 1761000 763000 477000 respectively additionally future amortization expense intangible assets approximates 2060000 2005 2014000 2006 1490000 2007 1304000 2008 1272000 2009 amortization expense provided straightline bases estimated useful lives intangible assets range 3 50 years intangible assets subject amortization primarily include trademarks unpatented technology watts water technologies inc subsidiaries notes consolidated financial statements continued property plant equipment property plant equipment recorded cost depreciation provided straightline basis estimated useful lives assets range 10 40 years buildings improvements 3 15 years machinery equipment income taxes income taxes accounted asset liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases operating loss tax credit carry forwards deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized income period includes enactment date foreign currency translation financial statements subsidiaries located outside united states generally measured using local currency functional currency balance sheet accounts including goodwill foreign subsidiaries translated united states dollars yearend exchange rates income expense items translated weighted average exchange rates period net translation gains losses included comprehensive income separate component stockholders’ equity company provide us income taxes foreign currency translation adjustments since provide taxes undistributed earnings foreign subsidiaries gains losses foreign currency transactions subsidiaries included net earnings watts water technologies inc subsidiaries notes consolidated financial statements continued stock based compensation company accounts stock based compensations accordance accounting principles board opinion 25 “accounting stock issued employees” apb 25 related interpretations company records stock based compensation expense associated management stock purchase plan due discount market price stockbased compensation expense amortized expense straightline basis vesting period following table illustrates effect reported net income earnings per common share company applied fair value method measure stockbased compensation described fully note 13 required disclosure provisions financial accounting standards board 123 “accounting stockbased compensation” fas 123 amended financial accounting standards board 148 “accounting stockbased compensation transition disclosure” fas 148 net income per common share basic net income per common share calculated dividing net income weighted average number common shares outstanding calculation diluted earnings per share assumes conversion dilutive securities see note 13 watts water technologies inc subsidiaries notes consolidated financial statements continued net income number shares used compute net earnings per share basic assuming full dilution reconciled derivative financial instruments normal course business company manages risks associated commodity prices foreign exchange rates interest rates variety strategies including use hedging transactions executed accordance company’s policies company’s hedging transactions include limited use various derivative financial commodity instruments matter policy company use derivative instruments unless underlying exposure change value derivative instruments would substantially offset opposite change value underlying hedged items company use derivative instruments trading speculative purposes using qualifying criteria defined financial accounting standards board statement 133 “accounting derivative instruments hedging activities” fas 133 derivative instruments designated accounted either hedge recognized asset liability fair value hedge forecasted transaction cash flow hedge fair value hedge effective ineffective portions change fair value derivative instrument along adjustment carrying amount hedged item fair value changes attributable hedged risk recognized earnings cash flow hedge changes fair value derivative instrument highly effective deferred accumulated comprehensive income loss underlying hedged item recognized earnings ineffective portion fair value changes qualifying hedges recognized earnings immediately fair value cash flow hedge cease qualify hedge accounting terminated would continue carried balance sheet fair value settled hedge accounting would discontinued prospectively forecasted transaction longer probable occurring amounts previously deferred accumulated comprehensive income would recognized immediately earnings occasion company may enter derivative instrument hedge accounting required entered offset changes fair value underlying transaction required recognized earnings natural hedge instruments reflected consolidated balance sheets fair value changes fair value recognized earnings certain forecasted transactions primarily intercompany sales united states canada assets exposed foreign currency risk company monitors foreign currency exposures ongoing basis maximize overall effectiveness foreign currency hedge positions 2004 watts water technologies inc subsidiaries notes consolidated financial statements continued 2003 company used foreign currency forward contracts means hedging exposure foreign currency risks company’s foreign currency forwards designated qualify cash flow hedges criteria fas 133 fas 133 requires changes fair value derivatives qualify cash flow hedges recognized comprehensive income ineffective portion derivative’s change fair value recognized immediately earnings portions company’s outstanding debt exposed interest rate risks company monitors interest rate exposures ongoing basis maximize overall effectiveness interest rates 2004 2003 company used interest rate swap means hedging exposure interest rate risks company’s swap designated qualified cash flow hedge criteria fas 133 fas 133 requires changes fair value derivatives qualify cash flow hedges recognized comprehensive income ineffective portion derivative’s change fair value recognized immediately earnings shipping handling shipping handling costs included selling general administrative expense amounted 25110000 22111000 20900000 years ended december 31 2004 2003 2002 respectively research development research development costs included selling general administrative expense amounted 9942000 9178000 9132000 years ended december 31 2004 2003 2002 respectively revenue recognition company recognizes revenue following criteria met company entered binding agreement product shipped title passes sales price customer fixed determinable collectability reasonably assured provisions estimated returns allowances made time sale recorded reduction sales included allowance doubtful accounts consolidated balance sheets company records provisions sales incentives primarily volume rebates adjustment net sales accordance financial accounting standards board’s emerging issues task force eitf issue 0014 “accounting certain sales incentives”eitf 0014 eitf issue 019 “accounting consideration given vendor customer reseller vendor’s products” basis presentation certain amounts years 2003 2002 reclassified permit comparison 2004 presentation watts water technologies inc subsidiaries notes consolidated financial statements continued estimates preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates new accounting standards december 2003 financial accounting standards board fasb issued financial accounting standards board statement 132 revised 2003 “employers’ disclosures pensions postretirement benefits” fas 132r standard increases existing disclosure requirements requiring details pension plan assets benefit obligations cash flows benefit costs related information companies required segregate plan assets category debt equity real estate provide certain expected rates return informational disclosures fas 132r also requires companies disclose various elements pension postretirement benefit costs interimperiod financial statements quarters beginning december 15 2003 company adopted additional interim disclosure provisions fas 132r effective january 1 2004 may 15 2003 fasb issued financial accounting standards board statement 150 “accounting certain financial instruments characteristics liabilities equity” fas150 fas 150 requires issuers classify liabilities assets circumstances three classes freestanding financial instruments embody obligations issuer generally fas 150 effective financial instruments entered modified may 31 2003 otherwise effective beginning first interim period beginning june 15 2003 company adopted provisions fas 150 july 1 2003 existing financial instruments entered prior june 30 2003 company concluded adoption fas 150 material impact consolidated financial statements november 29 2004 fasb issued financial accounting standards board statement 151 “inventory costs” fas 151 fas 151 amends guidance accounting research bulletin 43 chapter 4 “inventory pricing” clarify accounting inventory costs provisions statement effective beginning june 15 2005 although early application permitted company expect impact statement material consolidated financial statements december 16 2004 fasb issued final standard accounting sharebased payments sbp financial accounting standards board statement 123r revised 2004 requires companies expense value employee stock options similar awards statement effective public companies interim annual periods beginning june 15 2005 applies outstanding unvested sbp awards company’s adoption date impact statement company’s results operations expected approximately 002 per share december 16 2004 fasb issued financial accounting standards board statement 153 “exchanges nonmonetary assets amendment apb opinion 29 accounting nonmonetary transactions” fas 153 amendments made fas 153 based principle exchanges nonmonetary assets measured based fair value assets exchanged watts water technologies inc subsidiaries notes consolidated financial statements continued amendments eliminate narrow exception nonmonetary exchanges similar productive assets replace broader exception exchanges nonmonetary assets commercial substance previously opinion 29 required accounting exchange productive asset similar productive asset equivalent interest similar productive asset based recorded amount asset relinquished statement effective nonmonetary asset exchanges occurring fiscal periods beginning june 15 2005 earlier application permitted nonmonetary asset exchanges occurring fiscal periods beginning date issuance provisions statement shall applied prospectively company expect impact statement material consolidated financial statements 3 discontinued operations september 1996 company divested municipal water group businesses included henry pratt james jones company edward barber company ltd costs expenses related municipal water group 2004 2003 relate legal settlement costs associated james jones litigation see note 15 company also recorded expense payments made selling shareholders james jones company pursuant company’s original purchase agreement year ended december 31 2004 2003 company recorded net tax charge 72000 446000 respectively fourth quarter 2004 company planned divest interest minority owned subsidiary jameco international llc previously consolidated result financial accounting standards board interpretation 46 “consolidation variable interest entitiesrevised” fin 46r llc recorded north american segment management determined llc longterm strategic fit company decided divest interest result company recorded impairment charge net tax 739000 write investment estimated fair value 250000 company plans divest interest llc first half 2005 additionally years ended december 31 2004 2003 company recorded net loss 54000 net income 54000 respectively operations llc imports sells vitreous china imported faucets faucet parts imported bathroom accessories north american home improvement retail market condensed operating statements balance sheets discontinued operations summarized watts water technologies inc subsidiaries notes consolidated financial statements continued assets liabilities 2004 primarily relate reserves james jones litigation 2003 amounts include operating assets liabilities llc well reserves james jones litigation 4 restructuring charges company continues implement plan consolidate several manufacturing plants north america europe time expanding manufacturing capacity china low cost areas world year ended december 31 2004 company recorded expense approximately 2968000 compared costs 1655000 net recoveries year ended december 31 2003 expenses incurred 2004 primarily accelerated depreciation planned closure us manufacturing plant reduction estimated useful lives certain manufacturing equipment severance costs expenses net recoveries incurred 2003 consist primarily accelerated depreciation asset writedowns severance costs severance costs 48 employees manufacturing administration groups company completed severance payments first quarter 2004 expenses incurred 2002 consist primarily accelerated depreciation asset writedowns severance costs asset writedowns consist primarily writeoffs inventory related product lines company discontinued part restructuring plan primarily recorded cost goods sold accelerated depreciation based shorter remaining estimated useful lives certain fixed assets primarily recorded cost goods sold costs consist primarily removal shipping costs associated relocation manufacturing equipment primarily recorded cost goods sold expensed incurred severance costs recorded restructuring charges watts water technologies inc subsidiaries notes consolidated financial statements continued details company’s manufacturing restructuring plan december 31 2004 follows 5 business acquisitions september 28 2004 whollyowned subsidiary company completed planned increase ownership watts stern rubinetti srl stern 51 85 price paid additional 34 approximately 800000 company call option acquire remaining 15 minority shareholders approximately 400000 option became exercisable january 1 2005 company anticipates exercising option second quarter 2005 may 21 2004 whollyowned subsidiary company acquired 100 outstanding stock mccoy enterprises inc subsequently renamed orion enterprises inc orion located kansas city kansas approximately 27900000 cash orion distributes products brand names orion flo safe laboratory enterprises company contracted thirdparty valuation allocate purchase price consistent guidelines fas 141 allocation goodwill approximately 18100000 approximately 4300000 allocated intangible assets amount recorded intangibles assets primarily trademarks indefinite lives orion’s product lines include complete line acid resistant waste disposal products double containment piping systems well line high purity pipes fittings faucets april 16 2004 whollyowned subsidiary company acquired 90 stock team precision pipework ltd team located ammanford west wales united kingdom approximately 17200000 cash subject final adjustments stipulated purchase sale agreement company contracted thirdparty valuation allocate purchase price consistent guidelines fas 141 allocation goodwill approximately 9500000 approximately 9500000 allocated intangible assets amount recorded intangible assets primarily valuation customer base estimated 12 year life team custom designs manufactures manipulated pipe hose tubing assemblies utilized heating ventilation air conditioning markets team supplier major original equipment manufacturers air conditioning systems several major european automotive air conditioning manufacturers march 29 2004 whollyowned subsidiary company acquired 40 equity interest taizhou shida plumbing manufacturing co ltd shida held company’s former joint venture partner approximately 3000000 cash payment 3500000 cash watts water technologies inc subsidiaries notes consolidated financial statements continued connection knowhow transfer noncompete agreement december 31 2004 company paid 5750000 cash company owns 100 shida prior acquisition joint venture declared dividend 1250000 based 40 ownership 500000 cash dividend paid joint venture partner company contracted thirdparty valuation allocate purchase price consistent guidelines fas 141 preliminary allocation goodwill 1450000 2050000 allocated intangible assets amount recorded intangible assets primarily noncompete agreement 3year life company made prior investments 2003 2002 totaling 8000000 cash initial 60 interest shida manufacturer variety plumbing products sold chinese domestic market export markets january 5 2004 whollyowned subsidiary company acquired substantially assets flowmatic systems inc flowmatic located dunnellon florida approximately 16800000 cash company contracted thirdparty valuation allocate purchase price consistent guidelines fas 141 allocation goodwill approximately 5300000 approximately 5600000 allocated intangible assets amount recorded intangible assets primarily trademarks indefinite lives flowmatic designs distributes complete line high quality reverse osmosis components filtration equipment product line includes stainless steel plastic housings filter cartridges storage tanks control valves well complete reverse osmosis systems residential commercial applications july 30 2003 whollyowned subsidiary company acquired giuliani anello srl anello located cento bologna italy approximately 10600000 cash net acquired cash 1400000 giuliani anello manufactures distributes valves filters utilized heating applications including strainer filters solenoid valves flow stop valves stainless steel water filter elements steam cleaning filters april 18 2003 whollyowned subsidiary company acquired martin orgee uk ltd martin orgee located kidderminster west midlands united kingdom approximately 1600000 cash martin orgee distributes line plumbing heating products wholesale commercial oem markets united kingdom southern ireland martin orgee also assembles pumping systems underfloor radiant heat applications july 29 2002 whollyowned subsidiary company acquired fr foerster rothmann gmbh fr located neuenburg rhein germany approximately 2300000 cash less assumed net debt 800000 fr manufactures distributes line gauges predominately french german oem markets july 15 2002 whollyowned subsidiary company acquired adev electronic sa adev located rosieres france closely affiliated distributor ek eminent ab eminent located gothenburg sweden approximately 12900000 cash less assumed net debt 3500000 adev also low cost manufacturing facility located tunisia adev manufactures distributes electronic systems predominantly oem market product lines include thermostats controls heating ventilation air conditioning control systems hydronic electric floor warming systems controls residential applications eminent distributes electronic controls mechanical thermostats electric control related products throughout european nordic countries watts water technologies inc subsidiaries notes consolidated financial statements continued may 9 2002 whollyowned subsidiary company acquired hunter innovations inc hunter sacramento california 25000000 approximately 10000000 paid cash closing balance interest bearing notes payable equal annual installments 2006 hunter innovations founded 1995 developed line large backflow prevention devices represent significant advance technology improved product features important backflow prevention markets include lighter weight compact design better flow characteristics improved serviceability multiple endconnection shutoff valve options may 9 2003 company made scheduled payment approximately 3750000 first installment interest bearing notes may 4 2004 company made scheduled payment approximately 3750000 second installment interest bearing notes issued hunter sellers certain current prior years acquisition agreements contain either earnout provision put feature remaining common stock yet purchased company calculations typically based multiple future operating earnings defined agreements amounts contingent consideration determinable beyond reasonable doubt therefore liabilities established acquisitions accounted utilizing purchase method accounting proforma results respective year displayed combined results significant 6 accumulated comprehensive income loss comprehensive income loss consist following 7 inventories consist following finished goods 14549000 13191000 december 31 2004 2003 respectively consigned watts water technologies inc subsidiaries notes consolidated financial statements continued 8 property plant equipment property plant equipment consists following 9 income taxes significant components company’s deferred income tax liabilities assets follows provision income taxes continuing operations based following pretax income watts water technologies inc subsidiaries notes consolidated financial statements continued provision income taxes continuing operations consists following actual income taxes reported continuing operations different would computed applying federal statutory tax rate income continuing operations income taxes reasons difference follows december 31 2004 company net operating loss carryforwards 19700000 income tax purposes net operating losses relate foreign operations 18400000 losses carried forward indefinitely 1300000 losses expires 2008 net operating losses consist 15900000 related german operations 2400000 austrian operations 100000 related netherlands operations 1300000 related chinese operations company valuation allowance 838000 557000 december 31 2004 2003 respectively portion net operating loss carryforwards 18400000 net operating losses indefinite lives company feels limited valuation allowance necessary due length time would take earn amounts needed consume net operating losses based historical earnings operations involved undistributed earnings company’s foreign subsidiaries amounted approximately 144200000 december 31 2004 100800000 december 31 2003 78100000 december 31 2002 earnings considered indefinitely reinvested accordingly provision us federal state income taxes recorded thereon upon distribution earnings form dividends otherwise company subject withholding taxes payable various foreign countries determination amount us income tax liability would incurred watts water technologies inc subsidiaries notes consolidated financial statements continued practicable complexities associated hypothetical calculation however unrecognized foreign tax credits would available reduce portion us income tax liability withholding taxes approximately 4420000 would payable upon remittance previously unremitted earnings december 31 2004 company believes likely able recover deferred tax assets subject valuation allowance american job creation act 2004 ajca signed federal law october 22 2004 ajca contains onetime foreign dividend repatriation provision provides 85 special deduction respect certain qualifying dividends foreign subsidiaries limited period company anticipate repatriating dividends foreign affiliates provision 10 accrued expenses liabilities accrued expenses liabilities consist following watts water technologies inc subsidiaries notes consolidated financial statements continued 11 financing arrangements longterm debt consists following principal payments next five years thereafter due follows thousands 20054981 20064226 2007480 2008367 200949987 thereafter125502 company maintains letters credit guarantee performance payment third parties accordance specified terms conditions amounts outstanding approximately 42570000 december 31 2004 29880000 december 31 2003 company’s letters credit primarily letters credit associated insurance coverage lesser extent foreign purchases company’s letters credit generally expire within one year issuance drawn revolving credit facility increase primarily associated insurance coverage instruments may exist expire without drawn therefore necessarily represent future cash flow obligations september 23 2004 company entered unsecured revolving credit facility syndicate banks revolving credit facility revolving credit facility provides multicurrency unsecured borrowings standby letters credit 300000000 expires september 2009 borrowings outstanding revolving credit facility bear interest fluctuating rate per annum applicable percentage equal case eurocurrency rate loans british watts water technologies inc subsidiaries notes consolidated financial statements continued bankers association libor rate plus applicable percentage 0875 based company’s current consolidated leverage ratio debt rating ii case base rate loans swing line loans higher federal funds rate plus 05 b annual rate interest announced bank america na “prime rate” 2004 average interest rate borrowings revolving credit facility approximately 28 revolving credit facility replaced unsecured revolving credit facility provided revolving credit agreement dated february 28 2002 revolving credit facility used pay debt existed previous credit facility expire february 2005 revolving credit facility includes operational financial covenants customary facilities type including among others restrictions additional indebtedness liens investments maintenance certain leverage ratios december 31 2004 company compliance covenants related revolving credit facility company 218445000 unused potentially available credit revolving credit facility december 31 2004 may 15 2003 company completed private placement 125000000 senior unsecured notes consisting 50000000 principal amount 487 senior notes due 2010 75000000 principal amount 547 senior notes due 2013 company used net proceeds private placement purchase treasury securities repay 75000000 principal amount 83¤8 notes due december 2003 additional net proceeds used repay approximately 32000000 outstanding previous revolving credit facility balance net proceeds used general corporate purposes payment interest senior unsecured notes due semiannually may 15th november 15th year senior unsecured notes issued watts water technologies inc pari passu revolving credit facility subsidiary level senior unsecured notes allow company debt senior new notes amount 150000000 plus 5 stockholders’ equity ii debt pari passu junior senior unsecured notes extent company maintains compliance 200 100 fixed charge coverage ratio notes include prepayment provision might require makewhole payment note holders payment dependent upon level respective treasuries notes include customary terms conditions including events default effective july 1 2003 company entered interest rate swap notional amount 25000000 outstanding prior revolving credit facility company swapped variable rate revolving credit facility three month euribor plus 07 fixed rate 233 term swap two years company designated swap hedging instrument using cash flow method swap hedges cash flows associated interest payments first 25000000 revolving credit facility company marks market changes value swap comprehensive income ineffectiveness recorded income fair value swap recorded comprehensive income december 31 2004 39000 12 common stock class common stock class b common stock equal dividend liquidation rights share company’s class common stock entitled one vote matters submitted stockholders share class b common stock entitled ten votes matters shares class b common stock convertible shares class common stock onetoone basis option holder december 31 2004 company reserved total 4383686 class common stock issuance stockbased compensation plans 7343880 shares conversion class b common stock class common stock watts water technologies inc subsidiaries notes consolidated financial statements continued 13 stockbased compensation four stock option plans key employees outside directors granted currently outstanding incentive stock options isos nonqualified stock options nsos purchase company’s class common stock one plan 2004 stock incentive plan currently available grant new options become exercisable fiveyear period rate 20 per year expire ten years date grant 2004 stock incentive plan options become exercisable four year period rate 25 per year expire ten years grant date isos nsos granted plans exercise prices less 100 50 fair market value common stock date grant respectively december 31 2004 4383686 shares class common stock authorized future grants options company’s stock option plans following summary stock option activity related information following table summarizes information options outstanding december 31 2004 company issued 32133 shares restricted stock directors including company’s chief executive officer vest 3 years fair market price 2500 2650 per share amounting approximately 805000 deferred compensation restricted stock awards amortized expense straightline basis vesting period company also management stock purchase plan allows granting restricted stock units rsus key employees purchase 1000000 shares class common stock 67 fair market value date grant rsus vest annually three year period watts water technologies inc subsidiaries notes consolidated financial statements continued date grant difference rsu price fair market value date grant amortized compensation expense ratably vesting period december 31 2004 267321 rsus outstanding dividends declared rsus paid individuals remain unpaid december 31 2004 total approximately 35000 deferred compensation restricted stock rsu plans december 31 2004 anticipated expensed follows 2005 721000 2006 553000 2007 112000 company elected follow apb 25 related interpretations accounting stockbased compensation addition company provides proforma disclosure stockbased compensation measured fair value requirements fas 123 proforma disclosures calculated awards granted june 30 1995 provided footnote 2 required fas 148 weighted average grant date fair value options granted 544 448 443 years ending december 31 2004 2003 2002 respectively also weighted average grant date fair value rsus related management stock purchase plan 815 655 548 years ending december 31 2004 2003 2002 respectively fair value company’s stockbased awards employees used reconciliation note 2 estimated using blackscholes option pricing model following assumptions fair value company’s management stock purchase plan awards employees used reconciliation note 2 estimated using blackscholes option pricing model following assumptions watts water technologies inc subsidiaries notes consolidated financial statements continued 14 employee benefit plans company sponsors funded unfunded defined benefit pension plans covering substantially domestic employees benefits based primarily years service employees’ compensation funding policy company plans contribute annual amount exceed maximum amount deducted federal income tax purposes company uses september 30 measurement date plans funded status defined benefit plans amounts recognized balance sheet follows amounts recognized statement financial position follows watts water technologies inc subsidiaries notes consolidated financial statements continued information pension plans accumulated benefit obligation excess plan assets follows components net periodic benefit cost follows additional information assumptions weightedaverage assumptions used determine benefit obligations weightedaverage assumptions used determine net periodic benefit costs selecting expected longterm rate return assets company considers average rate earnings expected funds invested provide benefits plan watts water technologies inc subsidiaries notes consolidated financial statements continued includes considering trust’s asset allocation expected returns likely earned life plan basis consistent prior year plan assets weighted average asset allocations asset category follows company’s written retirement plan investment policy sets forth investment policy objectives constraints watts water technologies inc pension plan retirement plan investment policy set forth pension plan committee defines general investment principles directs investment management policy addressing preservation capital risk aversion adherence investment discipline investment managers make reasonable effort control risk evaluated quarterly commonly accepted benchmarks ensure risk assumed commensurate given investment style objectives portfolio designed achieve balanced return current income modest growth capital achieving returns excess rate inflation investment horizon order preserve purchasing power plan assets plan assets required invested liquid securities derivative investments allowed prohibited investments include limited following commodities futures contracts private placements options limited partnerships venturecapital investments real estate properties interestonly io principalonly po residual tranche cmos watts water technologies inc stock prohibited transactions include limited following short selling margin transactions allowable assets include cash equivalents fixed income securities equity securities mutual funds gics specific guidelines regarding allocation assets follows equities shall comprise 25 75 total portfolio fixed income shall comprise 30 65 investment performance monitored regular basis investments reallocated stay within specific guidelines equityfixed income allocation 5545 preferred securities one company government agency exceed 10 total fund 20 total fund invested one industry individual treasury securities may represent 50 total fund total allocation treasury bonds notes may represent 100 plan’s aggregate bond position watts water technologies inc subsidiaries notes consolidated financial statements continued cash flows information related company’s pension funds cash flow follows contributions expected made 2005 approximate 1700000 expected benefit payments paid pension plans follows additionally substantially company’s domestic employees eligible participate certain 401k savings plans company matches specified percentage employee contributions subject certain limitations company’s match contributions included selling general administrative expense years ended december 31 2004 2003 2002 421000 300000 330000 respectively company entered supplemental compensation agreement timothy p horne september 1 1996 per agreement upon ceasing employee company mr horne must make available requested board work minimum 300 500 hours per year consultant return certain annual compensation long physically able mr horne complies consulting provisions agreement shall receive supplemental compensation annual basis 400000 per year exchange services performed long physically able event physical disability subsequent commencing consulting services company mr horne continue receive 400000 annually payment consulting services provided mr horne expensed incurred company mr horne retired effective december 31 2002 therefore supplemental compensation period began january 1 2003 accordance financial accounting standards board statement 106 “employers accounting post retirement benefits pensions” company accrue future postretirement disability benefits period january 1 2003 time mr horne becomes physically unable perform consulting services period disability benefits earned 15 contingencies environmental remediation james jones litigation previously disclosed june 25 1997 nora armenta relator filed civil action california superior court los angeles county armenta case james jones company watts water technologies inc subsidiaries notes consolidated financial statements continued james jones mueller co tyco international us watts industries inc watts water technologies inc watts company formerly owned james jones relator filed qui tam provision california state false claims act cal govt code § 12650 et seq california false claims act generally alleged james jones defendants violated statute delivering “defective” “nonconforming” waterworks parts thirtyfour municipal water systems state california relator filed first amended complaint november 1998 second amended complaint december 2000 brought total number plaintiffs 161 june 2002 trial court excluded 47 cities total 161 relator able obtain appellate modification order still appealed end case date 11 named cities intervened attempts four named cities intervene denied one allegations second amended complaint complaintsinintervention purchased nonconforming james jones waterworks parts may leach public drinking water elevated amounts lead may create public health risk made ‘81 bronze alloy uns c8440 contain lead specified advertised ‘85 bronze alloy uns c83600 contention based average difference 2 lead content ‘81 bronze 6 8 lead ‘85 bronze 4 6 lead assumption would mean increased consumable lead public drinking water could cause public health concern company believes evidence discovery available date indicate case addition ‘81 bronze used extensively municipal home plumbing systems approved municipal local national codes federal environmental protection agency also defines metal pipe fittings 8 lead “lead free” section 1417 federal safe drinking water act case relator seeks three times unspecified amount actual damages alleges municipalities suffered hundreds millions dollars damages also seeks civil penalties 10000 false claim alleges defendants responsible tens thousands false claims finally relator requests award costs action including attorneys’ fees december 1998 los angeles department water power ladwp intervened case filed complaint settled city los angeles far significant city 7300000 plus attorneys’ fees codefendants contributed 20 million toward settlement august 2003 additional settlement payment made 13000000 11000000 company 2000000 james jones settled claims three phase cities santa monica san francisco east bay municipal utility district chosen relator strongest claims tried first settlement payment included relator’s statutory share claims three cities dismissed addition 13000000 payment company obligated pay relator’s attorney’s fees phase settlement court permitted defendants select five additional cities serve plaintiffs second trial phase case contra costa corona santa ana santa cruz vallejo chosen watts james jones reached agreement settle claims city santa ana total 45000 amount approximates santa ana’s purchases james jones products relevant period santa ana settlement approved court completed trial remaining phase ii cities’ claims presently scheduled october 2005 watts water technologies inc subsidiaries notes consolidated financial statements continued company reserve approximately 21000000 respect james jones litigation consolidated balance sheet december 31 2004 company believes basis available information reserve adequate cover probable reasonably estimable losses resulting armenta case insurance coverage litigation zurich american insurance company zurich discussed company currently unable make estimate range additional losses february 14 2001 insurers denied coverage claims armenta case company filed complaint coverage insurers california superior court coverage case james jones filed similar complaint cases consolidated trial court made summary adjudication rulings zurich must pay reasonable defense costs incurred watts james jones armenta case since april 23 1998 well future defense costs end armenta case july 2004 california court appeal affirmed rulings december 1 2004 california supreme court denied zurich’s appeal decision denial permanently established zurich’s obligation pay armenta defense costs watts 13800000 plus future costs james jones 14800000 plus future costs zurich currently making payments incurred armenta defense costs however noted zurich asserts defense costs paid subject reimbursement 2002 trial court made summary adjudication ruling zurich must indemnify pay watts james jones amounts paid settle city los angeles zurich’s attempt obtain appellate review order denied zurich still able appeal order end coverage case 2004 trial court made another summary adjudication ruling zurich must indemnify pay watts james jones 13000000 paid settle claims phase cities described zurich’s attempt obtain appellate review ruling denied december 3 2004 california court appeal zurich still able appeal order end coverage case although zurich making payments required indemnity orders company currently unable predict finality orders since zurich appeal end coverage case recorded reimbursed indemnity settlement amounts reimbursed defense costs liability pending court resolution indemnification matter relates zurich asserted amounts approximately 47500000 defense costs indemnity amounts paid settlements paid watts james jones subject reimbursement deductible agreements related insurance policies zurich watts zurich prevail argument james jones would possible indemnity claim watts exposure armenta case however management counsel anticipate watts ultimately prevail reimbursement issue zurich based management’s assessment company believe ultimate outcome james jones litigation material adverse effect liquidity financial condition results operations assessment based available information litigation inherently uncertain actual liability company resolve litigation fully cannot predicted certainty exists reasonable possibility company may ultimately incur losses james jones litigation excess amount accrued company intends continue contest vigorously aspects james jones litigation watts water technologies inc subsidiaries notes consolidated financial statements continued environmental remediation company named potentially responsible party prp respect limited number identified contaminated sites including site babylon new york levels contamination vary significantly site related levels remediation efforts environmental liabilities recorded based probable cost known estimated minimum cost remediation company accrues estimated environmental liabilities based assumptions subject number factors uncertainties circumstances affect reliability precision estimates include identification additional sites environmental regulations level cleanup required technologies available number financial condition contributors remediation time period remediation may occur company recognizes changes estimates new remediation requirements defined new information becomes available company reserve approximately 1400000 environmental accrual company estimates likely paid environmental remediation liabilities next five ten years based facts currently known company believe ultimate outcome matters material adverse effect liquidity financial condition results operations company’s environmental matters inherently uncertain exists possibility company may ultimately incur losses matters excess amount accrued however company cannot currently estimate amount additional losses asbestos litigation company defending approximately 161 cases filed primarily exclusively mississippi new jersey state courts alleging injury death result exposure asbestos filings typically name multiple defendants filed behalf many plaintiffs identify particular watts products source asbestos exposure date watts dismissed case scheduled trial date comes near discovery fails yield evidence exposure watts product based facts currently known company believe ultimate outcome claims material adverse effect liquidity financial condition results operations litigation march 26 2003 class action complaint filed watts north carolina hospitality group inc circuit court maryland prince george’s county alleges certain commercial valve models contain design defect causes fail prematurely june 7 2004 trial court issued opinion order denied plaintiff’s request class certification ruling appealed end year briefed appellate court based facts currently known company believe ultimate outcome matter material adverse effect liquidity financial condition results operations lawsuits proceedings claims arising ordinary course operations also pending threatened company based facts currently known company believe ultimate outcome litigation matters material adverse effect liquidity financial condition results operations watts water technologies inc subsidiaries notes consolidated financial statements continued 16 financial instruments fair value carrying amounts cash equivalents investment securities trade receivables trade payables approximate fair value short maturity financial instruments fair value company’s 487 senior notes due 2010 547 senior notes due 2013 based quoted market prices fair value company’s variable rate debt approximates carrying value carrying amount estimated fair market value company’s longterm debt including current portion follows derivative instruments company uses foreign currency forward exchange contracts reduce impact currency fluctuations certain anticipated intercompany purchase transactions expected occur within year certain foreign currency transactions related gains losses recognized incomeexpense contracts expire generally period underlying foreign currency denominated transaction contracts subject company market risk exchange movement offset gains losses related foreign currency denominated transactions december 31 2004 2003 2002 company outstanding forward contracts buy foreign currencies company uses commodity futures contracts fix price certain portion certain raw materials used manufacturing process contracts highly correlate actual purchases commodity contract values reflected cost commodity actually purchased commodity contracts utilized years ended december 31 2004 2003 2002 effective july 1 2003 company entered interest rate swap notional amount 25000000 outstanding revolving credit facility company swapped variable rate revolving credit facility three month euribor plus 07 fixed rate 233 term swap two years company designated swap hedging instrument using cash flow method swap hedges cash flows associated interest payments first 25000000 revolving credit facility company marks market changes value swap comprehensive income ineffectiveness recorded income fair value recorded comprehensive income december 31 2004 39000 december 31 2001 company outstanding interest rate swap converted 20000000 borrowings variable rate euro line credit fixed rate borrowings 43 swap agreement expired march 2002 value impact company’s results material december 31 2002 watts water technologies inc subsidiaries notes consolidated financial statements continued september 2001 company entered interest rate swap 75000000 83¤8 notes company swapped fixed interest rate 83¤8 floating libor plus 374 august 5 2002 company sold swap received 2315000 cash based company terminating hedge transaction adjustment fair value amortized term notes matured december 1 2003 leases company leases certain manufacturing facilities sales offices warehouses equipment generally leases carry renewal provisions require company pay maintenance costs future minimum lease payments capital leases noncancelable operating leases december 31 2004 follows 17 segment information criteria set forth financial accounting standards board no131 “disclosure segments enterprise related information” company operates three geographic segments north america europe china segments sell similar products managed separately separate financial results reviewed company’s chief operating decisionmaker sales region based upon location entity recording sale accounting policies segment described summary significant accounting policies see note 2 watts water technologies inc subsidiaries notes consolidated financial statements continued following summary significant accounts balances segment reconciled consolidated totals corporate expenses primarily sarbanesoxley compliance compensation expense professional fees including legal audit expenses benefit administration costs allocated geographic segments viewed corporate functions support activities north american segment consists us net sales 507061000 439436000 422703000 years ended december 31 2004 2003 2002 respectively north american segment also consists us longlived assets 67032000 67450000 73907000 years ended december 31 2004 2003 2002 respectively intercompany transactions eliminated intersegment revenues significant watts water technologies inc subsidiaries notes consolidated financial statements continued 18 quarterly financial information unaudited 1 fourth quarter 2004 company identified corrected errors related certain accrued expenses adjustments net income necessary correct errors amounted 2289000 007 per share portions adjustments related year ended december 31 2004 fourth quarter 2004 1520000 005 per share 411000 001 per share respectively impact amount related prior periods material financial statements prior periods thus amount related prior periods including first three quarters 2004 recorded fourth quarter 2004 19 related party transactions second quarter 2004 agreement executed relocation firm purchase sell home company’s chief executive officer also member company’s board directors relocation firm purchased home company’s chief executive officer company’s behalf price based fair market appraisals obtained company agreement watts water technologies inc subsidiaries notes consolidated financial statements continued sell home third party executed third quarter accordingly company charged income continuing operations approximately 285000 representing difference original appraised value home final sale price third party company owns 20 interest plumworldcouk ltd variable interest entity plumbworld primarily ebusiness sells bathroom sanitary appliances well plumbing heating products tools plumbing consumables annualized sales approximately 10980000 company notional investment approximately 500 plumbworld maintains loan receivable amount approximately 890000 plumbworld december 31 2004 company continues account investment plumbworld using equity method company leases land buildings occupied chinese joint venture joint venture partner lease classified operating lease extends another 20 years total rental expense 2004 2003 2002 approximated 267000 year total lease costs remaining term lease approximate 5300000 20 subsequent events february 8 2005 company declared quarterly dividend 008 per share company’s class common stock class b common stock increase 001 per share compared dividend paid comparable period last year january 5 2005 company acquired 100 outstanding stock hf scientific inc located fort myers florida approximately 7000000 cash plus 800000 assumed debt hf scientific manufactures distributes line instrumentation equipment test kits chemical reagents used monitoring water quality variety applications january 4 2005 company acquired substantially assets sea tech inc located wilmington north carolina approximately 10000000 cash sea tech provides cost effective solutions fluidic connection needs sea tech offers wide range standard custom quick connect fittings valves manifolds pex tubing designed address specific customer requirements watts water technologies inc subsidiaries schedule iivaluation qualifying accounts amounts thousands three years ended december 31item 15 exhibits financial statement schedules a1 financial statements following financial statements included separate section report commencing page numbers specified report independent registered public accounting firm consolidated statements operations years ended december 31 2006 2005 2004 consolidated balance sheets december 31 2006 2005 consolidated statements stockholders’ equity years ended december 31 2006 2005 2004 consolidated statements cash flows years ended december 31 2006 2005 2004 notes consolidated financial statements 6297 a2 schedules schedule iivaluation qualifying accounts years ended december 31 2006 2005 2004 required schedules provision made applicable accounting regulations securities exchange commission included notes consolidated financial statements a3 exhibits listed exhibit index immediately preceding exhibits filed part annual report form 10k signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated report independent registered public accounting firm board directors stockholders watts water technologies inc audited accompanying consolidated balance sheets watts water technologies inc subsidiaries december 31 2006 2005 related consolidated statements operations stockholders’ equity cash flows years threeyear period ended december 31 2006 connection audits consolidated financial statements also audited financial statement schedule consolidated financial statements financial statement schedule responsibility company’s management responsibility express opinion consolidated financial statements financial statement schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position watts water technologies inc subsidiaries december 31 2006 2005 results operations cash flows years threeyear period ended december 31 2006 conformity us generally accepted accounting principles also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein discussed note 2 consolidated financial statements watts water technologies inc adopted statement financial accounting standards 123r “sharebased payment” effective january 1 2006 utilizing modified prospective application transition method also discussed note 2 consolidated financial statements watts water technologies inc adopted statement financial accounting standards 158 “employers’ accounting defined benefit pension postretirement plansan amendment fasb statements 87 88 106 132r” effective december 31 2006 also audited accordance standards public company accounting oversight board united states effectiveness watts water technologies inc’s internal control financial reporting december 31 2006 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso report dated march 1 2007 expressed unqualified opinion management’s assessment effective operation internal control financial reporting boston massachusetts march 1 2007 watts water technologies inc subsidiaries consolidated statements operations amounts thousands except per share information accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated balance sheets amounts thousands except share information accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated statements stockholders’ equity amounts thousands except share information accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated statements cash flows amounts thousands accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries notes consolidated financial statements 1 description business watts water technologies inc company designs manufactures sells extensive line water safety flow control products primarily water quality water safety water flow control water conservation markets located predominantly north america europe china 2 accounting policies principles consolidation consolidated financial statements include accounts company majority wholly owned subsidiaries upon consolidation significant intercompany accounts transactions eliminated cash equivalents cash equivalents consist highly liquid investments maturities three months less date original issuance investment securities investment securities december 31 2006 consisted auction rate certificates whose underlying investments aaa rated municipal bonds certificates bought sold auction reset dates 35 days certificates traded par value approximates market value december 31 2006 company classifies debt securities available sale availableforsale securities recorded fair value unrealized holding gains losses net related tax effect availableforsale securities excluded earnings reported separate component comprehensive income realized gains losses sale availableforsale securities determined specificidentification basis decline market value availableforsale security cost deemed otherthantemporary results reduction carrying amount fair value impairment charged earnings new cost basis security established determine whether impairment otherthantemporary company considers whether ability intent hold investment market price recovery considers whether evidence indicating cost investment recoverable outweighs evidence contrary evidence considered assessment includes reasons impairment severity duration impairment changes value subsequent yearend forecasted performance investee premiums discounts amortized accreted life related availableforsale security adjustment yield using effectiveinterest method dividend interest income recognized earned allowance doubtful accounts allowance doubtful accounts includes reserves bad debts sales returns allowances company analyzes aging accounts receivable individual accounts receivable historical bad debts concentration receivables customer credit worthiness current economic trends changes customer payment terms company specifically analyzes individual accounts receivable watts water technologies inc subsidiaries notes consolidated financial statements continued establishes specific reserves financially troubled customers addition factors developed certain regions utilizing historical trends sales returns allowances derive reserve returns allowances concentration credit company sells products diversified customer base therefore significant concentrations credit risk except approximately 100 107 103 company’s total sales 2006 2005 2004 respectively one company sales transacted within north america geographic segment inventories stated lower cost primarily firstin firstout method market value determined replacement cost net realizable value historical experience used basis determining reserve excess obsolete inventories goodwill intangible assets goodwill recorded consideration paid acquisitions exceeds fair value net tangible intangible assets acquired goodwill intangible assets indefinite useful lives amortized rather tested annually impairment test performed october 29 2006 impairment goodwill longlived assets goodwill intangible assets indefinite lives tested annually impairment accordance provisions financial accounting standards board statement 142 “goodwill intangible assets” fas 142 company’s impairment review based discounted cash flow approach reporting unit level requires management judgment respect revenue expense growth rates changes working capital selection use appropriate discount rate company uses judgment assessing whether assets may become impaired annual impairment tests indicators unexpected adverse business conditions economic factors unanticipated technological change competitive activities loss key personnel acts governments courts may signal asset become impaired intangible assets estimable lives longlived assets reviewed impairment whenever events changes circumstances indicate carrying amount asset group may recoverable accordance financial accounting standards board statement 144 “accounting impairment disposal longlived assets” fas 144 recoverability intangible assets estimable lives longlived assets measured comparison carrying amount asset group future net undiscounted pretax cash flows expected generated asset group comparisons indicate asset recoverable impairment loss recognized amount carrying amount asset group exceeds related estimated fair value estimated fair value based either discounted future pretax operating cash flows appraised values depending nature asset company determines discount rate analysis based expected internal rate return related business watts water technologies inc subsidiaries notes consolidated financial statements continued allocate interest charges asset group measured judgment required estimate discounted future operating cash flows changes carrying amount goodwill follows adjustments north american goodwill year ended december 31 2006 relate accrual approximately 4000000 earnout provisions finalization dormont manufacturing company core industries inc purchase price allocations dormont manufacturing company core industries inc acquired december 2005 intangible assets include following presented “other assets net” consolidated balance sheets aggregate amortization expense amortized intangible assets years ended december 31 2006 2005 2004 8635000 2576000 1761000 respectively additionally future amortization expense amortizable intangible assets approximates 10056000 2007 8582000 2008 8294000 2009 8287000 2010 7861000 2011 amortization expense provided straightline basis estimated useful lives intangible assets weightedaverage remaining life total amortizable intangible assets 115 years patents customer relationships technology amortizable intangibles weightedaverage remaining lives 107 watts water technologies inc subsidiaries notes consolidated financial statements continued years 102 years 72 years 215 years respectively intangible assets subject amortization primarily include trademarks unpatented technology property plant equipment property plant equipment recorded cost depreciation provided straightline basis estimated useful lives assets range 10 40 years buildings improvements 3 15 years machinery equipment income taxes income taxes accounted asset liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases operating loss tax credit carry forwards deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized income period includes enactment date foreign currency translation financial statements subsidiaries located outside united states generally measured using local currency functional currency balance sheet accounts including goodwill foreign subsidiaries translated united states dollars yearend exchange rates income expense items translated weighted average exchange rates period net translation gains losses included comprehensive income separate component stockholders’ equity company provide us income taxes foreign currency translation adjustments since provide taxes undistributed earnings foreign subsidiaries gains losses foreign currency transactions subsidiaries included net earnings stockbased compensation effective january 1 2006 company adopted financial accounting standards board statement 123r “sharebased payment”fas 123r utilizing “modified prospective” method described fas 123r “modified prospective” method compensation cost recognized sharebased payments granted effective date unvested awards granted prior effective date accordance fas 123r prior period amounts restated fas 123r also requires excess tax benefits associated sharebased payments classified financing activities statements consolidated cash flows rather operating cash flows required previous regulations december 31 2006 company three stockbased compensation plans total unrecognized compensation costs related unvested stockbased compensation arrangements approximately 7271000 total weighted average remaining term 20 years 2006 company recognized compensation costs related stockbased programs approximately 2985000 selling general administrative expenses company recorded approximately 360000 tax benefit 2006 compensation expense relating stock options 2006 company recorded approximately 592000 tax benefit stockbased plans 2006 recognition total stockbased compensation expense impacted basic net income per common share diluted net income per common share 006 watts water technologies inc subsidiaries notes consolidated financial statements continued prior effective date stockbased compensation plans accounted accounting principles board opinion apb 25 “accounting stock issued employees” related interpretations proforma information regarding impact total stockbased compensation net income per share prior periods required fas 123r proforma information determined company accounted employee stock options restricted stock units rsus fair value method measure stockbased compensation required disclosure provisions financial accounting standards board statement 123 “accounting stockbased compensation” fas 123 amended financial accounting standards board statement 148 “accounting stockbased compensation transition disclosure” fas 148 2005 2004 illustrated following tables net income per common share basic net income per common share calculated dividing net income weighted average number common shares outstanding calculation diluted earnings per share assumes conversion dilutive securities see note 13 watts water technologies inc subsidiaries notes consolidated financial statements continued net income number shares used compute net earnings per share basic assuming full dilution reconciled derivative financial instruments normal course business company manages risks associated commodity prices foreign exchange rates interest rates variety strategies including use hedging transactions executed accordance company’s policies company’s hedging transactions include limited use various derivative financial commodity instruments matter policy company use derivative instruments unless underlying exposure change value derivative instruments would substantially offset opposite change value underlying hedged items company use derivative instruments trading speculative purposes using qualifying criteria defined financial accounting standards board statement 133 “accounting derivative instruments hedging activities” fas 133 derivative instruments designated accounted either hedge recognized asset liability fair value hedge forecasted transaction cash flow hedge fair value hedge effective ineffective portions change fair value derivative instrument along adjustment carrying amount hedged item fair value changes attributable hedged risk recognized earnings cash flow hedge changes fair value derivative instrument highly effective deferred accumulated comprehensive income loss underlying hedged item recognized earnings fair value cash flow hedge cease qualify hedge accounting terminated would continue carried balance sheet fair value settled hedge accounting would discontinued prospectively forecasted transaction longer probable occurring amounts previously deferred accumulated comprehensive income would recognized immediately earnings occasion company may enter derivative instrument hedge accounting required entered offset changes fair value underlying transaction required recognized earnings natural hedge instruments reflected consolidated balance sheets fair value changes fair value recognized earnings certain forecasted transactions primarily intercompany sales united states canada assets exposed foreign currency risk company monitors foreign currency exposures ongoing basis maximize overall effectiveness foreign currency hedge positions 2006 2005 company used foreign currency forward contracts means hedging exposure foreign watts water technologies inc subsidiaries notes consolidated financial statements continued currency risks company’s foreign currency forwards qualify cash flow hedge criteria fas 133 portions company’s outstanding debt exposed interest rate risks company monitors interest rate exposures ongoing basis maximize overall effectiveness interest rates 2006 2005 company used interest rate swap means hedging exposure interest rate risks see note 11 company’s interest rate swap qualify cash flow hedge criteria fas 133 shipping handling shipping handling costs included selling general administrative expense amounted 37257000 28123000 25110000 years ended december 31 2006 2005 2004 respectively research development research development costs included selling general administrative expense amounted 12650000 11576000 9942000 years ended december 31 2006 2005 2004 respectively revenue recognition company recognizes revenue following criteria met company entered binding agreement product shipped title passes sales price customer fixed determinable collectability reasonably assured provisions estimated returns allowances made time sale recorded reduction sales included allowance doubtful accounts consolidated balance sheets company records provisions sales incentives primarily volume rebates adjustment net sales accordance financial accounting standards board’s emerging issues task force eitf issue 0014 “accounting certain sales incentives” eitf 0014 eitf issue 019 “accounting consideration given vendor customer reseller vendor’s products” basis presentation certain amounts 2006 reclassified permit comparison 2005 presentation estimates preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates watts water technologies inc subsidiaries notes consolidated financial statements continued new accounting standards february 2007 financial accounting standards board fasb issued financial accounting standards board statement fas 159 “the fair value option financial assets financial liabilitiesincluding amendment fas 115” fas 159 permits entities choose measure many financial instruments certain items fair value fas 159 effective financial statements issued fiscal years beginning november 15 2007 interim periods within fiscal years earlier application encouraged company currently evaluating impact fas 159 consolidated financial statements september 2006 securities exchange commission issued staff accounting bulletin 108 “considering effects prior year misstatements quantifying misstatements current year financial statements” sab 108 provides interpretive guidance effects carryover reversal prior year misstatements considered quantifying current year misstatement sab 108 effective fiscal years ending november 15 2006 company adopted provisions sab 108 fiscal year 2006 impact sab 108 material consolidated financial statements september 2006 fasb issued fas 158 “employers’ accounting defined benefit pension postretirement plansan amendment fasb statements 87 88 106 132r” fas 158 requires employer recognize statement financial position asset plan’s overfunded status liability plan’s underfunded status b measure plan’s assets obligations determine funded status end employer’s fiscal year c recognize changes funded status defined benefit postretirement plan year changes occur changes reported comprehensive income requirement recognize funded status benefit plan disclosure requirements effective end fiscal year ending december 15 2006 companies publicly traded equity securities requirement measure plan assets benefit obligations date employer’s fiscal yearend statement financial position effective fiscal years ending december 15 2008 although earlier adoption permitted result requirement recognize funded status company benefit plans december 31 2006 company recorded increase pension liability approximately 8300000 decrease approximately 1300000 assets net decrease accumulated comprehensive income approximately 5800000 net tax september 2006 fasb issued fas 157 “fair value measurements” fas 157 defines fair value establishes framework measuring fair value generally accepted accounting principles expands disclosures fair value measurements fas 157 effective financial statements issued fiscal years beginning november 15 2007 interim periods within fiscal years earlier application encouraged provided reporting company yet issued financial statements fiscal year including financial statements interim period within fiscal year company expect adoption fas 157 material impact consolidated financial statements july 2006 fasb issued financial interpretation 48 “accounting uncertainty income taxes” fin 48 clarifies accounting uncertainty income taxes recognized financial statements accordance sfas 109 “accounting income taxes” fin 48 provides tax benefit uncertain tax position may recognized likely position sustained upon examination based technical merits interpretation also watts water technologies inc subsidiaries notes consolidated financial statements continued provides guidance measurement derecognition classification interest penalties accounting interim periods disclosure transition fin 48 become effective fiscal years beginning december 15 2006 company adopted provisions fin 48 fiscal year 2007 impact material consolidated financial statements march 2006 fasb issued fas 156 “accounting servicing financial assetsan amendment fasb statement 140” fas 156 fas 156 amends fas statement no140 “accounting transfers servicing financial assets extinguishments liabilities” respect accounting separately recognized servicing assets servicing liabilities fas 156 addresses recognition measurement separately recognized servicing assets liabilities provides approach simplify efforts obtain hedgelike offset accounting company adopted provisions fas 156 fiscal year 2007 impact material consolidated financial statements february 2006 fasb issued fas 155 “accounting certain hybrid financial instrumentsan amendment fasb statements 133 140” fas 155 fas 155 amends fas 133 “accounting derivatives hedging activities” fas 140 “accounting transfers servicing financial assets extinguishments liabilities” allows entity remeasure fair value hybrid financial instrument contains embedded derivative otherwise would require bifurcation host holder irrevocably elects account whole instrument fair value basis subsequent changes fair value instrument would recognized earnings company adopted provisions fas 155 fiscal year 2007 impact material consolidated financial statements may 2005 fasb issued fas 154 “accounting changes error correction replacement apb opinion 20 fasb statement 3” fas 154 fas 154 replaces apb opinion 20 “accounting changes” apb 20 fasb statement 3 “reporting accounting changes interim financial statements” changes requirements accounting reporting change accounting principle apb 20 previously required voluntary changes accounting principles recognized including net income period change cumulative effect changing new accounting principle fas 154 requires retrospective application prior periods’ financial statements changes accounting principle fas 154 defines retrospective application different accounting principle prior accounting periods principle always used fas 154 also requires change depreciation amortization depletion method longlived nonfinancial assets accounted change accounting estimate affected change accounting principle impact material consolidated financial statements december 2004 fasb issued fas 153 “exchanges nonmonetary assets amendment apb opinion 29 accounting nonmonetary transactions” fas 153 amendments made fas 153 based principle exchanges nonmonetary assets measured based fair value assets exchanged amendments eliminate narrow exception nonmonetary exchanges similar productive assets replace broader exception exchanges nonmonetary assets commercial substance previously opinion 29 required accounting exchange productive asset similar productive asset equivalent interest similar productive asset based recorded amount asset relinquished statement effective nonmonetary asset exchanges occurring fiscal periods beginning june 15 2005 earlier application permitted nonmonetary asset exchanges occurring watts water technologies inc subsidiaries notes consolidated financial statements continued fiscal periods beginning date issuance provisions statement applied prospectively impact material company’s consolidated financial statements november 2004 fasb issued fas 151 “inventory costs” fas 151 fas 151 amends guidance accounting research bulletin 43 chapter 4 “inventory pricing” clarify accounting inventory costs provisions statement effective fiscal years beginning june 15 2005 impact material company’s consolidated financial statements 3 discontinued operations september 1996 company divested municipal water group businesses included henry pratt james jones company edward barber company ltd costs expenses related municipal water group relate legal settlement costs associated james jones litigation see note 15 2004 company divested interest minorityowned subsidiary jameco international llc jameco llc previously consolidated result financial accounting standards board interpretation 46 “consolidation variable interest entitiesrevised” fin 46r jameco llc recorded north american segment management determined jameco llc longterm strategic fit company decided divest interest result company recorded impairment charge net tax 739000 write investment estimated fair value 250000 additionally year ended december 31 2004 company recorded net loss 54000 operations jameco llc jameco llc imports sells vitreous china imported faucets faucet parts imported bathroom accessories north american home improvement retail market condensed operating statements balance sheets discontinued operations summarized watts water technologies inc subsidiaries notes consolidated financial statements continued assets liabilities 2006 2005 primarily relate reserves james jones litigation statements cash flows amounts 2006 2005 2004 primarily relate operating activities 4 restructuring income charges 2006 company recorded charges 4667000 costs goods sold primarily manufacturing severance costs related company’s relocation restructuring plan 60 owned chinese joint venture company recorded income 5648000 restructuring income charges primarily comprised gains approximately 8188000 related sales buildings italy partially offset charges approximately 2150000 severance costs related company’s european restructuring plans approximately 390000 accelerated amortization related company’s chinese restructuring plan company also recognized income 1530000 minority interest representing 40 liability chinese joint venture partner restructuring plan company recorded charges net recoveries 2545000 2968000 2005 2004 respectively expenses incurred 2005 primarily accelerated depreciation planned closure us manufacturing plant reduction estimated useful lives certain manufacturing equipment net recoveries european severance related charges asset writedowns expenses incurred 2004 primarily accelerated depreciation planned closure us manufacturing plant reduction estimated useful lives certain manufacturing equipment severance costs asset writedowns consist primarily writeoffs inventory related product lines company discontinued part restructuring plan primarily recorded cost goods sold accelerated depreciation based shorter remaining estimated useful lives certain fixed assets primarily recorded cost goods sold costs consist primarily gains sales buildings 2006 removal shipping costs associated relocation manufacturing equipment 2005 costs primarily recorded cost goods sold expensed incurred severance costs primarily recorded restructuring charges european restructuring plan cost goods sold chinese restructuring plan watts water technologies inc subsidiaries notes consolidated financial statements continued details company’s manufacturing restructuring plans december 31 2006 follows 5 business acquisitions following acquisitions accounted purchase method accounting accordingly results included company’s consolidated results operation since respective dates acquisition august 14 2006 wholly owned subsidiary company acquired 100 outstanding stock black teknigas limited teknigas located st neots united kingdom approximately 8700000 net cash acquired approximately 300000 allocations goodwill intangible assets approximately 3585000 4493000 respectively amount recorded intangible assets primarily technology customer relationships estimated useful lives ranging 6 9 years trade names indefinite lives teknigas designs develops manufactures range gas control products systems combustion industrial medical laboratory specialty gas june 7 2006 wholly owned subsidiary company acquired 100 outstanding stock kim olofsson safe corporation ab kimsafe located almhult sweden approximately 5800000 net cash acquired approximately 2900000 allocations goodwill intangible assets approximately 887000 4436000 respectively amount recorded intangible assets primarily customer relationships estimated useful lives 5 years trade names indefinite lives kimsafe manufactures electronic controls heat pump solar pellet heaters provide ability heat water using renewable energy june 2 2006 wholly owned subsidiary company acquired assets business calflex manufacturing inc calflex located vernon california stock ningbo best metal plastic manufacturing company ltd ningbo located ningbo china aggregate approximately 6600000 allocation intangible assets approximately 2389000 amount recorded intangible assets primarily customer relationships estimated useful lives 12 years trade names indefinite lives calflex ningbo distribute manufacture water connectors watts water technologies inc subsidiaries notes consolidated financial statements continued may 19 2006 wholly owned subsidiary company acquired 100 outstanding stock ats expansion group ats located sorgues grenoble houtvillers france approximately 62100000 net cash acquired approximately 5600000 plus assumed debt approximately 14100000 preliminary allocations goodwill intangible assets approximately 32690000 26520000 respectively amount recorded intangible assets primarily customer relationships estimated useful 6 years patents estimated useful lives ranging 6 12 years trade names indefinite lives ats’ products include broad range fittings valves manifolds water gas heating applications stainless steel flexible hoses purchase price allocation ats preliminary pending final determination fair values intangible assets certain assumed assets liabilities april 26 2006 wholly owned subsidiary company acquired assets business changsha valve works changsha located changsha china approximately 9200000 approximately 1184000 remains paid subject certain conditions met preliminary allocations goodwill intangible assets approximately 3447000 3971000 respectively amount recorded intangible assets primarily noncompete agreements estimated useful lives 10 years customer order backlog estimated useful life 1 year changsha leading manufacturer large diameter hydraulicactuated butterfly valves thermopower hydropower plants water distribution projects water works projects china purchase price allocation changsha preliminary pending final determination fair values certain assumed assets liabilities april 5 2006 wholly owned subsidiary company completed planned increase ownership watts stern rubinetti srl stern 85 100 price paid additional 15 interest approximately 387000 certain prior years acquisition agreements contain either earnout provision put feature remaining common stock yet purchased company 2006 company accrued approximately 4000000 earnout provisions charged goodwill paid 2007 2005 company charged operations approximately 1500000 earnout costs prior year acquisition also paid 2005 calculations typically based multiple future gross margins operating earnings defined agreements amount certain contingent consideration agreement determinable beyond reasonable doubt therefore liability established agreement future earnouts payments accounted additional purchase price watts water technologies inc subsidiaries notes consolidated financial statements continued 6 accumulated comprehensive income loss accumulated comprehensive income loss consist following 7 inventories net inventories consist following finished goods 18275000 15423000 december 31 2006 2005 respectively consigned 8 property plant equipment property plant equipment consists following watts water technologies inc subsidiaries notes consolidated financial statements continued 9 income taxes significant components company’s deferred income tax liabilities assets follows provision income taxes continuing operations based following pretax income provision income taxes continuing operations consists following watts water technologies inc subsidiaries notes consolidated financial statements continued actual income taxes reported continuing operations different would computed applying federal statutory tax rate income continuing operations income taxes reasons difference follows december 31 2006 company foreign net operating loss carry forwards 10800000 income tax purposes 9100000 losses carried forward indefinitely 1700000 losses expires 2008 net operating losses consist 7400000 related german operations 1700000 austrian operations 1700000 related chinese operations company provide valuation allowance december 31 2006 2005 portion net operating loss carry forwards company’s earnings related certain german operations improved therefore company believes valuation allowance longer necessary company believes likely able recover deferred tax assets undistributed earnings company’s foreign subsidiaries amounted approximately 168900000 december 31 2006 earnings considered indefinitely reinvested accordingly provision us federal state income taxes recorded thereon upon distribution earnings form dividends otherwise company subject withholding taxes payable various foreign countries determination amount us income tax liability would incurred practicable complexities associated hypothetical calculation however unrecognized foreign tax credits would available reduce portion us income tax liability withholding taxes approximately 2780000 would payable upon remittance previously unremitted earnings december 31 2006 american job creation act 2004 ajca signed federal law october 22 2004 ajca contain onetime foreign dividend repatriation provision provides 85 special deduction respect certain qualifying dividends foreign subsidiaries limited period company repatriate dividends foreign affiliates provision watts water technologies inc subsidiaries notes consolidated financial statements continued 10 accrued expenses liabilities accrued expenses liabilities consist following 11 financing arrangements longterm debt consists following principal payments next five years thereafter due follows thousands 20077522 2008235 2009209 201050194 201191059 thereafter300000 company maintains letters credit guarantee performance payment third parties accordance specified terms conditions amounts outstanding approximately 49637000 december 31 2006 48651000 december 31 2005 company’s letters credit primarily associated insurance coverage lesser extent foreign purchases company’s watts water technologies inc subsidiaries notes consolidated financial statements continued letters credit generally expire within one year issuance drawn revolving credit facility increase primarily associated insurance coverage instruments may exist expire without drawn therefore necessarily represent future cash flow obligations april 27 2006 company completed private placement 225000000 585 senior unsecured notes due april 2016 2006 note purchase agreement 2006 note purchase agreement includes operational financial covenants company required comply including among others maintenance certain financial ratios restrictions additional indebtedness liens dispositions events default 2006 note purchase agreement include failure comply financial operational covenants well bankruptcy insolvency events company may option upon notice noteholders prepay time part notes amount less 1 million paying principal amount plus makewhole amount dependent upon yield respective us treasury securities company used net proceeds private placement repay 147000000 outstanding revolving credit facility balance net proceeds used finance future acquisitions general corporate purposes december 31 2006 company compliance covenants related 2006 note purchase agreement payment interest senior unsecured notes due semiannually april 30th october 30th year additionally company amended 2003 note purchase agreement reflect existence subsidiary guarantors substantially conform certain provisions 2003 note purchase agreement 2006 note purchase agreement april 27 2006 company amended restated unsecured revolving credit facility syndicate banks amended revolving credit facility revolving credit facility provides multicurrency unsecured borrowings standby letters credit 350000000 expires april 2011 borrowings outstanding revolving credit facility bear interest fluctuating rate per annum equal applicable percentage equal case eurocurrency rate loans british bankers association libor rate plus applicable percentage 060 determined reference company’s consolidated leverage ratio debt rating ii case base rate loans swing line loans higher federal funds rate plus 05 b rate interest effect day announced bank america na “prime rate” 2006 average interest rate revolving credit facility eurobased borrowings approximately 35 revolving credit facility includes operational financial covenants customary facilities type including among others restrictions additional indebtedness liens investments maintenance certain leverage ratios december 31 2006 company compliance covenants related revolving credit facility 226300000 unused potentially available credit revolving credit facility us dollar denominated debt 91059000 eurobased borrowings outstanding revolving credit facility 32641000 standby letters credit outstanding revolving credit facility closing dormont acquisition dormont longterm debt outstanding 8900000 form two series taxable variable rate demand bonds 1998 series 1500000 outstanding 2000 series 7400000 outstanding due provisions trust agreements could redeemed dates subsequent closing bonds secured letter credit bank maintained security interest assets dormont condition purchase gain bank’s consent sale dormont company dormont’s former owners required establish cash collateral account bonds amount equal potential obligation watts water technologies inc subsidiaries notes consolidated financial statements continued dormont bank letter credit reimbursement agreements entire obligation bonds approximates 9096000 represents 8900000 bond principal plus interest related fees closing portion dormont purchase price placed cash collateral account guarantee payment company recorded escrow deposit prepaid expenses assets december 31 2005 1998 series bonds repaid full january 17 2006 2000 series bonds repaid full february 1 2006 former owners using cash collateral account effective july 1 2005 company entered threeyear interest rate swap counter party notional amount 25000000 outstanding revolving credit facility company swapped threemonth euribor plus 06 fixed rate 302 change fair value swap 2006 approximated 673000 recorded reduction interest expense 2006 swap terminated october 3 2006 may 15 2003 company completed private placement 125000000 senior unsecured notes consisting 50000000 principal amount 487 senior notes due 2010 75000000 principal amount 547 senior notes due 2013 payment interest senior unsecured notes due semiannually may 15th november 15th year senior unsecured notes issued watts water technologies inc pari passu revolving credit facility subsidiary level senior unsecured notes allow company debt senior notes amount 150000000 plus 5 stockholders’ equity ii debt pari passu junior senior unsecured notes extent company maintains compliance 200 100 fixed charge coverage ratio notes include prepayment provision might require makewhole payment note holders payment dependent upon level respective treasuries notes include customary terms conditions including events default 12 common stock class common stock class b common stock equal dividend liquidation rights share company’s class common stock entitled one vote matters submitted stockholders share class b common stock entitled ten votes matters shares class b common stock convertible shares class common stock onetoone basis option holder december 31 2006 company reserved total 3881308 class common stock issuance stockbased compensation plans 7293880 shares conversion class b common stock class common stock february 6 2007 company’s board directors approved amendment company’s certificate incorporation increase number shares class common stock authorized issuance 80000000 shares 200000000 shares amendment remains subject approval company’s stockholders annual meeting stockholders scheduled may 2 2007 13 stockbased compensation company maintains four stock incentive plans key employees outside directors granted outstanding incentive stock options isos nonqualified stock options nsos purchase company’s class common stock one plan 2004 stock incentive plan currently available grant new equity awards stock options granted prior plans became exercisable fiveyear period rate 20 per year expire ten years date grant 2004 stock incentive plan options become exercisable four year period rate 25 per year watts water technologies inc subsidiaries notes consolidated financial statements continued expire ten years grant date isos nsos granted plans may exercise prices less 100 50 fair market value common stock date grant respectively company’s current practice issue options fair market value grant date december 31 2006 2230743 shares class common stock authorized future grants options company’s stock option plans company also granted shares restricted stock key employees nonemployee members company’s board directors 2004 stock incentive plan vest three years restricted stock awards amortized expense straightline basis vesting period company also management stock purchase plan allows purchase restricted stock units rsus key employees aggregate 1000000 shares class common stock 67 fair market value date grant rsus vest annually threeyear period date grant february 6 2007 board directors company approved amendment management stock purchase plan increase number shares available issuance plan 1000000 shares 2000000 shares amendment remains subject approval company’s stockholders annual meeting stockholders scheduled may 2 2007 2004 stock incentive plan total unrecognized compensation cost related unvested stock options approximately 4206000 december 31 2006 amortized straightline basis five fouryear vesting period 2006 company recognized compensation cost 1428000 selling general administrative expenses following summary stock option activity related information december 31 2006 aggregate intrinsic values outstanding exercisable options approximately 19558000 12450000 respectively representing total pretax intrinsic value based company’s closing class common stock price 4111 december 31 2006 would received option holders option holders exercised options date total intrinsic value options exercised 2006 approximately 2244000 upon exercise options company issues shares class common stock watts water technologies inc subsidiaries notes consolidated financial statements continued following table summarizes information options outstanding december 31 2006 fair value option granted 2004 stock incentive plan estimated date grant using blackscholesmerton model based following weighted average assumptions riskfree interest rate based upon us treasury yield curve time grant respective expected life option expected life estimated period time outstanding options volatility calculated using historical data expected dividend yield stock company’s best estimate expected future dividend yield company applied estimated forfeiture rate 15 stock options rates calculated based upon historical activity estimate granted shares expected vest actual forfeitures differ expected rates company may required make additional adjustments compensation expense future periods assumptions used determine weighted average grantdate fair value stock options 1350 1154 901 years ending december 31 2006 2005 2004 respectively additionally december 31 2006 73463 unvested shares restricted stock outstanding granted key employees nonemployee members company’s board directors company issued 59008 shares 5616 shares 32133 shares restricted stock 2006 2005 2004 respectively restricted shares issued fair market prices 3520 4114 2671 2500 2650 2006 2005 2004 respectively december 31 2006 total unrecognized compensation cost related unvested restricted stock approximately 1855000 amortized straightline basis threeyear vesting period 2006 company recognized compensation costs 599000 selling general administrative expenses company applied estimated forfeiture rate 10 restricted stock issued key employees aggregate intrinsic value restricted stock granted outstanding approximated 3020000 representing total pretax intrinsic value based company’s closing class common stock price 4111 december 31 2006 watts water technologies inc subsidiaries notes consolidated financial statements continued management stock purchase plan company also management stock purchase plan allows granting restricted stock units rsus key employees purchase 1000000 shares class common stock 67 fair market value date grant rsus vest annually threeyear period date grant dividends declared rsus paid individuals remain unpaid december 31 2006 total approximately 210000 total unrecognized compensation cost related unvested rsus approximately 1210000 december 31 2006 amortized straightline basis threeyear vesting period 2006 company recognized compensation cost 958000 selling general administrative expenses summary company’s rsus activity related information 2006 shown following table december 31 2006 aggregate intrinsic values outstanding vested rsus approximately 7665000 3767000 respectively representing total pretax intrinsic value based company’s closing class common stock price 4111 december 31 2006 would received rsus holders rsus settled date total intrinsic value rsus settled 2006 approximately 1397000 upon settlement rsus company issues shares class common stock following table summarizes information rsus outstanding december 31 2006 watts water technologies inc subsidiaries notes consolidated financial statements continued fair value share issued management stock purchase plan estimated date grant using blackscholesmerton model based following weighted average assumptions riskfree interest rate based upon us treasury yield curve time grant respective expected life rsu’s expected life estimated period time outstanding rsu’s volatility calculated using historical data expected dividend yield stock company’s best estimate expected future dividend yield company applied estimated forfeiture rate 10 rsus rates calculated based upon historical activity estimate granted shares expected vest actual forfeitures differ expected rates company may required make additional adjustments compensation expense future periods assumptions used determine weighted average grantdate fair value rsus granted 1360 1241 841 2006 2005 2004 respectively company distributed dividends 036 per share 2006 032 per share 2005 028 per share 2004 company’s class common stock class b common stock 14 employee benefit plans company sponsors funded unfunded noncontributing defined benefit pension plans together cover substantially domestic employees benefits based primarily years service employees’ compensation funding policy company plans contribute annual amount exceed maximum amount deducted federal income tax purposes company uses september 30 measurement date plans watts water technologies inc subsidiaries notes consolidated financial statements continued funded status defined benefit plans amounts recognized balance sheet follows amounts recognized balance sheet follows watts water technologies inc subsidiaries notes consolidated financial statements continued amounts recognized accumulated comprehensive income consist applicable due change accounting standard information pension plans accumulated benefit obligation excess plan assets follows components net periodic benefit cost follows estimated net actuarial loss prior service cost defined benefit pension plans amortized accumulated comprehensive income net periodic benefit cost next year 1065000 201000 respectively additional information watts water technologies inc subsidiaries notes consolidated financial statements continued assumptions weightedaverage assumptions used determine benefit obligations weightedaverage assumptions used determine net periodic benefit costs discount rates selected based upon rates return measurement date utilizing bond matching approach match expected benefit cash flows selecting expected longterm rate return assets company considers average rate earnings expected funds invested provide benefits plan includes considering trust’s asset allocation expected returns likely earned life plan basis consistent prior year plan assets weighted average asset allocations asset category follows company’s written retirement plan investment policy sets forth investment policy objectives constraints watts water technologies inc pension plan retirement plan investment policy set forth pension plan committee defines general investment principles directs investment management policy addressing preservation capital risk aversion adherence investment discipline investment managers make reasonable effort control risk evaluated quarterly commonly accepted benchmarks ensure risk assumed commensurate given investment style objectives portfolio designed achieve balanced return current income modest growth capital achieving returns excess rate inflation investment horizon order preserve purchasing power plan assets plan assets required invested liquid securities derivative investments allowed prohibited investments include limited following commodities futures contracts private placements options limited partnerships venturecapital investments real estate properties interestonly io principalonly po residual tranche cmos watts water technologies inc stock watts water technologies inc subsidiaries notes consolidated financial statements continued prohibited transactions include limited following short selling margin transactions allowable assets include cash equivalents fixed income securities equity securities mutual funds gics specific guidelines regarding allocation assets follows equities shall comprise 25 75 total portfolio fixed income shall comprise 30 65 investment performance monitored regular basis investments reallocated stay within specific guidelines equityfixed income allocation 5545 preferred securities one company government agency exceed 10 total fund 20 total fund invested one industry individual treasury securities may represent 50 total fund total allocation treasury bonds notes may represent 100 plan’s aggregate bond position cash flows information related company’s pension funds cash flow follows contributions expected made 2007 approximate 3700000 expected benefit payments paid pension plans follows additionally substantially company’s domestic employees eligible participate certain 401k savings plans company matches specified percentage employee contributions subject certain limitations company’s match contributions included selling general administrative expense years ended december 31 2006 2005 2004 633000 423000 421000 respectively charges european pension plans approximated 1900000 2000000 1900000 years ended december 31 2006 2005 2004 respectively costs relate plans administered certain european subsidiaries benefits calculated according government requirements paid employees upon retirement change employment watts water technologies inc subsidiaries notes consolidated financial statements continued company entered supplemental compensation agreement timothy p horne september 1 1996 per agreement upon ceasing employee company mr horne must make available requested board work minimum 300 500 hours per year consultant return certain annual compensation long physically able mr horne complies consulting provisions agreement shall receive supplemental compensation annual basis 400000 per year subject cost living increases year exchange services performed long physically able event physical disability subsequent commencing consulting services company mr horne continue receive 400000 annually payment consulting services provided mr horne expensed incurred company mr horne retired effective december 31 2002 therefore supplemental compensation period began january 1 2003 accordance financial accounting standards board statement 106 “employers accounting post retirement benefits pensions” company accrue future postretirement disability benefits period january 1 2003 time mr horne becomes physically unable perform consulting services period disability benefits earned 15 contingencies environmental remediation james jones litigation june 25 1997 nora armenta relator filed civil action california superior court los angeles county armenta case james jones company james jones mueller co tyco international us company formerly owned james jones relator filed qui tam provision california state false claims act cal govt code § 12650 et seq california false claims act generally alleged james jones defendants violated statute delivering “defective” “nonconforming” waterworks parts thirtyfour municipal water systems state california relator filed first amended complaint november 1998 second amended complaint december 2000 brought total number plaintiffs 161 date 11 named cities intervened attempts four named cities intervene denied june 2002 trial court excluded 47 cities december 2000 total 161 exclusion reversed august 30 2006 california court appeal ruling final august 30 2006 court appeal ruling also reversed dismissals tyco international mueller co allowed relator make timely motion would remove armenta case litigation judge lichtman’s court another complex litigation judge’s court one allegations second amended complaint complaintsinintervention purchased nonconforming james jones waterworks parts may leach public drinking water elevated amounts lead may create public health risk made ‘81 bronze alloy uns c8440 contain lead specified advertised ‘85 bronze alloy uns c83600 contention based average difference 2 lead content ‘81 bronze 6 8 lead ‘85 bronze 4to 6 lead assumption would mean increased consumable lead public drinking water could cause public health concern company believes evidence discovery available date indicates case watts water technologies inc subsidiaries notes consolidated financial statements continued addition ‘81 bronze used extensively municipal home plumbing systems approved municipal local national codes federal environmental protection agency also defines metal pipe fittings 8 lead “lead free” section 1417 federal safe drinking water act case relator seeks three times unspecified amount actual damages alleges municipalities suffered hundreds millions dollars damages also seeks civil penalties 10000 false claim alleges defendants responsible tens thousands false claims finally relator requests award costs action including attorneys’ fees december 1998 los angeles department water power ladwp intervened case filed complaint company settled city los angeles far significant city 7300000 plus attorneys’ fees codefendants contributed 2000000 toward settlement august 2003 additional settlement payment made 13000000 11000000 company 2000000 james jones settled claims three phase cities santa monica san francisco east bay municipal utility district chosen relator strongest claims tried first settlement payment included relator’s statutory share claims three cities dismissed addition 13000000 payment company obligated pay relator’s attorney’s fees phase settlement court permitted defendants select five additional cities serve plaintiffs second trial phase case contra costa corona santa ana santa cruz vallejo chosen company james jones reached agreement settle claims city santa ana total 45000 amount approximates santa ana’s purchases james jones products relevant period santa ana settlement approved court completed june 22 2005 court dismissed claims remaining phase ii cities contra costa corona santa cruz vallejo court ruled relator cities required show cities received spec parts related specific invoices showing made although city’s claim unique ruling significant claims remaining cities relator appealed litigation inherently uncertain company unable predict outcome appeal september 15 2004 relator’s attorneys filed new common law fraud lawsuit california superior court city banning fortyfive cities water districts james jones watts mueller co based transactions alleged armenta case thirtyfour plaintiffs new lawsuit also plaintiffs armenta case january 4 2006 court denied much defendants’ demurrer filed claimsplitting statute limitations grounds litigation inherently uncertain company unable predict outcome new lawsuit company reserve approximately 26000000 respect james jones litigation consolidated balance sheet december 31 2006 company believes basis available information reserve adequate cover probable reasonably estimable losses resulting armenta case insurance coverage litigation zurich american insurance company zurich discussed company currently unable make estimate range additional losses watts water technologies inc subsidiaries notes consolidated financial statements continued february 14 2001 company’s insurers denied coverage claims armenta case filed complaint coverage insurers california superior court coverage case james jones filed similar complaint cases consolidated trial court made summary adjudication rulings zurich must pay reasonable defense costs incurred company james jones armenta case since april 23 1998 well defense costs future end armenta case july 2004 california court appeal affirmed rulings december 1 2004 california supreme court denied zurich’s appeal decision denial permanently established zurich’s obligation pay armenta defense costs company approximately 16600000 plus future costs james jones company estimates 17000000 plus future costs zurich currently making payments incurred armenta defense costs however noted zurich asserts defense costs paid subject reimbursement november 22 2002 trial court made summary adjudication ruling zurich must indemnify pay company james jones amounts paid settle city los angeles zurich’s attempt obtain appellate review order denied zurich still able appeal order end coverage case august 6 2004 trial court made another summary adjudication ruling zurich must indemnify pay us james jones 13000000 paid settle claims phase cities described zurich’s attempt obtain appellate review ruling denied december 3 2004 california court appeal zurich still able appeal order end coverage case zurich made payments required indemnity orders february 8 2006 zurich filed motion set aside void november 22 2002 august 6 2004 summary adjudication indemnity payment orders motion denied zurich appealed appeal yet resolved company currently unable predict finality indemnity payment orders since zurich also appeal end coverage case company recorded reimbursed indemnity settlement amounts reimbursed defense costs liability pending court resolution indemnification matter relates zurich asserted amounts company estimates 51000000 defense costs indemnity amounts paid settlements paid company james jones subject reimbursement deductible agreements related insurance policies zurich watts zurich prevail argument james jones would possible indemnity claim company exposure armenta case company believes armenta case viewed one occurrence deductible amount 500000 per occurrence reimbursement claims subject arbitration wattszurich deductible agreements zurich claims reimbursement right defense costs paid arises six deductible agreements company contend two deductible agreements apply company contend final decision california supports position number deductible agreements apply defense costs january 31 2006 federal district court chicago illinois determined disputes deductible agreements effect period zurich issued primary policies arbitrator could decide agreements would control reimbursement claims company appealed ruling october 20 2006 united states court appeals seventh circuit affirmed arbitration panel could decide deductible agreements zurich company would control zurich’s reimbursement claim defense watts water technologies inc subsidiaries notes consolidated financial statements continued costs paid james jones case result development company recorded pretax charge 5000000 discontinued operations 2006 based management’s assessment company believe ultimate outcome james jones litigation material adverse effect liquidity financial condition results operations assessment based available information litigation inherently uncertain actual liability us resolve litigation fully cannot predicted certainty exists reasonable possibility company may ultimately incur losses james jones litigation excess amount accrued company intends continue contest vigorously aspects james jones litigation environmental remediation company named potentially responsible party prp respect limited number identified contaminated sites levels contamination vary significantly site related levels remediation efforts environmental liabilities recorded based probable cost known estimated minimum cost remediation company accrues estimated environmental liabilities based assumptions subject number factors uncertainties circumstances affect reliability precision estimates include identification additional sites environmental regulations level cleanup required technologies available number financial condition contributors remediation time period remediation may occur company recognizes changes estimates new remediation requirements defined new information becomes available december 31 2006 company reserve approximately 1400000 environmental accrual estimates likely paid environmental remediation liabilities next five ten years based facts currently known company believe ultimate outcome matters material adverse effect liquidity financial condition results operations environmental matters inherently uncertain exists possibility may ultimately incur losses matters excess amount accrued however company cannot currently estimate amount additional losses asbestos litigation company defending approximately 104 cases filed primarily exclusively mississippi new jersey state courts alleging injury death result exposure asbestos filings typically name multiple defendants filed behalf many plaintiffs identify particular watts products source asbestos exposure date company dismissed case scheduled trial date comes near discovery fails yield evidence exposure products based facts currently known company believe ultimate outcome claims material adverse effect liquidity financial condition results operations litigation march 26 2003 class action complaint filed company north carolina hospitality group inc circuit court maryland prince george’s county alleges certain commercial valve models contain design defect causes fail prematurely june 7 watts water technologies inc subsidiaries notes consolidated financial statements continued 2004 trial court issued opinion order denied plaintiff’s request class certification ruling appealed end 2004 january 17 2006 ruling affirmed maryland court special appeals release obtained plaintiff matter successfully concluded lawsuits proceedings claims arising ordinary course operations also pending threatened company based facts currently known company believe ultimate outcome litigation matters material adverse effect liquidity financial condition results operations 16 financial instruments fair value carrying amounts cash equivalents investment securities trade receivables trade payables approximate fair value short maturity financial instruments fair value company’s 487 senior notes due 2010 547 senior notes due 2013 585 senior notes due 2016 based quoted market prices fair value company’s variable rate debt approximates carrying value carrying amount estimated fair market value company’s longterm debt including current portion follows derivative instruments company uses foreign currency forward exchange contracts economic hedge reduce impact currency fluctuations certain anticipated intercompany purchase transactions expected occur next twelve months certain foreign currency transactions realized unrealized gains losses contracts recognized incomeexpense contracts subject company significant market risk exchange movement offset gains losses related foreign currency denominated transactions december 31 2006 fair value contracts approximated 159000 december 31 2005 2004 company outstanding forward contracts buy foreign currencies company occasionally uses commodity futures contracts fix price certain portion certain raw materials used manufacturing process commodity contracts utilized years ended december 31 2006 2005 2004 watts water technologies inc subsidiaries notes consolidated financial statements continued leases company leases certain manufacturing facilities sales offices warehouses equipment generally leases carry renewal provisions require company pay maintenance costs future minimum lease payments capital leases noncancelable operating leases december 31 2006 follows 17 segment information criteria set forth financial accounting standards board 131 “disclosure segments enterprise related information” company operates three geographic segments north america europe china segments sell similar products managed separately separate financial results reviewed company’s chief operating decisionmaker intercompany sales transactions eliminated sales region based upon location entity recording sale accounting policies segment described summary significant accounting policies see note 2 watts water technologies inc subsidiaries notes consolidated financial statements continued following summary company’s significant accounts balances segment reconciled consolidated totals corporate expenses primarily compensation expense sarbanesoxley compliance professional fees including legal audit expenses shareholder services benefit administration costs allocated geographic segments viewed corporate functions support activities north america segment consists us net sales 762692000 582279000 507061000 years ended december 31 2006 2005 2004 respectively north american segment also consists us longlived assets 93060000 86099000 67032000 december 31 2006 2005 2004 respectively watts water technologies inc subsidiaries notes consolidated financial statements continued intersegment sales year ended december 31 2006 north america europe china 6880000 2987000 82343000 respectively intersegment sales year ended december 31 2005 north america europe china 4847000 5279000 48770000 respectively intersegment sales year ended december 31 2004 north america europe china 6040000 6834000 27030000 respectively 18 quarterly financial information unaudited 19 related party transactions august 21 2006 company divested 20 interest wwwplumbworldcouk limited plumbworld variable interest entity company nominal investment approximately 500 plumbworld maintained loan receivable paid full time relinquished shares plumbworld 2004 agreement executed relocation firm purchase sell home company’s chief executive officer also member company’s board directors relocation firm purchased home company’s chief executive officer company’s behalf watts water technologies inc subsidiaries notes consolidated financial statements continued price based fair market appraisals obtained company accordingly company charged income continuing operations approximately 285000 representing difference original appraised value home final sale price third party company leases land buildings occupied 60 chinese joint venture tianjin tanggu watts valve co ltd twt joint venture partner venture tianjin china lease classified operating lease total rental expense 2006 approximated 284000 total rental expense 2005 2004 approximated 275000 year 2006 local chinese government informed company property owned twt would taken eminent domain december 31 2007 company therefore established plan relocate rationalize operations chinese government expected partially compensate company move exact reimbursement amount yet determined see note 4 20 subsequent events february 2007 company declared quarterly dividend ten cents 010 per share outstanding share class common stock class b common stock increase 001 per share compared dividend paid comparable period last year watts water technologies inc subsidiaries schedule iivaluation qualifying accounts amounts thousands three years ended december 31 exhibit index exhibit description 31 restated certificate incorporation amended 21 32 amended restated bylaws amended 1 91 amended restated george b horne voting trust agreement1997 dated september 14 1999 15 101 supplemental compensation agreement effective september 1 1996 registrant timothy p horne 9 amendment 1 dated july 25 2000 16 amendment 2 dated october 23 2002 3 102 form indemnification agreement registrant certain directors officers registrant 22 103 1996 stock option plan dated october 15 1996 10 first amendment dated february 28 2003 3 104 watts industries inc retirement plan salaried employees dated december 30 1994 amended restated effective january 1 1994 8 amendment 1 9 amendment 2 9 amendment 3 9 amendment 4 dated september 4 1996 12 amendment 5 dated january 1 1998 15 amendment 6 dated may 3 1999 15 amendment 7 dated june 7 1999 15 105 watts industries inc pension plan amended restated effective january 1 1997 3 first amendment dated october 25 2002 3 106 registration rights agreement dated july 25 1986 5 107 executive incentive bonus plan amended restated 20 108 amended restated stock restriction agreement dated october 30 1991 2 amendment dated august 26 1997 12 109 watts industries inc 1991 nonemployee directors’ nonqualified stock option plan 6 amendment 1 9 1010 watts industries inc 2003 nonemployee directors’ stock option plan 3 1011 letter credit issued fleet national bank successor bankboston na benefit zurichamerican insurance company dated june 25 1999 amended january 22 2001 17 1012 watts water technologies inc management stock purchase plan amended restated 20 1013 stock purchase agreement dated june 19 1996 among mueller co tyco valves limited watts investment company tyco international ltd registrant 11 1014 note purchase agreement dated may 15 2003 registrant purchasers named schedule thereto relating registrant’s 50000000 487 senior notes series due may 15 2010 75000000 547 senior notes series b due may 15 2013 7 1015 form 487 senior note due may 15 2010 7 1016 form 547 senior note due may 15 2013 7 1017 watts water technologies inc 2004 stock incentive plan 17 1018 nonemployee director compensation arrangements 1 1019 watts water technologies inc supplemental employees retirement plan amended restated effective may 4 2004 18 1020 form incentive stock option agreement watts water technologies inc 2004 stock incentive plan 19 1021 form nonqualified stock option agreement watts water technologies inc 2004 stock incentive plan 19 1022 form restricted stock award agreement employees watts water technologies inc 2004 stock incentive plan 19 1023 form restricted stock award agreement employees watts water technologies inc 2004 stock incentive plan 19 1024 form restricted stock award agreement nonemployee directors watts water technologies inc 2004 stock incentive plan 19 1025 note purchase agreement dated april 27 2006 registrant purchasers named schedule thereto relating registrant’s 225000000 585 senior notes due april 30 2016 4 1026 form 585 senior note due april 30 2016 4 1027 subsidiary guaranty dated april 27 2006 connection registrant’s 585 senior notes due april 30 2016 executed subsidiary guarantors party thereto including form joinder subsidiary guaranty 4 1027 first amendment dated april 27 2006 note purchase agreement dated may 15 2003 amongst registrant purchasers named therein 4 1029 amended restated credit agreement dated april 27 2006 among registrant certain subsidiaries registrant borrowers bank america na administrative agent swing line lender lc issuer lenders referred therein 4 1030 amended restated guaranty dated april 27 2006 registrant subsidiaries registrant set forth therein watts industries europe bv favor bank america na 4 statement regarding computation earnings per common share 13 subsidiaries consent kpmg llp 311 certification principal executive officer pursuant rule 13a14a rule 15d14a securities exchange act 1934 amended 312 certification principal financial officer pursuant rule 13a14a rule 15d14a securities exchange act 1934 amended 321 certification principal executive officer pursuant 18 usc section 1350 322 certification principal financial officer pursuant 18 usc section 1350 1 incorporated reference registrant’s current report form 8k dated february 5 2007 file 00111499 2 incorporated reference registrant’s current report form 8k dated november 14 1991 file 00111499 3 incorporated reference registrant’s annual report form 10k year ended december 31 2002 file 00111499 4 incorporated reference registrant’s current report form 8k dated april 27 2006 file 00111499 5 incorporated reference registrant’s form s1 336515 part second amendment form s1 dated august 21 1986 6 incorporated reference amendment 1 registrant’s annual report form 10k year ended june 30 1992 file 00111499 7 incorporated reference registrant’s current report form 8k dated may 15 2003 file 00111499 8 incorporated reference registrant’s annual report form 10k year ended june 30 1995 file 00111499 9 incorporated reference registrant’s annual report form 10k year ended june 30 1996 file 00111499 10 incorporated reference registrant’s form s8 33332685 dated august 1 1997 11 incorporated reference registrant’s current report form 8k dated september 4 1996 file 001 11499 12 incorporated reference registrant’s annual report form 10k year ended june 30 1997file 001 11499 13 incorporated reference notes consolidated financial statements note 2 report 14 incorporated reference registrant’s current report form 8k dated december 28 2005 file 00111499 registrant hereby agrees furnish supplementally copy omitted schedule similar attachment agreement securities exchange commission upon request 15 incorporated reference registrant’s annual report form 10k year ended june 30 1999 file 00111499 16 incorporated reference registrant’s quarterly report form 10q quarter ended september 30 2000 file 00111499 17 incorporated reference registrant’s annual report form 10k year ended december 31 2003 file 00111499 18 incorporated reference registrant’s quarterly report form 10q quarter ended june 27 2004 file 00111499 19 incorporated reference registrant’s quarterly report form 10q quarter ended september 26 2004 file 00111499 20 incorporated reference registrant’s current report form 8k dated february 8 2005 file 00111499 21 incorporated reference registrant’s quarterly report form 10q quarter ended july 3 2005 file 00111499 22 incorporated reference registrant’s quarterly report form 10q quarter ended october 1 2006 file 00111499 management contract compensatory plan arrangementitem 15 exhibits financial statement schedules a1 financial statements following financial statements included separate section report commencing page numbers specified report independent registered public accounting firm consolidated statements operations years ended december 31 2009 2008 2007 consolidated balance sheets december 31 2009 2008 consolidated statements stockholders equity comprehensive income loss years ended december 31 2009 2008 2007 consolidated statements cash flows years ended december 31 2009 2008 2007 notes consolidated financial statements 5897 a2 schedules schedule iivaluation qualifying accounts years ended december 31 2009 2008 required schedules provision made applicable accounting regulations securities exchange commission included notes consolidated financial statements a3 exhibits listed exhibit index immediately preceding exhibits filed part annual report form 10k signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized watts water technologies inc patrick okeefe patrick okeefe chief executive officer president director dated march 1 2010 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated report independent registered public accounting firm board directors stockholders watts water technologies inc audited accompanying consolidated balance sheets watts water technologies inc subsidiaries december 31 2009 2008 related consolidated statements operations stockholders equity comprehensive income loss cash flows years threeyear period ended december 31 2009 connection audits consolidated financial statements also audited financial statement schedule consolidated financial statements financial statement schedule responsibility companys management responsibility express opinion consolidated financial statements financial statement schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position watts water technologies inc subsidiaries december 31 2009 2008 results operations cash flows years threeyear period ended december 31 2009 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states watts water technologies incs internal control financial reporting december 31 2009 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso report dated march 1 2010 expressed unqualified opinion effectiveness companys internal control financial reporting kpmg llp boston massachusetts march 1 2010 watts water technologies inc subsidiaries consolidated statements operations amounts millions except per share information accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated balance sheets amounts millions except share information accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated statements stockholders equity comprehensive income loss amounts millions except share information accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated statements cash flows amounts millions accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries notes consolidated financial statements 1 description business watts water technologies inc company designs manufactures sells extensive line water safety flow control products primarily water quality water conservation water safety water flow control markets located predominantly north america europe china 2 accounting policies principles consolidation consolidated financial statements include accounts company majority wholly owned subsidiaries upon consolidation significant intercompany accounts transactions eliminated cash equivalents cash equivalents consist instruments remaining maturities three months less date purchase consist primarily money market funds carrying amount reasonable estimate fair value investment securities investment securities december 31 2009 2008 consisted auction rate securities ars whose underlying investments municipal bonds student loans investments rights issued ubs ag ubs securities purchased par value rights issued ubs received connection settlement agreement see note 16 additional information regarding rights issued ubs company classified debt securities investment rights ubs trading securities trading securities recorded fair value company determines fair value obtaining market value available quoted prices active markets absence quoted prices company uses inputs determine fair value investments changes fair value well realized gains losses sale securities recorded incurred consolidated statements operations income expense allowance doubtful accounts allowance doubtful accounts includes reserves bad debts sales returns allowances company analyzes aging accounts receivable individual accounts receivable historical bad debts concentration receivables customer credit worthiness current economic trends changes customer payment terms company specifically analyzes individual accounts receivable establishes specific reserves financially troubled customers addition factors developed certain regions utilizing historical trends sales returns allowances derive reserve returns allowances concentration credit company sells products diversified customer base therefore significant concentrations credit risk 2009 2008 one customer accounted 100 companys total sales watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued inventories stated lower cost using primarily firstin firstout method market value determined replacement cost net realizable value historical experience used basis determining reserve excess obsolete inventories goodwill intangible assets goodwill recorded consideration paid acquisitions exceeds fair value net tangible intangible assets acquired goodwill intangible assets indefinite useful lives amortized rather tested annually impairment test performed october 25 2009 assets held sale company accounts assets held sale management committed plan sell asset group assets actively marketing asset group assets asset group assets sold current condition reasonable period time plan expected change december 31 2009 company actively marketing two properties one group assets worldwide expects complete sale assets group assets next twelve months company recorded estimated losses 78 million reduce assets group assets estimated fair value less costs sell amount recorded component restructuring costs consolidated statements operations see note 4 additional information associated companys restructuring charges impairment goodwill longlived assets changes carrying amount goodwill geographic segment follows watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued 2008 company completed assessment fair value net assets water quality business unit includes number businesses purchased time recorded pretax goodwill impairment charge 220 million due sales declining prior year levels companys expectations lower commercial residential project activity company estimated fair value reporting unit using expected present value future cash flows february 2009 company reached settlement seller regarding purchase price adjustment core industries inc acquisition resulted company receiving 11 million may 2009 company deconsolidated team precision pipework ltd team result deconsolidation company reduced goodwill 84 million associated team see note 3 additional information relating deconsolidation team september 2009 companys board directors approved plan dispose investment watts valve changsha co ltd cwv indirect whollyowned subsidiary company located china company classified net assets cwv discontinued operation recorded decrease net assets estimated fair value less costs sell result company reduced goodwill 61 million associated cwv see note 3 note 5 additional information relating cwv goodwill tested impairment least annually frequently events circumstances indicate likely goodwill might impaired change business conditions company performs annual goodwill impairment assessment fourth quarter year intangible assets estimable lives longlived assets reviewed impairment whenever events changes circumstances indicate carrying amount asset group may recoverable recoverability intangible assets estimable lives longlived assets measured comparison carrying amount asset group future net undiscounted pretax cash flows expected generated asset group comparisons indicate asset recoverable impairment loss recognized amount carrying amount asset group exceeds related estimated fair value estimated fair value based either discounted future pretax operating cash flows appraised values depending nature asset company determines discount rate analysis based expected internal rate return related business allocate interest charges asset group measured judgment required estimate future operating cash flows connection restructuring plan announced february 2009 company closing several facilities reduce overall size manufacturing footprint company concluded likely carrying amount certain assets held used may recoverable specifically company identified longlived asset group primarily comprised buildings land use rights china company used undiscounted future cash flow model test longlived asset group based primary asset identified current economic outlook estimated fair value ultimate disposition asset group inputs used analysis unobservable inputs level 3 based analysis performed company recorded 55 million impairment charge one asset group china quarter ended september 27 2009 charge reported restructuring charges consolidated statements operations watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued connection plan dispose cwv certain longlived assets reduced 39 million reflect estimated fair value less cost sell charge recorded discontinued operations part 85 million loss disposal intangible assets include following aggregate amortization expense amortized intangible assets 2009 2008 2007 131 million 122 million 92 million respectively additionally future amortization expense amortizable intangible assets expected 131 million 2010 127 million 2011 103 million 2012 99 million 2013 97 million 2014 amortization expense provided straightline basis estimated useful lives intangible assets weightedaverage remaining life total amortizable intangible assets 102 years patents customer relationships technology amortizable intangibles weightedaverage remaining lives 82 years 92 years 152 years 141 years respectively intangible assets subject amortization primarily include trademarks adjustments indefinite lived intangible assets year ended december 31 2009 relate primarily reclassification one technology related intangible asset results annual impairment analysis evaluation performed october 25 2009 company previously classified technology intangible asset indefinite lived intangible asset could determine time horizon asset expected used 2009 company concluded technology asset longer indefinite life due part recent competition changes regulations result company increased technology amortizable intangible assets reduced intangible assets subject amortization approximately 75 million company uses royalty relief method evaluate current fair value trademarks technology due decreases sales experienced several brands technology 2009 well estimated outlook future sales brands technology company recorded pretax charge 33 million decrease assets estimated fair value property plant equipment property plant equipment recorded cost depreciation provided straightline basis estimated useful lives assets range 10 40 years buildings improvements 3 15 years machinery equipment watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued taxes income taxes assessed governmental authorities sale transactions recorded net basis excluded sales companys consolidated statements operations income taxes income taxes accounted asset liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases operating loss tax credit carry forwards deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized income period includes enactment date company accounts tax benefits item question meets morelikelythannot greater 50 likelihood sustained upon examination taxing authorities threshold 2009 company reduced unrecognized tax benefits approximately 06 million result finalizing federal tax audit 04 million resulting voluntary disclosure agreements company estimates reasonably possible portion currently remaining unrecognized tax benefit may recognized end 2011 result conclusion federal foreign income tax audits amount expense accrued penalties interest 05 million worldwide december 31 2009 company gross unrecognized tax benefits approximately 28 million approximately 25 million recognized would affect effective tax rate difference amount unrecognized tax benefits amount would impact effective tax rate consists federal tax benefit state income tax items reconciliation beginning ending amount unrecognized tax benefits separate analysis accrued interest related unrecognized tax benefits follows company currently audit internal revenue service 2008 2007 tax years expected completion date audits march 2011 company anticipate significant adjustments time watts conducts business variety locations throughout world resulting tax filings numerous domestic foreign jurisdictions company subject tax examinations regularly part normal course business companys major jurisdictions us canada china netherlands uk germany italy france exceptions company longer subject us federal state local nonus income tax examinations years 2003 watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued company accounts interest penalties related uncertain tax positions component income tax expense statute limitations major jurisdictions open us year 2006 later canada 2005 later netherlands 2005 later foreign currency translation financial statements subsidiaries located outside united states generally measured using local currency functional currency balance sheet accounts including goodwill foreign subsidiaries translated united states dollars yearend exchange rates income expense items translated weighted average exchange rates period net translation gains losses included comprehensive income separate component stockholders equity company provide us income taxes foreign currency translation adjustments since provide taxes undistributed earnings foreign subsidiaries gains losses foreign currency transactions subsidiaries included net earnings stockbased compensation company records compensation expense financial statements sharebased awards based grant date fair value awards stockbased compensation expense includes estimate prevesting forfeitures recognized requisite service periods awards straightline basis generally commensurate vesting term benefits associated tax deductions excess recognized compensation cost reported financing cash flow december 31 2009 company three stockbased compensation plans total unrecognized compensation costs related unvested stockbased compensation arrangements approximately 77 million total weighted average remaining term 24 years 2009 2008 2007 company recognized compensation costs related stockbased programs approximately 49 million 53 million 60 million respectively selling general administrative expenses company recorded approximately 06 million 07 million 07 million tax benefits 2009 2008 2007 respectively compensation expense relating stock options 2009 2008 2007 company recorded approximately 12 million 11 million 13 million respectively tax benefit stockbased plans 2009 2008 2007 recognition total stockbased compensation expense impacted basic diluted net income per common share 008 010 respectively net income per common share basic net income per common share calculated dividing net income weighted average number common shares outstanding calculation diluted income per share assumes conversion dilutive securities see note 13 watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued net income attributable watts water technologies inc number shares used compute net income per share basic assuming full dilution reconciled computation diluted net income per share years ended december 31 2009 2008 2007 excludes effect potential exercise options purchase approximately 09 million 10 million 05 shares respectively exercise price option greater average market price class common stock effect would antidilutive years ended december 31 2008 2007 company repurchased approximately 16 million shares 09 million shares respectively class common stock derivative financial instruments normal course business company manages risks associated commodity prices foreign exchange rates interest rates variety strategies including use hedging transactions executed accordance companys policies companys hedging transactions include limited use various derivative financial commodity instruments matter policy company use derivative instruments unless underlying exposure change value derivative instruments would substantially offset opposite change value underlying hedged items company use derivative instruments trading speculative purposes derivative instruments may designated accounted either hedge recognized asset liability fair value hedge forecasted transaction cash flow hedge fair value hedge effective ineffective portions change fair value derivative instrument along adjustment carrying amount hedged item fair value changes attributable hedged risk recognized earnings cash flow hedge changes fair value derivative instrument highly effective deferred accumulated comprehensive income loss underlying hedged item recognized earnings fair value cash flow hedge cease qualify hedge accounting terminated would continue carried balance sheet fair value settled hedge accounting would discontinued prospectively forecasted transaction longer probable occurring amounts previously deferred accumulated comprehensive income would recognized immediately earnings occasion company may enter derivative instrument qualify hedge accounting entered offset changes fair value underlying transaction required recognized earnings natural hedge instruments reflected consolidated balance sheets fair value changes fair value recognized earnings watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued foreign currency derivatives include forward foreign exchange contracts primarily canadian dollars metal derivatives included commodity swaps copper 2009 2008 company used copper swap means hedging exposure metal prices see note 16 portions companys outstanding debt exposed interest rate risks company monitors interest rate exposures ongoing basis maximize overall effectiveness interest rates shipping handling shipping handling costs included selling general administrative expense amounted 314 million 394 million 389 million years ended december 31 2009 2008 2007 respectively research development research development costs included selling general administrative expense amounted 178 million 175 million 151 million years ended december 31 2009 2008 2007 respectively revenue recognition company recognizes revenue following criteria met company entered binding agreement product shipped title passes sales price customer fixed determinable collectability reasonably assured provisions estimated returns allowances made time sale recorded reduction sales included allowance doubtful accounts consolidated balance sheets company records provisions sales incentives primarily volume rebates adjustment net sales time sale based estimated purchase targets estimates preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates new accounting standards october 2009 financial accounting standards board fasb issued accounting standard update improve disclosures related fair value measurements update require new disclosures significant transfers various fair value levels occur update require reconciliation fair value measurements using significant unobservable inputs level 3 prepared gross basis separately presenting information purchases sales issuance settlements addition update amend current disclosure requirements postretirement benefit plan assets update effective interim annual periods beginning december 15 2009 except disclosures regarding level 3 fair value measurements disclosures effective fiscal years beginning december 15 2010 interim periods within watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued fiscal years company evaluating impact update expect adoption material impact consolidated financial statements october 2009 fasb issued accounting standard update address accounting multipledeliverable arrangements specifically addressing separate deliverables measure allocate arrangement consideration one units accounting update established hierarchy determining selling price deliverable standard also expands disclosures relating entitys multipledeliverable revenue arrangements update effective prospectively arrangements entered materially modified fiscal years beginning june 15 2010 adoption update expected material impact companys consolidated financial statements june 2009 fasb issued new standard identifies sources accounting principles framework selecting principles used preparation financial statements presented conformity generally accepted accounting principles gaap united states gaap hierarchy standard also establishes fasb accounting standards codification asc source authoritative accounting principles recognized fasb applied preparation nongovernmental financial statements standard effective interim annual financial statements issued september 15 2009 adoption standard material impact companys consolidated financial statements june 2009 fasb issued new standard requires entity perform analysis determine whether variable interest interests give controlling financial interest statement also requires entity regularly reassess whether entity controlling financial interest variable interest interests statement also expand disclosures variable interest interests footnotes standard effective first annual reporting period beginning november 15 2009 well interim period therein adoption standard material impact companys consolidated financial statements june 2009 fasb issued new standard eliminates concept qualifying specialpurpose entity defined gaap literature statement also establishes stringent conditions reporting transfer portion financial asset sale changes initial measurement transferors interest transferred financial assets statement expands disclosures interim annual reports effective first annual reporting period beginning november 15 2009 adoption standard material impact companys consolidated financial statements 3 discontinued operations september 2009 companys board directors approved sale investment cwv manufacturer large diameter hydraulicactuated butterfly valves thermopower hydropower plants water distribution projects water works projects china management determined cwvs business longer fit strategically company completed sale cwv january 2010 see note 5 information related cwv company evaluated classification assets liabilities cwv concluded net assets qualified discontinued operations company evaluated fair value less cost sell net assets cwv recorded estimated pretax noncash loss approximately 85 million based final agreement buyer level 1 company concluded future cash flows associated cwv completely eliminated continuing operations watts water technologies inc subsidiaries notes consolidated financial statements continued 3 discontinued operations continued company classified cwvs result operations loss disposition discontinued operations periods presented may 2009 company liquidated team business located ammanford uk team custom designed manufactured manipulated pipe hose tubing assemblies served heating ventilation air conditioning automotive markets western europe management determined business longer fit strategically company sale team feasible may 22 2009 company appointed administrator team united kingdom insolvency act 1986 administration process administrator sole control responsibility teams operations assets liabilities company deconsolidated team administrator obtained control team deconsolidation resulted recognition 180 million pretax noncash loss 2009 company evaluated operations team determined continuing involvement teams operations cash flows result loss control teams cash flows operations eliminated continuing operations company classified teams results operations loss deconsolidation discontinued operations periods presented september 1996 company divested municipal water group businesses included henry pratt james jones company edward barber company ltd discontinued operating expense 2009 2008 related operations writeoff team operations estimated loss net assets cwv legal costs net reserve adjustments associated james jones litigation see note 15 condensed operating statements discontinued operations summarized company recognize tax benefits write net assets cwv company believe likely tax benefits would realized watts water technologies inc subsidiaries notes consolidated financial statements continued 3 discontinued operations continued revenues reported discontinued operations follows carrying amounts major classes assets liabilities december 31 2009 december 31 2008 associated discontinued operations follows 4 restructuring income charges companys board directors approves major restructuring programs involve discontinuance product lines shut facilities time company takes additional restructuring actions including involuntary terminations part major program company accounts costs period individual employees notified liability incurred costs included restructuring charges watts water technologies inc subsidiaries notes consolidated financial statements continued 4 restructuring income charges continued companys consolidated statements operations company also includes part charges costs associated asset impairments summary cost restructuring program follows company recorded net pretax restructuring charges business segments follows 2009 pretax costs 17 million recorded costs goods sold primarily accelerated depreciation net pretax costs 161 million recorded restructuring charges included 80 million severance costs 92 million charges principally 84 million impairment charges certain longlived assets 08 million relocation costs associated 2009 actions described offset 11 million gain disposition tianjin tanggu watts valve co ltd twt gain deferred year ended december 31 2008 local government approvals finalized 80 million severance costs approximately 16 million relates involuntary termination benefits incurred 2009 part previously announced restructuring plan 42 million associated 2010 actions described 17 million associated 2009 actions described 05 million related primarily involuntary termination benefits relocation expenses associated 2007 actions described also 2009 company recorded tax charge 39 million related previously realized tax benefits china company expects recaptured result companys decision restructure operations 2009 tax charge part 2009 actions 2008 pretax costs 03 million recorded costs goods sold primarily accelerated depreciation pretax costs 56 million recorded restructuring charges primarily severance costs asset writedowns accelerated depreciation related companys watts water technologies inc subsidiaries notes consolidated financial statements continued 4 restructuring income charges continued relocation 60 owned chinese joint venture 56 million restructuring costs approximately 22 million relates involuntary termination benefits incurred 2008 part previously announced restructuring plan 34 million related primarily involuntary termination benefits relocation expenses associated 2007 actions described company also recognized income 02 million noncontrolling interest representing 40 liability chinese joint venture partner restructuring plan 2007 company recorded pretax charges approximately 75 million pretax costs 43 million recorded costs goods sold primarily product line discontinuances 12 million relates product line discontinuances accelerated depreciation related companys relocation 60 owned chinese joint venture part previously announced restructuring plan pretax costs 32 million recorded restructuring charges consisted 20 million asset writedowns severance costs china north america 12 million accelerated depreciation related companys relocation 60 owned chinese joint venture part previously announced restructuring plan company also recognized income 09 million minority interest representing 40 liability chinese joint venture partners restructuring plan following information outlines companys current restructuring plans 2007 actions 2007 company undertook review certain product lines overall manufacturing capacity based review company initiated global restructuring program approved companys board directors october 30 2007 company also discontinued certain product lines program included shutdown several manufacturing facilities rightsizing another facility restructuring program charges certain product line discontinuances expected include pretax charges totaling approximately 129 million charges primarily asset writedowns expected net losses asset disposals severance costs facility exit costs annual cash savings net tax estimated 11 million expected fully realized 2010 company reviewed remaining activities associated 2007 actions associated europe due large part review company concluded charges incurred program february 2010 companys board directors approved new program europe launched 2010 include components identified 2007 actions following table presents total pretax charges incurred global restructuring program product line discontinuances initiated 2007 companys reportable segments north america incurred restructuring costs excess planned amount primarily due writedown vacated facility estimated fair value part 2007 plan company watts water technologies inc subsidiaries notes consolidated financial statements continued 4 restructuring income charges continued closed one facility consolidated operations existing facility plan created called sale building vacated plan anticipate significant downturn commercial real estate market occurred shortly consolidation completed 2008 result continued poor commercial real estate market conditions 2009 company recorded reduction carrying cost building estimated fair value less estimated costs sell 23 million remaining excess primarily result higher costs incurred complete consolidation two facilities originally anticipated following table summarizes incurred cost 2007 restructuring actions segment details companys 2007 restructuring actions december 31 2009 follows following table summarizes incurred cost 2007 restructuring actions type consists primarily relocation costs watts water technologies inc subsidiaries notes consolidated financial statements continued 4 restructuring income charges continued 2008 actions 2008 company announced reductioninforce united states workforce severance charge 22 million recorded 2008 included restructuring charges related north america segment substantially spent end 2008 2009 actions february 8 2009 board directors approved plan expand companys program consolidate manufacturing footprint north america china plan provides closure three additional plants operations moved existing facilities either north america china relocated new central facility united states footprint consolidation pretax charge estimated approximately 117 million including severance charges approximately 32 million relocation costs approximately 33 million asset writedowns approximately 52 million onetime tax charges approximately 39 million incurred part relocations company may incur additional onetime tax charge connection restructuring activities could range 0 44 million depending companys final plans approximately 400 positions could eliminated program net aftertax charge manufacturing consolidation program expected range 128 172 million 44 million non cash costs incurred fiscal 2009 2010 company expects spend approximately 48 million capital expenditures consolidate operations company still evaluating remaining plant consolidations originally anticipated 2009 actions original plan called closure relocation manufacturing activities associated two facilities located china company substantially completed closure relocation one facilities 2009 throughout 2009 facility identified plan closed improved operations substantially due improvement company evaluating closure relocation manufacturing activities location still appropriate action take company expects conclude additional actions 2010 following table summarizes total estimated pretax charges expected incurred remaining cost footprint consolidationrestructuring program initiated 2009 companys reportable segments watts water technologies inc subsidiaries notes consolidated financial statements continued 4 restructuring income charges continued details companys footprint consolidationrestructuring program december 31 2009 follows 2010 actions february 8 2010 board directors approved restructuring program respect companys operating facilities france restructuring program expected include shutdown three facilities including two manufacturing sites one distribution center program expected include pretax charges totaling approximately 125 million including costs severance relocation cleanup certain asset writedowns result elimination approximately 95 positions total net aftertax charges restructuring program expected approximately 83 million 11 million noncash charges costs incurred 2011 company expects spend approximately 66 million capital expenditures consolidate operations annual cash savings net tax estimated 39 million company expects fully realize 2012 company recorded certain severance costs related program 2009 amounts related contractual statutory obligations details companys footprint consolidationrestructuring program december 31 2009 follows 5 business acquisitions disposition may 30 2008 company acquired outstanding stock blücher metal blücher approximately 1835 million purchase price consisted 1701 million cash assumption debt 134 million net cash acquired blücher leading provider stainless steel drainage systems europe residential commercial industrial market places worldwide leader providing stainless steel drainage products marine industry blücher provides watts water technologies inc subsidiaries notes consolidated financial statements continued 5 business acquisitions disposition continued company new product platform europe allowing company offer broader product line existing customer base company completed purchase price allocation resulted recognition 645 million intangible assets 895 million goodwill intangible assets comprised primarily customer relationships patents estimated lives 10 years trade names indefinite lives consolidated results operations include results blücher since acquisition date may 30 2008 second quarter 2008 company completed acquisition remaining 40 ownership joint venture china twt 33 million cash twt manufactured products support us operations well sell local china market third quarter 2008 company relocated business supporting us twt existing operation china company entered agreement sell twt agreement company determined risks rewards ownership twt effectively transferred buyer october 18 2008 company determined longer primary beneficiary operating results twt therefore deconsolidated twt october 18 2008 company recognized 11 million gain sale 2009 upon final approval transfer chinese government authority see note 3 additional information concerning dispositions certain acquisition agreements prior years contain earnout provisions 2009 2008 2007 company accrued approximately 05 million 04 million 38 million respectively earnout provisions charged goodwill paid year following earnout calculations typically based multiple future gross margins operating earnings defined agreements 6 accumulated comprehensive income loss accumulated comprehensive income loss consists following watts water technologies inc subsidiaries notes consolidated financial statements continued 7 inventories net inventories consist following finished goods 138 million 191 million december 31 2009 2008 respectively consigned 8 property plant equipment property plant equipment consists following watts water technologies inc subsidiaries notes consolidated financial statements continued 9 income taxes significant components companys deferred income tax liabilities assets follows provision income taxes continuing operations based following pretax income watts water technologies inc subsidiaries notes consolidated financial statements continued 9 income taxes continued provision income taxes continuing operations consists following actual income taxes reported continuing operations different would computed applying federal statutory tax rate income continuing operations income taxes reasons difference follows december 31 2009 company foreign net operating loss carry forwards 389 million income tax purposes 56 million losses carried forward indefinitely 69 million losses expire 2014 50 million expire 2016 51 million expire 2017 163 million expire 2018 net operating losses consist 55 million related german operations 01 million austrian operations 264 million dutch operations 69 related chinese operations watts water technologies inc subsidiaries notes consolidated financial statements continued 9 income taxes continued december 31 2009 company valuation allowance 98 million us 46 million relates capital loss management believes likely company would use loss within applicable carryforward period europe valuation allowance 30 million pertains net operating loss dutch operations china valuation allowance 22 million relates twvcs deferred tax assets company believes utilized entire 47 million beginning year valuation allowance pertained us capital loss company valuation allowance deferred tax assets management believes likely company recover net deferred tax assets enacted changes income tax laws material effect company 2009 2008 2007 undistributed earnings companys foreign subsidiaries amounted approximately 3203 million december 31 2009 3117 million december 31 2008 2499 million december 31 2007 earnings considered indefinitely reinvested accordingly provision us federal state income taxes recorded thereon upon distribution earnings form dividends otherwise company subject withholding taxes payable various foreign countries determination amount us income tax liability would incurred practicable complexities associated hypothetical calculation however unrecognized foreign tax credits may available reduce portion us income tax liability withholding taxes approximately 72 million would payable upon remittance previously unremitted earnings december 31 2009 10 accrued expenses liabilities accrued expenses liabilities consist following watts water technologies inc subsidiaries notes consolidated financial statements continued 11 financing arrangements longterm debt consists following principal payments next five years thereafter due follows millions 2010509 201107 201207 2013757 201408 thereafter2261 company maintains letters credit guarantee performance payment third parties accordance specified terms conditions amounts outstanding approximately 370 million december 31 2009 393 million december 31 2008 companys letters credit primarily associated insurance coverage lesser extent foreign purchases companys letters credit generally expire within one year issuance drawn revolving credit facility instruments may exist expire without drawn therefore necessarily represent future cash flow obligations april 27 2006 company completed private placement 2250 million 585 senior unsecured notes due april 2016 2006 note purchase agreement 2006 note purchase agreement includes operational financial covenants company required comply including among others maintenance certain financial ratios restrictions additional indebtedness liens dispositions events default 2006 note purchase agreement include failure comply financial operational covenants well bankruptcy insolvency events company may option upon notice noteholders prepay time part notes amount less 10 million paying principal amount plus makewhole amount dependent upon yield respective us treasury securities december 31 2009 company compliance covenants related 2006 note purchase agreement payment interest senior unsecured notes due semiannually april 30th october 30th year additionally company amended 2003 note purchase agreement reflect existence subsidiary guarantors substantially conform certain provisions 2003 note purchase agreement 2006 note purchase agreement watts water technologies inc subsidiaries notes consolidated financial statements continued 11 financing arrangements continued april 27 2006 company amended restated unsecured revolving credit facility syndicate banks amended revolving credit facility revolving credit facility provides multicurrency unsecured borrowings standby letters credit 3500 million expires april 2011 borrowings outstanding revolving credit facility bear interest fluctuating rate per annum equal applicable percentage equal case eurocurrency rate loans british bankers association libor rate plus applicable percentage 0625 determined reference companys consolidated leverage ratio debt rating ii case base rate loans swing line loans higher federal funds rate plus 05 b rate interest effect day announced bank america na prime rate 2009 average interest rate revolving credit facility eurobased borrowings approximately 22 revolving credit facility includes operational financial covenants customary facilities type including among others restrictions additional indebtedness liens investments maintenance certain leverage ratios december 31 2009 company compliance covenants related revolving credit facility company 3144 million unused credit revolving credit facility 356 million standby letters credit outstanding revolving credit facility due primarily current leverage ratio company could borrow approximately 1085 million existing facility excluding standbyletters credit would violate covenants may 15 2003 company completed private placement 1250 million senior unsecured notes consisting 500 million principal amount 487 senior notes due 2010 750 million principal amount 547 senior notes due 2013 payment interest senior unsecured notes due semiannually may 15th november 15th year senior unsecured notes issued watts water technologies inc pari passu revolving credit facility senior unsecured notes allow company debt senior notes amount 1500 million plus 5 stockholders equity ii debt pari passu junior senior unsecured notes extent company maintains compliance 20 10 fixed charge coverage ratio notes include prepayment provision might require makewhole payment note holders payment dependent upon level respective treasuries notes include customary terms conditions including events default 12 common stock class common stock class b common stock equal dividend liquidation rights share companys class common stock entitled one vote matters submitted stockholders share class b common stock entitled ten votes matters shares class b common stock convertible shares class common stock onetoone basis option holder december 31 2009 company reserved total 4078905 class common stock issuance stockbased compensation plans 7193880 shares conversion class b common stock class common stock november 2007 company announced board directors authorized repurchase 3000000 shares class common stock december 31 2009 company repurchased 245 million shares stock total cost 681 million 13 stockbased compensation company maintains three stock incentive plans key employees outside directors granted incentive stock options isos nonqualified stock options nsos watts water technologies inc subsidiaries notes consolidated financial statements continued 13 stockbased compensation continued purchase companys class common stock one plan 2004 stock incentive plan currently available grant new equity awards stock options granted prior plans became exercisable fiveyear period rate 20 per year expire ten years date grant 2004 stock incentive plan options become exercisable fouryear period rate 25 per year expire ten years grant date isos nsos granted plans may exercise prices less 100 50 fair market value class common stock date grant respectively companys current practice grant options fair market value grant date december 31 2009 2428706 shares class common stock authorized future grants new equity awards companys stock incentive plans company also grants shares restricted stock key employees nonemployee members companys board directors 2004 stock incentive plan vest either immediately threeyear period rate onethird per year restricted stock awards amortized expense straightline basis vesting period company also management stock purchase plan allows granting restricted stock units rsus key employees annual basis key employees may elect receive portion annual incentive compensation rsus instead cash rsu provides key employee right purchase share class common stock 67 fair market value date grant rsus vest annually threeyear period grant date aggregate 2000000 shares class common stock may issued management stock purchase plan 2004 stock incentive plan december 31 2009 total unrecognized compensation cost related unvested stock options approximately 39 million total weighted average remaining term 28 years 2009 2008 2007 company recognized compensation cost 17 million 23 million 27 million respectively selling general administrative expenses following summary stock option activity related information december 31 2009 aggregate intrinsic values exercisable options approximately 52 million representing total pretax intrinsic value based companys closing class common stock price 3092 december 31 2009 would received watts water technologies inc subsidiaries notes consolidated financial statements continued 13 stockbased compensation continued option holders option holders exercised options date total intrinsic value options exercised 2009 2008 2007 approximately 03 million 08 million 14 million respectively upon exercise options company issues shares class common stock following table summarizes information options outstanding december 31 2009 fair value option granted 2004 stock incentive plan estimated date grant using blackscholesmerton model based following weighted average assumptions riskfree interest rate based upon us treasury yield curve time grant respective expected life option expected life estimated period time outstanding options volatility calculated using historical data expected dividend yield stock companys best estimate expected future dividend yield company applied estimated forfeiture rate 675 2009 stock options rates calculated based upon historical activity estimate granted shares expected vest actual forfeitures differ expected rates company may required make additional adjustments compensation expense future periods assumptions used determine weighted average grantdate fair value stock options 970 1010 1275 years ending december 31 2009 2008 2007 respectively watts water technologies inc subsidiaries notes consolidated financial statements continued 13 stockbased compensation continued following summary unvested restricted stock activity related information total fair value shares vested 2009 2008 2007 21 million 14 million 14 million respectively december 31 2009 total unrecognized compensation cost related unvested restricted stock approximately 26 million total weighted average remaining term 20 years 2009 2008 2007 company recognized compensation costs 20 million 18 million 16 million respectively selling general administrative expenses company applied estimated forfeiture rate 52 restricted stock issued key employees aggregate intrinsic value restricted stock granted outstanding approximated 36 million representing total pretax intrinsic value based companys closing class common stock price 3092 december 31 2009 management stock purchase plan total unrecognized compensation cost related unvested rsus approximately 12 million december 31 2009 total weighted average remaining term 18 years 2009 2008 2007 company recognized compensation cost 12 million 12 million 17 million respectively selling general administrative expenses dividends declared rsus paid individuals remain unpaid december 31 2009 total approximately 02 million watts water technologies inc subsidiaries notes consolidated financial statements continued 13 stockbased compensation continued summary companys rsu activity related information 2009 shown following table december 31 2009 aggregate intrinsic values outstanding vested rsus approximately 45 million 13 million respectively representing total pretax intrinsic value based companys closing class common stock price 3092 december 31 2009 would received rsus holders rsus settled date total intrinsic value rsus settled 2009 2008 2007 approximately 01 million 07 million 25 million respectively upon settlement rsus company issues shares class common stock following table summarizes information rsus outstanding december 31 2009 watts water technologies inc subsidiaries notes consolidated financial statements continued 13 stockbased compensation continued fair value share issued management stock purchase plan estimated date grant using blackscholesmerton model based following weighted average assumptions riskfree interest rate based upon us treasury yield curve time grant respective expected life rsus expected life estimated period time outstanding rsus volatility calculated using historical data expected dividend yield stock companys best estimate expected future dividend yield company applied estimated forfeiture rate 52 rsus rates calculated based upon historical activity estimate granted shares expected vest actual forfeitures differ expected rates company may required make additional adjustments compensation expense future periods assumptions used determine weighted average grantdate fair value rsus granted 814 1144 1679 2009 2008 2007 respectively company distributed dividends 044 per share 2009 044 per share 2008 040 per share 2007 companys class common stock class b common stock 14 employee benefit plans company sponsors funded unfunded noncontributing defined benefit pension plans together cover substantially domestic employees benefits based primarily years service employees compensation funding policy company plans contribute annual amount exceed maximum amount deducted federal income tax purposes watts water technologies inc subsidiaries notes consolidated financial statements continued 14 employee benefit plans continued funded status defined benefit plans amounts recognized consolidated balance sheet follows amounts recognized consolidated balance sheet follows amounts recognized accumulated comprehensive income consist watts water technologies inc subsidiaries notes consolidated financial statements continued 14 employee benefit plans continued information pension plans accumulated benefit obligation excess plan assets follows components net periodic benefit cost follows estimated net actuarial loss prior service cost defined benefit pension plans amortized accumulated comprehensive income net periodic benefit cost next year 23 million 03 million respectively assumptions weightedaverage assumptions used determine benefit obligations weightedaverage assumptions used determine net periodic benefit costs discount rates selected based upon rates return measurement date utilizing bond matching approach match expected benefit cash flows selecting expected longterm rate return assets company considers average rate earnings expected funds invested provide benefits plan includes considering trusts asset allocation expected returns likely earned life plan basis consistent prior year watts water technologies inc subsidiaries notes consolidated financial statements continued 14 employee benefit plans continued plan assets weighted average asset allocations asset category follows companys written retirement plan investment policy sets forth investment policy objectives constraints watts water technologies inc pension plan retirement plan investment policy set forth pension plan committee defines general investment principles directs investment management policy addressing preservation capital risk aversion adherence investment discipline investment managers make reasonable effort control risk evaluated quarterly commonly accepted benchmarks ensure risk assumed commensurate given investment style objectives portfolio designed achieve balanced return current income modest growth capital achieving returns excess rate inflation investment horizon order preserve purchasing power plan assets plan assets required invested liquid securities derivative investments allowed prohibited investments include limited following commodities futures contracts private placements options limited partnerships venturecapital investments real estate properties interestonly io principalonly po residual tranche cmos watts water technologies inc stock prohibited transactions include limited following short selling margin transactions allowable assets include cash equivalents fixed income securities equity securities mutual funds gics specific guidelines regarding allocation assets follows equities shall comprise 25 75 total portfolio fixed income shall comprise 30 65 investment performance monitored regular basis investments reallocated stay within specific guidelines equityfixed income allocation 5545 preferred securities one company government agency exceed 10 total fund 20 total fund invested one industry individual treasury securities may represent 50 total fund total allocation treasury bonds notes may represent 100 plans aggregate bond position watts water technologies inc subsidiaries notes consolidated financial statements continued 14 employee benefit plans continued following table presents investments pension plan measured fair value december 31 2009 aprimarily represented investments common stock diverse industries bprimarily represented investments index funds cprimarily represented investments mutual funds dprimarily represented investments money market funds cash flows information related companys pension funds cash flow follows company expects contribute approximately 100 million 2010 expected benefit payments paid pension plans follows additionally substantially companys domestic employees eligible participate certain 401k savings plans company matches specified percentage employee contributions subject certain limitations companys match contributions included selling general administrative expense year ended december 31 2009 05 million watts water technologies inc subsidiaries notes consolidated financial statements continued 14 employee benefit plans continued years ended december 31 2008 2007 06 million year respectively charges european pension plans approximated 28 million 33 million 30 million years ended december 31 2009 2008 2007 respectively costs relate plans administered certain european subsidiaries benefits calculated according government requirements paid employees upon retirement change employment company entered supplemental compensation agreement timothy p horne september 1 1996 per agreement upon ceasing employee company mr horne must make available requested board work minimum 300 500 hours per year consultant return certain annual compensation long physically able mr horne complies consulting provisions agreement shall receive supplemental compensation annual basis 400000 per year subject cost living increases year exchange services performed long physically able event physical disability subsequent commencing consulting services company mr horne continue receive payment annually payment consulting services provided mr horne expensed incurred company mr horne retired effective december 31 2002 therefore supplemental compensation period began january 1 2003 accordance gaap company accrues future postretirement disability benefits period january 1 2003 time mr horne becomes physically unable perform consulting services period disability benefits earned 15 contingencies environmental remediation james jones litigation previously disclosed company party lawsuit filed nora armenta california superior court us james jones company mueller co tyco international armenta case separate lawsuit filed california superior court behalf city banning california 42 cities water districts california company james jones company mueller co city banning case mediation session held california superior court june 910 2009 parties armenta case city banning case agreed principle settle cases agreement principle effective binding upon approval plaintiffs armenta city banning cases final approval settlement california superior court fairness hearing agreement principle also reached settle related insurance coverage cases watts industries inc vs zurich american insurance company et al zurich american insurance company vs watts industries inc et al pending california superior court zurich american insurance company vs watts industries inc james jones company pending united states district court northern district illinois eastern division settlement insurance coverage cases effective binding upon approval settlement underlying armenta case city banning case described settlement agreement approved plaintiffs armenta city banning cases fairness hearing held november 5 2009 california superior court approved settlement armenta case city banning case objectors settlement based contemporaneous final settlement underlying insurance coverage cases companys contribution settlement 153 million result settlements lawsuits claims dismissed addition separate settlement company paid watts water technologies inc subsidiaries notes consolidated financial statements continued 15 contingencies environmental remediation continued outside counsel additional 50 million services rendered connection described litigation result settlement described litigation company recorded noncash pretax gain discontinued operations approximately 95 million fourth quarter 2009 reduce previously recorded estimates loss related fees amounts noted foreign corrupt practices act investigation july 2009 company received information employees cwv time indirect whollyowned subsidiary company china made payments employees stateowned agencies payments may violate foreign corrupt practices act company conducting investigation utilizing outside counsel voluntarily disclosed matter united states department justice securities exchange commission company cannot predict outcome matter time whether materially adverse impact financial condition results operations company sold cwv january 2010 environmental remediation company named potentially responsible party respect limited number identified contaminated sites levels contamination vary significantly site related levels remediation efforts environmental liabilities recorded based probable cost known estimated minimum cost remediation company accrues estimated environmental liabilities based assumptions subject number factors uncertainties circumstances affect reliability precision estimates include identification additional sites environmental regulations level cleanup required technologies available number financial condition contributors remediation time period remediation may occur company recognizes changes estimates new remediation requirements defined new information becomes available based facts currently known company believe ultimate outcome matters material adverse effect liquidity financial condition results operations environmental matters inherently uncertain exists possibility may ultimately incur losses matters excess amount accrued however company cannot currently estimate amount additional losses asbestos litigation company defending approximately 105 lawsuits different jurisdictions greatest number filed mississippi california state courts alleging injury death result exposure asbestos complaints cases typically name large number defendants identify particular watts products source asbestos exposure date company obtained dismissal every case reached trial discovery failed yield evidence substantial exposure watts products based facts currently known company believe ultimate outcome claims material adverse effect liquidity financial condition results operations watts water technologies inc subsidiaries notes consolidated financial statements continued 15 contingencies environmental remediation continued litigation lawsuits proceedings claims arising ordinary course operations also pending threatened us based facts currently known company believe ultimate outcome litigation matters material adverse effect liquidity financial condition results operations 16 financial instruments fair value carrying amounts cash equivalents shortterm investments trade receivables trade payables approximate fair value short maturity financial instruments fair value companys 487 senior notes due 2010 547 senior notes due 2013 585 senior notes due 2016 based quoted market prices similar notes level 2 fair value companys variable rate debt approximates carrying value carrying amount estimated fair market value companys longterm debt including current portion follows derivative instruments company measures certain financial assets liabilities fair value recurring basis including auction rate securities foreign currency derivatives deferred compensation plan assets related liability metal derivatives fair value certain financial assets liabilities determined using following inputs december 31 2009 1included shortterm investment securities companys consolidated balance sheet watts water technologies inc subsidiaries notes consolidated financial statements continued 16 financial instruments continued 2included net companys consolidated balance sheet 3included accrued expenses liabilities companys consolidated balance sheet 4included noncurrent liabilities companys consolidated balance sheet table provides summary changes fair value financial assets measured fair value recurring basis using significant unobservable inputs level 3 period december 31 2008 december 31 2009 trading securities comprise auction rate securities rights issued ubs company holds variety interest bearing auction rate securities ars including 47 million municipal bonds 07 million student loans december 31 2009 ars investments intended provide liquidity via auction process resets applicable interest rate predetermined calendar intervals allowing investors either roll holdings sell interests par uncertainties credit markets affected companys holdings ars investments auctions companys investments securities failed respective auction dates consequently investments currently liquid company able access funds future auction investments successful buyer found outside auction process maturity dates ars investments range 2027 2036 fourth quarter 2008 company elected participate settlement offer ubs outstanding ars investments terms settlement offer company issued rights ubs entitling holder require ubs purchase underlying ars par value period june 30 2010 july 2 2012 rights valued 11 million december 31 2009 also entitle ubs purchase find buyer ars time par value company continues earn interest ars investments currently trading therefore currently readily determinable market value company used discounted cash flow model determine estimated fair value investment ars investments ubs rights december 31 2009 assumptions used preparing discounted cash flow model include estimates interest rates credit quality ars issuer timing amount cash flows government guarantees related student loans expected holding periods ars based assessment fair value company recorded income approximately 04 million income consolidated statement operations investment ars 2009 determine fair value rights issued ubs connection settlement company used discounted cash flow model period first date company exercise rights based assessment fair value company recorded charge approximately 05 million expense 2009 company used financial instruments enhance ability manage risk including foreign currency commodity pricing exposures exist part ongoing business operations watts water technologies inc subsidiaries notes consolidated financial statements continued 16 financial instruments continued use derivatives exposes company counterparty credit risk nonperformance market risk related changes currency exchange rates commodity prices company manages exposure counterparty credit risk diversification counterparties companys counterparties derivative transactions substantial commercial banks significant experience using derivative instruments impact market risk fair value cash flows companys derivative instruments monitored company restricts use derivative financial instruments hedging activities company enter contracts trading purposes company enter contracts speculative purposes use derivative instruments approved senior management written guidelines company exposure number foreign currency rates including canadian dollar euro chinese yuan british pound manage risk company generally uses layering methodology whereby end quarter company generally entered forward exchange contracts hedge approximately 50 projected intercompany purchase transactions next twelve months company primarily uses strategy purchases canada us average volume contracts vary generally approximates 10 12 million open contracts end given quarter december 31 2009 company contracts notional amounts aggregating approximately 90 million buy various currencies company accounts forward exchange contracts economic hedge realized unrealized gains losses contracts recognized income expense consolidated statement operations contracts subject company significant market risk exchange movement offset gains losses related foreign currency denominated transactions 2008 company entered series copper swaps fix price per pound copper october 2008 september 2009 1 million pounds delivered 12 months one customer company determined copper swaps qualify hedge accounting accounted financial instruments economic hedge therefore changes fair value copper swaps recorded immediately consolidated statement operations company enter swap forward contracts speculative purposes december 31 2009 company outstanding swaps following table discloses fair values derivative instruments companys balance sheet december 31 2009 2008 following table discloses impact derivative instruments companys operations 2009 2008 2007 watts water technologies inc subsidiaries notes consolidated financial statements continued 16 financial instruments continued leases company leases certain manufacturing facilities sales offices warehouses equipment generally leases carry renewal provisions require company pay maintenance costs future minimum lease payments capital leases noncancelable operating leases december 31 2008 follows carrying amounts assets capital lease include 17 segment information company operates three geographic segments north america europe china segments sell similar products managed separately separate financial results reviewed companys chief operating decisionmaker intercompany sales transactions eliminated sales region based upon location entity recording sale accounting policies segment described summary significant accounting policies see note 2 watts water technologies inc subsidiaries notes consolidated financial statements continued 17 segment information continued following summary companys significant accounts balances segment reconciled consolidated totals corporate expenses primarily compensation expense sarbanesoxley compliance professional fees including legal audit expenses shareholder services benefit administration costs allocated geographic segments viewed corporate functions support activities watts water technologies inc subsidiaries notes consolidated financial statements continued 17 segment information continued north america segment consists us net sales 6726 million 7981 million 8055 million years ended december 31 2009 2008 2007 respectively north american segment also consists us longlived assets 748 million 866 million 927 million december 31 2009 2008 2007 respectively intersegment sales year ended december 31 2009 north america europe china 36 million 58 million 1104 million respectively intersegment sales year ended december 31 2008 north america europe china 64 million 64 million 1331 million respectively intersegment sales year ended december 31 2007 north america europe china 66 million 60 million 1371 million respectively 18 quarterly financial information unaudited 19 subsequent events february 9 2010 company declared quarterly dividend eleven cents 011 per share outstanding share class common stock class b common stock watts water technologies inc subsidiaries schedule iivaluation qualifying accounts amounts millions three years ended december 31 exhibit index 1incorporated reference registrants current report form 8k dated february 8 2010 file 00111499 2incorporated reference registrants current report form 8k dated november 14 1991 file 00111499 3incorporated reference registrants annual report form 10k year ended december 31 2002 file 00111499 4incorporated reference registrants current report form 8k dated april 27 2006 file 00111499 5incorporated reference registrants form s1 336515 part second amendment form s1 dated august 21 1986 6incorporated reference amendment 1 registrants annual report form 10k year ended june 30 1992 file 00111499 7incorporated reference registrants current report form 8k dated may 15 2003 file 00111499 8incorporated reference registrants current report form 8k dated may 14 2008 file 00111499 9incorporated reference registrants annual report form 10k year ended june 30 1996 file 00111499 10incorporated reference registrants form s8 33332685 dated august 1 1997 11incorporated reference registrants quarterly report form 10q quarter ended june 28 2009 file 00111499 12incorporated reference registrants annual report form 10k year ended june 30 1997 file 00111499 13incorporated reference notes consolidated financial statements note 2 report 14incorporated reference registrants quarterly report form 10q quarter ended july 3 2005 file 00111499 15incorporated reference registrants annual report form 10k year ended june 30 1999 file 00111499 16incorporated reference registrants quarterly report form 10q quarter ended september 30 2000 file 00111499 17incorporated reference registrants annual report form 10k year ended december 31 2008 file 00111499 18incorporated reference registrants quarterly report form 10q quarter ended september 26 2004 file 00111499 19incorporated reference registrants quarterly report form 10q quarter ended july 1 2007 file 00111499 20incorporated reference registrants annual report form 10k year ended december 31 2007 file 00111499 management contract compensatory plan arrangement part item 1 business item 1a risk factors item 1b unresolved staff comments item 2 properties item 3 legal proceedings part ii item 5 market registrants common equity related stockholder matters issuer purchases equity securities item 6 selected financial data item 7 managements discussion analysis financial condition results operations item 7a quantitative qualitative disclosures market risk item 8 financial statements supplementary data item 9 changes disagreements accountants accounting financial disclosure item 9a controls procedures managements annual report internal control financial reporting report independent registered public accounting firm item 9b information part iii item 10 directors executive officers corporate governance item 11 executive compensation item 12 security ownership certain beneficial owners management related stockholder matters item 13 certain relationships related transactions director independence item 14 principal accountant fees services part iv item 15 exhibits financial statement schedules signatures report independent registered public accounting firm watts water technologies inc subsidiaries consolidated statements operations amounts millions except per share information watts water technologies inc subsidiaries consolidated balance sheets amounts millions except share information watts water technologies inc subsidiaries consolidated statements stockholders equity comprehensive income loss amounts millions except share information watts water technologies inc subsidiaries consolidated statements cash flows amounts millions watts water technologies inc subsidiaries notes consolidated financial statements watts water technologies inc subsidiaries schedule iivaluation qualifying accounts amounts millions exhibit indexitem 15 exhibits financial statement schedules a1 financial statements following financial statements included separate section report commencing page numbers specified report independent registered public accounting firm consolidated statements operations years ended december 31 2010 2009 2008 consolidated balance sheets december 31 2010 2009 consolidated statements stockholders equity comprehensive income loss years ended december 31 2010 2009 consolidated statements cash flows years ended december 31 2010 2009 2008 notes consolidated financial statements 58100 a2 schedules schedule iivaluation qualifying accounts years ended december 31 2010 2009 2008 required schedules provision made applicable accounting regulations securities exchange commission included notes consolidated financial statements a3 exhibits listed exhibit index immediately preceding exhibits filed part annual report form 10k signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated report independent registered public accounting firm board directors stockholders watts water technologies inc audited accompanying consolidated balance sheets watts water technologies inc subsidiaries december 31 2010 2009 related consolidated statements operations stockholders equity comprehensive income loss cash flows years threeyear period ended december 31 2010 connection audits consolidated financial statements also audited financial statement schedule iivaluation qualifying accounts consolidated financial statements financial statement schedule responsibility companys management responsibility express opinion consolidated financial statements financial statement schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position watts water technologies inc subsidiaries december 31 2010 2009 results operations cash flows years threeyear period ended december 31 2010 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic consolidated financial statements taken whole present fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states watts water technologies incs internal control financial reporting december 31 2010 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso report dated march 1 2011 expressed unqualified opinion effectiveness companys internal control financial reporting kpmg llp boston massachusetts march 1 2011 watts water technologies inc subsidiaries consolidated statements operations amounts millions except per share information accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated balance sheets amounts millions except share information accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated statements stockholders equity comprehensive income loss amounts millions except share information accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated statements cash flows amounts millions accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries notes consolidated financial statements 1 description business watts water technologies inc company designs manufactures sells extensive line water safety flow control products primarily water quality water conservation water safety water flow control markets located predominantly north america europe presence china 2 accounting policies principles consolidation consolidated financial statements include accounts company majority wholly owned subsidiaries upon consolidation significant intercompany accounts transactions eliminated cash equivalents cash equivalents consist instruments remaining maturities three months less date purchase consist primarily us treasury bills money market funds carrying amount reasonable estimate fair value investment securities investment securities december 31 2010 consisted primarily certificates deposit original maturities greater three months december 31 2009 consisted auction rate securities ars whose underlying investments municipal bonds student loans investments rights issued ubs ag ubs securities purchased par value rights issued ubs received connection settlement agreement see note 16 additional information regarding rights issued ubs company classified debt securities investment rights ubs trading securities trading securities recorded fair value company determines fair value obtaining market value available quoted prices active markets absence quoted prices company uses inputs determine fair value investments changes fair value well realized gains losses sale securities recorded incurred consolidated statements operations income expense allowance doubtful accounts allowance doubtful accounts includes reserves bad debts sales returns allowances cash discounts company analyzes aging accounts receivable individual accounts receivable historical bad debts concentration receivables customer credit worthiness current economic trends changes customer payment terms company specifically analyzes individual accounts receivable establishes specific reserves financially troubled customers addition factors developed certain regions utilizing historical trends sales returns allowances cash discount activities derive reserve returns allowances cash discounts concentration credit company sells products diversified customer base therefore significant concentrations credit risk 2010 2009 customer accounted 10 companys total sales watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued inventories stated lower cost using primarily firstin firstout method market value determined replacement cost net realizable value historical usage used basis determining reserve excess obsolete inventories goodwill intangible assets goodwill recorded consideration paid acquisitions exceeds fair value net tangible intangible assets acquired goodwill intangible assets indefinite useful lives amortized rather tested annually impairment test performed october 31 2010 assets held sale company accounts assets held sale management committed plan sell asset group assets actively marketing asset group assets asset group assets sold current condition reasonable period time plan expected change december 31 2010 company actively marketing one property one group assets expects complete sale assets group assets next twelve months 2010 2009 company recorded estimated losses 10 million 78 million respectively reduce assets group assets estimated fair value less costs sell amounts recorded component restructuring costs consolidated statements operations see note 4 additional information associated companys restructuring charges impairment goodwill longlived assets changes carrying amount goodwill geographic segment follows watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued 2008 company completed assessment fair value net assets water quality business unit includes number businesses purchased time recorded pretax goodwill impairment charge 220 million due sales declining prior year levels companys expectations lower commercial residential project activity company estimated fair value reporting unit using expected present value future cash flows february 2009 company reached settlement seller regarding purchase price adjustment core industries inc acquisition resulted company receiving 11 million may 2009 company deconsolidated team precision pipework ltd team result deconsolidation company reduced goodwill 84 million associated team see note 3 additional information relating deconsolidation team september 2009 companys board directors approved plan dispose investment watts valve changsha co ltd cwv former subsidiary company located china company classified net assets cwv discontinued operation recorded decrease net assets estimated fair value less costs sell result company reduced goodwill 61 million associated cwv see note 3 note 5 additional information relating cwv goodwill tested impairment least annually frequently events circumstances indicate likely goodwill might impaired change business conditions company performs annual goodwill impairment assessment fourth quarter year intangible assets estimable lives longlived assets reviewed impairment whenever events changes circumstances indicate carrying amount asset group may recoverable recoverability intangible assets estimable lives longlived assets measured comparison carrying amount asset group future net undiscounted pretax cash flows expected generated asset group comparisons indicate asset recoverable impairment loss recognized amount carrying amount asset group exceeds related estimated fair value estimated fair value based either discounted future pretax operating cash flows appraised values depending nature asset company determines discount rate analysis based weighted average cost capital based market guideline public companies related businesses allocate interest charges asset group measured judgment required estimate future operating cash flows connection restructuring plan announced february 2009 company concluded likely carrying amount certain assets held used may recoverable specifically company identified longlived asset group primarily consisting buildings land use rights china company used undiscounted future cash flow model test longlived asset group based primary asset identified current economic outlook estimated fair value ultimate disposition asset group inputs used analysis unobservable inputs level 3 based analysis performed company recorded 55 million impairment charge one asset group china quarter ended september 27 2009 charge reported restructuring charges consolidated statements operations watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued connection plan dispose cwv certain longlived assets reduced 39 million reflect estimated fair value less cost sell charge recorded discontinued operations part 85 million loss disposal intangible assets include following aggregate amortization expense amortized intangible assets 2010 2009 2008 143 million 131 million 122 million respectively additionally future amortization expense amortizable intangible assets expected 154 million 2011 135 million 2012 124 million 2013 124 million 2014 121 million 2015 amortization expense provided straightline basis estimated useful lives intangible assets weightedaverage remaining life total amortizable intangible assets 96 years patents customer relationships technology amortizable intangibles weightedaverage remaining lives 79 years 75 years 145 years 245 years respectively indefinitelived intangible assets primarily include trade names trademarks adjustments indefinitelived intangible assets year ended december 31 2010 relate primarily additional trade name related austroflex rohrisoliersysteme gmbh acquisition offset impairment trade name european segment reclassification 44 million trade names north american segment amortizable intangibles adjustments indefinitelived intangible assets year ended december 31 2009 relate primarily reclassification one technology related intangible asset results annual impairment analysis evaluation performed october 25 2009 company previously classified technology intangible asset indefinitelived intangible asset could determine time horizon asset expected used 2009 company concluded technology asset longer indefinite life due part recent competition changes regulations result company increased technology amortizable intangible assets reduced indefinitelived intangible assets approximately 75 million company uses royalty relief method evaluate current fair value trademarks technology due decreases sales experienced several brands technology 2009 well estimated outlook future sales brands technology company recorded pretax charge 33 million decrease assets estimated fair value watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued property plant equipment property plant equipment recorded cost depreciation provided straightline basis estimated useful lives assets range 10 40 years buildings improvements 3 15 years machinery equipment taxes income taxes assessed governmental authorities sale transactions recorded net basis excluded sales companys consolidated statements operations income taxes income taxes accounted asset liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases operating loss tax credit carry forwards deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized income period includes enactment date company accounts tax benefits item question meets morelikelythannot greater 50 likelihood sustained upon examination taxing authorities threshold 2010 company reduced unrecognized tax benefits approximately 03 million resulting voluntary disclosure agreements company estimates reasonably possible portion currently remaining unrecognized tax benefit may recognized end 2011 result conclusion federal foreign income tax audits amount expense accrued penalties interest 08 million worldwide december 31 2010 company gross unrecognized tax benefits approximately 38 million approximately 35 million recognized would affect effective tax rate difference amount unrecognized tax benefits amount would affect effective tax rate consists federal tax benefit state income tax items reconciliation beginning ending amount unrecognized tax benefits separate analysis accrued interest related unrecognized tax benefits follows watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued february 2011 company completed audit internal revenue service 2007 2008 tax years material adjustments made company conducts business variety locations throughout world resulting tax filings numerous domestic foreign jurisdictions company subject tax examinations regularly part normal course business companys major jurisdictions us canada china netherlands uk germany italy france exceptions company longer subject us federal state local nonus income tax examinations years 2004 company accounts interest penalties related uncertain tax positions component income tax expense statute limitations major jurisdictions open us year 2007 later canada 2006 later netherlands 2006 later foreign currency translation financial statements subsidiaries located outside united states generally measured using local currency functional currency balance sheet accounts including goodwill foreign subsidiaries translated united states dollars yearend exchange rates income expense items translated weighted average exchange rates period net translation gains losses included comprehensive income separate component stockholders equity company provide us income taxes foreign currency translation adjustments since provide taxes undistributed earnings foreign subsidiaries gains losses foreign currency transactions subsidiaries included net earnings stockbased compensation company records compensation expense financial statements sharebased awards based grant date fair value awards stockbased compensation expense includes estimate prevesting forfeitures recognized requisite service periods awards straightline basis generally commensurate vesting term benefits associated tax deductions excess recognized compensation cost reported financing cash flow december 31 2010 company three stockbased compensation plans total unrecognized compensation costs related unvested stockbased compensation arrangements approximately 111 million total weighted average remaining term 25 years 2010 2009 2008 company recognized compensation costs related stockbased programs approximately 47 million 49 million 53 million respectively selling general administrative expenses company recorded approximately 06 million 06 million 07 million tax benefits 2010 2009 2008 respectively compensation expense relating stock options 2010 2009 2008 company recorded approximately 12 million 12 million 11 million respectively tax benefit stockbased plans 2010 2009 2008 recognition total stockbased compensation expense impacted basic diluted net income per common share 008 010 respectively net income per common share basic net income per common share calculated dividing net income weighted average number common shares outstanding calculation diluted income per share assumes conversion dilutive securities see note 13 watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued net income attributable watts water technologies inc number shares used compute net income per share basic assuming full dilution reconciled computation diluted net income per share years ended december 31 2010 2009 2008 excludes effect potential exercise options purchase approximately 05 million 09 million 10 shares respectively exercise price option greater average market price class common stock effect would antidilutive year ended december 31 2008 company repurchased approximately 16 million shares class common stock derivative financial instruments normal course business company manages risks associated commodity prices foreign exchange rates interest rates variety strategies including use hedging transactions executed accordance companys policies companys hedging transactions include limited use various derivative financial commodity instruments matter policy company use derivative instruments unless underlying exposure change value derivative instruments would substantially offset opposite change value underlying hedged items company use derivative instruments trading speculative purposes derivative instruments may designated accounted either hedge recognized asset liability fair value hedge forecasted transaction cash flow hedge fair value hedge effective ineffective portions change fair value derivative instrument along adjustment carrying amount hedged item fair value changes attributable hedged risk recognized earnings cash flow hedge changes fair value derivative instrument highly effective deferred accumulated comprehensive income loss underlying hedged item recognized earnings fair value cash flow hedge cease qualify hedge accounting terminated would continue carried balance sheet fair value settled hedge accounting would discontinued prospectively forecasted transaction longer probable occurring amounts previously deferred accumulated comprehensive income would recognized immediately earnings occasion company may enter derivative instrument qualify hedge accounting entered offset changes fair value underlying transaction required recognized earnings natural hedge instruments reflected consolidated balance sheets fair value changes fair value recognized earnings watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued foreign currency derivatives include forward foreign exchange contracts primarily canadian dollars metal derivatives included commodity swaps copper 2009 2008 company used copper swap means hedging exposure metal prices see note 16 portions companys outstanding debt exposed interest rate risks company monitors interest rate exposures ongoing basis maximize overall effectiveness interest rates shipping handling shipping handling costs included selling general administrative expense amounted 335 million 314 million 394 million years ended december 31 2010 2009 2008 respectively research development research development costs included selling general administrative expense amounted 186 million 178 million 175 million years ended december 31 2010 2009 2008 respectively revenue recognition company recognizes revenue following criteria met company entered binding agreement product shipped title passes sales price customer fixed determinable collectability reasonably assured provisions estimated returns allowances made time sale recorded reduction sales included allowance doubtful accounts consolidated balance sheets company records provisions sales incentives primarily volume rebates adjustment net sales time sale based estimated purchase targets basis presentation certain amounts 2009 consolidated financial statements reclassified permit comparison 2010 presentation reclassifications effect reported results operations stockholders equity estimates preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates new accounting standards october 2009 financial accounting standards board fasb issued accounting standard update improve disclosures related fair value measurements update requires new disclosures significant transfers various fair value levels occur update requires reconciliation fair value measurements using significant unobservable inputs level 3 prepared watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued gross basis separately presenting information purchases sales issuance settlements addition update amends current disclosure requirements postretirement benefit plan assets update effective interim annual periods beginning december 15 2009 except disclosures regarding level 3 fair value measurements disclosures effective fiscal years beginning december 15 2010 interim periods within fiscal years adoption standard material impact companys consolidated financial statements 3 discontinued operations september 2009 companys board directors approved sale investment cwv manufactured large diameter hydraulicactuated butterfly valves thermopower hydropower plants water distribution projects water works projects china management determined cwvs business longer fit strategically company completed sale cwv january 2010 2009 company evaluated classification assets liabilities cwv concluded net assets qualified discontinued operations company evaluated fair value less cost sell net assets cwv recorded pretax loss approximately 85 million 2009 based final agreement buyer company concluded future cash flows associated cwv would completely eliminated continuing operations company classified cwvs results operations loss disposition discontinued operations periods presented may 2009 company liquidated team business located ammanford uk team custom designed manufactured manipulated pipe hose tubing assemblies served heating ventilation air conditioning automotive markets western europe management determined business longer fit strategically company sale team feasible may 22 2009 company appointed administrator team united kingdom insolvency act 1986 administration process administrator sole control responsibility teams operations assets liabilities company deconsolidated team administrator obtained control team deconsolidation resulted recognition 181 million pretax noncash loss company evaluated operations team determined would continuing involvement teams operations cash flows result loss control teams cash flows operations eliminated continuing operations company classified teams results operations loss deconsolidation discontinued operations periods presented discontinued operating losses 2010 primarily includes estimated reserve connection foreign corrupt practices act fcpa investigation cwv see note 15 legal costs associated fcpa investigation discontinued operating expense 2009 2008 related operations writeoff team operations estimated loss net assets cwv legal costs net reserve adjustments associated concluded james jones litigation see note 15 watts water technologies inc subsidiaries notes consolidated financial statements continued 3 discontinued operations continued condensed operating statements discontinued operations summarized company recognize tax benefits write net assets cwv company believe likely tax benefits would realized revenues reported discontinued operations follows carrying amounts major classes assets liabilities december 31 2010 december 31 2009 associated discontinued operations follows watts water technologies inc subsidiaries notes consolidated financial statements continued 4 restructuring income charges companys board directors board approves major restructuring programs involve discontinuance significant product lines shutdown facilities related capital expenditures time company takes additional restructuring actions including involuntary terminations part major program company accounts costs period individual employees notified liability incurred costs included restructuring charges companys consolidated statements operations summary pretax cost restructuring program follows company recorded net pretax restructuring charges business segments follows 2010 pretax costs 15 million recorded cost goods sold primarily accelerated depreciation associated 2010 actions described additionally net pretax costs 126 million recorded restructuring charges detailed watts water technologies inc subsidiaries notes consolidated financial statements continued 4 restructuring income charges continued 2009 pretax costs 17 million recorded costs goods sold primarily accelerated depreciation additionally net pretax costs 161 million recorded restructuring charges detailed includes 11 million gain disposition tianjin tanggu watts valve co ltd twt gain deferred year ended december 31 2008 local government approvals finalized also 2009 company recorded tax charge 39 million related previously realized tax benefits china expected recaptured result companys decision restructure operations 2009 tax charge part 2009 actions 2008 pretax costs 03 million recorded costs goods sold primarily accelerated depreciation additionally net pretax costs 56 million recorded restructuring charges detailed company also recognized income 02 million noncontrolling interest representing 40 liability chinese joint venture partner restructuring plan 2008 includes severance charges reductioninforce us occurred completed 2008 following information outlines companys current restructuring plans 2007 actions 2007 company undertook review certain product lines overall manufacturing capacity initiated board approved global restructuring program company also discontinued certain product lines program included shutdown several manufacturing facilities rightsizing another facility restructuring program charges certain product line discontinuances expected include pretax charges totaling approximately 129 million charges primarily asset writedowns expected net losses asset disposals severance costs facility exit costs watts water technologies inc subsidiaries notes consolidated financial statements continued 4 restructuring income charges continued 2009 company reviewed remaining activities associated 2007 actions related europe due large part review company concluded charges europe would incurred program february 2010 board approved new program europe launched 2010 included components identified 2007 actions following table presents total pretax charges incurred global restructuring program product line discontinuances initiated 2007 companys reportable segments north america incurred restructuring costs excess planned amount primarily due writedown vacated facility estimated fair value part 2007 plan company closed one facility consolidated operations existing facility plan created called sale building vacated plan anticipate significant downturn commercial real estate market occurred shortly consolidation completed 2008 result continued poor commercial real estate market conditions 2010 2009 company recorded reduction carrying cost building estimated fair value less estimated costs sell 10 million 23 million respectively remaining excess primarily result higher costs incurred complete consolidation two facilities originally anticipated following table summarizes incurred cost 2007 restructuring actions segment watts water technologies inc subsidiaries notes consolidated financial statements continued 4 restructuring income charges continued details companys 2007 restructuring actions december 31 2010 follows following table summarizes incurred cost 2007 restructuring actions type consists primarily relocation costs 2009 actions february 2009 board approved plan expand companys program consolidate manufacturing footprint north america china final plan provided closure two additional plants operations moved existing facilities either north america china relocated new central facility united states another facility originally identified closure operations improved substantially therefore removed program footprint consolidation pretax charge estimated approximately 117 million including severance charges relocation costs asset writedowns onetime tax charges approximately 39 million incurred part relocations approximately 225 positions eliminated program additionally company spent approximately 33 million capital expenditures consolidate operations watts water technologies inc subsidiaries notes consolidated financial statements continued 4 restructuring income charges continued following table summarizes total estimated pretax charges expected incurred remaining cost footprint consolidationrestructuring program initiated 2009 companys reportable segments company expect incur additional costs project substantially complete details companys footprint consolidationrestructuring program december 31 2010 follows 2010 actions february 8 2010 board approved restructuring program respect companys operating facilities france restructuring program expected include consolidation five facilities two facilities consolidation three facilities includes two manufacturing sites one distribution center program originally expected include pretax charges totaling approximately 125 million including costs severance relocation cleanup certain asset writedowns result elimination approximately 95 positions company revised forecast 155 million primarily additional severance legal costs total net aftertax charges restructuring program expected approximately 97 million including 11 million noncash charges costs incurred 2011 company expects spend approximately 66 million capital expenditures consolidate operations company recorded certain severance costs related program 2009 amounts related contractual statutory obligations following table summarizes total expected incurred remaining pretax costs 2010 europe footprint consolidationrestructuring program companys reportable segments watts water technologies inc subsidiaries notes consolidated financial statements continued 4 restructuring income charges continued details companys europe footprint consolidationrestructuring program december 31 2010 follows following table summarizes expected incurred remaining costs 2010 europe footprint consolidationrestructuring actions type additional costs incurred companys europe footprint consolidationrestructuring program primarily came unexpected number employees elected make use severance plan including higher paid employees september 13 2010 board approved restructuring program respect certain companys operating facilities united states restructuring program includes shutdown two manufacturing facilities north carolina operations facilities consolidated companys manufacturing facilities new hampshire missouri locations program expected include pretax charges totaling approximately 49 million including costs severance shutdown costs equipment writedowns additionally company expecting pretax training preproduction setup costs approximately 20 million total net aftertax charge restructuring program expected approximately 41 million including 04 million noncash charges costs incurred 2011 company expects spend approximately 12 million capital expenditures consolidate operations restructuring program expected completed end third quarter 2011 watts water technologies inc subsidiaries notes consolidated financial statements continued 4 restructuring income charges continued following table summarizes total expected incurred remaining pretax costs 2010 north america footprint consolidationrestructuring program companys reportable segments details companys 2010 north america footprint consolidationrestructuring program december 31 2010 follows following table summarizes expected incurred remaining costs 2010 north america footprint consolidationrestructuring actions type 5 business acquisitions disposition june 28 2010 company acquired 100 outstanding stock austroflex rohrisoliersysteme gmbh austroflex approximately 337 million austroflex austrianbased manufacturer preinsulated flexible pipe systems district heating solar applications underfloor radiant heating systems acquisition austroflex provides company full range preinsulated pex tubing preinsulated solar tubes underfloor heating insulation distribution capability positions company major supplier preinsulated pipe systems europe company completed purchase price allocation resulted recognition 172 million intangible assets 123 million goodwill intangible assets based fair value estimates comprised primarily customer relationships estimated useful lives 8 years trade names indefinite lives goodwill expected tax deductible certain limit established austrian tax rules austroflex annual sales prior acquisition approximately 230 million april 13 2010 company acquired 100 outstanding stock blue ridge atlantic enterprises inc brae located oakboro north carolina 53 million net cash acquired total purchase price 05 million paid closing remaining 48 million contingent upon brae achieving certain performance metric year ending december 31 watts water technologies inc subsidiaries notes consolidated financial statements continued 5 business acquisitions disposition continued 2014 extent achieved expected paid cash 2015 company recognized liability 19 million estimate acquisition date fair value contingent consideration based net present value 37 million derived weighted probability achievement performance metric date acquisition failure meet performance metric would reduce liability 0 complete achievement would increase liability full remaining purchase price 48 million change fair value acquisitionrelated contingent consideration subsequent acquisition date recognized earnings period estimated fair value changes excess fair value consideration transferred fair value net assets acquired 27 million allocated goodwill trade name none goodwill expected tax deductible brae provider engineered rain water harvesting solutions addresses commercial industrial residential markets brae annual sales prior acquisition approximately 20 million may 30 2008 company acquired outstanding stock blücher metal blücher approximately 1835 million purchase price consisted 1701 million cash assumption debt 134 million net cash acquired blücher leading provider stainless steel drainage systems europe residential commercial industrial market places worldwide leader providing stainless steel drainage products marine industry blücher provides company new product platform europe allowing company offer broader product line existing customer base company completed purchase price allocation resulted recognition 645 million intangible assets 895 million goodwill intangible assets comprised primarily customer relationships patents estimated lives 10 years trade names indefinite lives consolidated results operations include results blücher since acquisition date may 30 2008 second quarter 2008 company completed acquisition remaining 40 ownership joint venture china twt 33 million cash twt manufactured products support us operations well sell local china market third quarter 2008 company relocated business supporting us twt existing operation china company entered agreement sell twt agreement company determined risks rewards ownership twt effectively transferred buyer october 18 2008 company determined longer beneficiary operating results twt therefore deconsolidated twt october 18 2008 company recognized 11 million gain sale 2009 upon final approval transfer chinese government authority see note 3 additional information concerning dispositions results operations brae included companys north america segment results operations austroflex blücher included companys europe segment since respective acquisition dates material companys consolidated financial statements certain acquisition agreements prior years contain earnout provisions 2010 2009 2008 company accrued approximately 05 million 05 million 04 million respectively earnout provisions charged goodwill paid year following earnout calculations typically based multiple future gross margins operating earnings defined agreements watts water technologies inc subsidiaries notes consolidated financial statements continued 6 accumulated comprehensive income loss accumulated comprehensive income loss consists following 7 inventories net inventories consist following raw materials workinprocess finished goods net valuation reserves 239 million 257 million december 31 2010 2009 respectively finished goods 147 million 138 million december 31 2010 2009 respectively consigned 8 property plant equipment property plant equipment consists following watts water technologies inc subsidiaries notes consolidated financial statements continued 9 income taxes significant components companys deferred income tax liabilities assets follows provision income taxes continuing operations based following pretax income watts water technologies inc subsidiaries notes consolidated financial statements continued 9 income taxes continued provision income taxes continuing operations consists following actual income taxes reported continuing operations different would computed applying federal statutory tax rate income continuing operations income taxes reasons difference follows december 31 2010 company foreign net operating loss carry forwards 315 million income tax purposes 10 million losses carried forward indefinitely 76 million losses expire 2015 46 million expire 2016 183 million expire 20172019 net operating losses consist 10 million related austrian operations 229 million netherland operations 76 related chinese operations december 31 2010 company valuation allowance 91 million us 69 million relates capital losses management believes likely company would use losses within applicable carryforward period china valuation allowance 22 million relates deferred tax assets twvc chinese subsidiary company believes utilized company valuation allowance deferred tax assets management believes likely company recover net deferred tax assets watts water technologies inc subsidiaries notes consolidated financial statements continued 9 income taxes continued enacted changes income tax laws material effect company 2010 2009 2008 undistributed earnings companys foreign subsidiaries amounted approximately 3130 million december 31 2010 3203 million december 31 2009 3117 million december 31 2008 earnings considered indefinitely reinvested accordingly provision us federal state income taxes recorded thereon upon distribution earnings form dividends otherwise company subject withholding taxes payable various foreign countries determination amount us income tax liability would incurred practicable complexities associated hypothetical calculation however unrecognized foreign tax credits may available reduce portion us income tax liability withholding taxes approximately 72 million would payable upon remittance previously unremitted earnings december 31 2010 10 accrued expenses liabilities accrued expenses liabilities consist following 11 financing arrangements longterm debt consists following watts water technologies inc subsidiaries notes consolidated financial statements continued 11 financing arrangements continued principal payments next five years thereafter due follows millions 201107 201207 2013757 201407 201508 thereafter3001 company maintains letters credit guarantee performance payment third parties accordance specified terms conditions amounts outstanding approximately 349 million december 31 2010 370 million december 31 2009 companys letters credit primarily associated insurance coverage lesser extent foreign purchases companys letters credit generally expire within one year issuance drawn revolving credit facility instruments may exist expire without drawn therefore necessarily represent future cash flow obligations june 18 2010 company entered note purchase agreement certain institutional investors 2010 note purchase agreement pursuant 2010 note purchase agreement company issued senior notes 750 million principal due june 18 2020 company pay interest outstanding balance notes rate 505 per annum payable semiannually june 18 december 18 principal notes shall become due payable company may option upon notice subject terms 2010 note purchase agreement prepay time part notes amount less 1 million paying principal amount plus makewhole amount defined 2010 note purchase agreement 2010 note purchase agreement includes operational financial covenants company required comply including among others maintenance certain financial ratios restrictions additional indebtedness liens dispositions events defaults 2010 note purchase agreement include failure comply financial operational covenants well bankruptcy insolvency events event default occurs continuing majority note holders right accelerate require company repay outstanding notes 2010 note purchase agreement limited circumstances acceleration automatic december 31 2010 company compliance covenants related 2010 note purchase agreement june 18 2010 company entered credit agreement credit agreement among company certain subsidiaries company become borrowers credit agreement bank america na administrative agent swing line lender letter credit issuer lenders referred therein credit agreement provides 300 million fiveyear senior unsecured revolving credit facility may increased additional 150 million certain circumstances subject terms credit agreement credit agreement sublimit 750 million letters credit agreement replaced 2006 unsecured revolving credit facility borrowings outstanding credit agreement bear interest fluctuating rate per annum equal case eurocurrency rate loans british bankers association libor rate plus applicable percentage ranging 170 230 determined reference companys consolidated leverage ratio plus case certain lenders mandatory cost calculated accordance terms credit agreement ii case base rate loans swing line loans highest federal funds rate plus 05 b rate interest effect day announced bank america na prime rate c british bankers association libor rate plus 10 plus applicable percentage ranging 070 130 determined reference companys consolidated leverage ratio addition paying interest credit watts water technologies inc subsidiaries notes consolidated financial statements continued 11 financing arrangements continued agreement company also required pay certain fees connection credit facility including limited facility fee letter credit fees credit agreement expires june 18 2015 company may repay loans outstanding credit agreement time without premium penalty customary breakage costs subject terms credit agreement credit agreement company required satisfy maintain specified financial ratios financial condition tests december 31 2010 company compliance covenants related credit agreement 2653 million unused available credit agreement 347 million standby letters credit outstanding credit agreement borrowings credit agreement december 31 2010 april 27 2006 company completed private placement 2250 million 585 senior unsecured notes due april 2016 2006 note purchase agreement 2006 note purchase agreement includes operational financial covenants company required comply including among others maintenance certain financial ratios restrictions additional indebtedness liens dispositions events default 2006 note purchase agreement include failure comply financial operational covenants well bankruptcy insolvency events company may option upon notice noteholders prepay time part notes amount less 10 million paying principal amount plus makewhole amount dependent upon yield respective us treasury securities december 31 2010 company compliance covenants related 2006 note purchase agreement payment interest senior unsecured notes due semiannually april 30th october 30th year may 15 2003 company completed private placement 1250 million senior unsecured notes consisting 500 million principal amount 487 senior notes due 2010 750 million principal amount 547 senior notes due may 2013 payment interest senior unsecured notes due semiannually may 15th november 15th year may 2010 company repaid 500 million principal 487 senior notes due upon maturity december 31 2010 company compliance covenants related note purchase agreement 12 common stock class common stock class b common stock equal dividend liquidation rights share companys class common stock entitled one vote matters submitted stockholders share class b common stock entitled ten votes matters shares class b common stock convertible shares class common stock onetoone basis option holder december 31 2010 company reserved total 3668183 class common stock issuance stockbased compensation plans 6953680 shares conversion class b common stock class common stock november 2007 company announced board directors authorized repurchase 30 million shares class common stock december 31 2010 company repurchased 245 million shares stock total cost 681 million company repurchased shares stock since 2008 watts water technologies inc subsidiaries notes consolidated financial statements continued 13 stockbased compensation company maintains three stock incentive plans key employees outside directors granted incentive stock options isos nonqualified stock options nsos purchase companys class common stock one plan 2004 stock incentive plan currently available grant new equity awards stock options granted prior plans became exercisable fiveyear period rate 20 per year expire ten years date grant 2004 stock incentive plan options become exercisable fouryear period rate 25 per year expire ten years grant date isos nsos granted plans may exercise prices less 100 50 fair market value class common stock date grant respectively companys current practice grant options fair market value grant date december 31 2010 2003598 shares class common stock authorized future grants new equity awards companys stock incentive plans company grants shares restricted stock key employees nonemployee members companys board directors 2004 stock incentive plan vest either immediately oneyear period threeyear period rate onethird per year restricted stock awards amortized expense straightline basis vesting period company also management stock purchase plan allows granting restricted stock units rsus key employees annual basis key employees may elect receive portion annual incentive compensation rsus instead cash rsu provides key employee right purchase share class common stock 67 fair market value date grant rsus vest ratably threeyear period grant date aggregate 2000000 shares class common stock may issued management stock purchase plan 2004 stock incentive plan december 31 2010 total unrecognized compensation cost related unvested stock options approximately 52 million total weighted average remaining term 30 years 2010 2009 2008 company recognized compensation cost 17 million 17 million 23 million respectively selling general administrative expenses following summary stock option activity related information watts water technologies inc subsidiaries notes consolidated financial statements continued 13 stockbased compensation continued december 31 2010 aggregate intrinsic values exercisable options approximately 69 million representing total pretax intrinsic value based companys closing class common stock price 3659 december 31 2010 would received option holders option holders exercised options date total intrinsic value options exercised 2010 2009 2008 approximately 27 million 03 million 08 million respectively upon exercise options company issues shares class common stock following table summarizes information options outstanding december 31 2010 fair value option granted 2004 stock incentive plan estimated date grant using blackscholesmerton model based following weighted average assumptions riskfree interest rate based upon us treasury yield curve time grant respective expected life option expected life estimated period time outstanding options volatility calculated using historical data expected dividend yield stock companys best estimate expected future dividend yield company applied estimated forfeiture rate 675 150 2010 2009 2008 respectively stock options rates calculated based upon historical activity estimate granted shares expected vest actual forfeitures differ expected rates company may required make additional adjustments compensation expense future periods assumptions used determine weighted average grantdate fair value stock options 1236 970 1010 years ending december 31 2010 2009 2008 respectively watts water technologies inc subsidiaries notes consolidated financial statements continued 13 stockbased compensation continued following summary unvested restricted stock activity related information total fair value shares vested 2010 2009 2008 15 million 21 million 14 million respectively december 31 2010 total unrecognized compensation cost related unvested restricted stock approximately 41 million total weighted average remaining term 21 years 2010 2009 2008 company recognized compensation costs 18 million 20 million 18 million respectively selling general administrative expenses company applied estimated forfeiture rate 975 52 100 2010 2009 2008 respectively restricted stock issued key employees aggregate intrinsic value restricted stock granted outstanding approximated 59 million representing total pretax intrinsic value based companys closing class common stock price 3659 december 31 2010 management stock purchase plan total unrecognized compensation cost related unvested rsus approximately 18 million december 31 2010 total weighted average remaining term 19 years 2010 2009 2008 company recognized compensation cost 12 million 12 million 12 million respectively selling general administrative expenses dividends declared rsus paid individuals remain unpaid december 31 2010 total approximately 02 million summary companys rsu activity related information shown following table watts water technologies inc subsidiaries notes consolidated financial statements continued 13 stockbased compensation continued december 31 2010 aggregate intrinsic values outstanding vested rsus approximately 71 million 22 million respectively representing total pretax intrinsic value based companys closing class common stock price 3659 december 31 2010 would received rsus holders rsus settled date total intrinsic value rsus settled 2010 2009 2008 approximately 07 million 01 million 07 million respectively upon settlement rsus company issues shares class common stock following table summarizes information rsus outstanding december 31 2010 fair value share issued management stock purchase plan estimated date grant using blackscholesmerton model based following weighted average assumptions riskfree interest rate based upon us treasury yield curve time grant respective expected life rsus expected life estimated period time outstanding rsus volatility calculated using historical data expected dividend yield stock companys best estimate expected future dividend yield company applied estimated forfeiture rate 63 52 100 2010 2009 2008 respectively rsus rates calculated based upon historical activity estimate granted shares expected vest actual forfeitures differ expected rates company may required make additional adjustments compensation expense future periods assumptions used determine weighted average grantdate fair value rsus granted 1281 814 1144 2010 2009 2008 respectively company distributed dividends 044 per share 2010 2009 2008 companys class common stock class b common stock watts water technologies inc subsidiaries notes consolidated financial statements continued 14 employee benefit plans company sponsors funded unfunded noncontributing defined benefit pension plans together cover substantially domestic employees benefits based primarily years service employees compensation funding policy company plans contribute annual amount exceed maximum amount deducted federal income tax purposes funded status defined benefit plans amounts recognized consolidated balance sheet follows amounts recognized consolidated balance sheet follows amounts recognized accumulated comprehensive income consist watts water technologies inc subsidiaries notes consolidated financial statements continued 14 employee benefit plans continued information pension plans accumulated benefit obligation excess plan assets follows components net periodic benefit cost follows estimated net actuarial loss prior service cost defined benefit pension plans amortized accumulated comprehensive income net periodic benefit cost next year 23 million 03 million respectively assumptions weightedaverage assumptions used determine benefit obligations weightedaverage assumptions used determine net periodic benefit costs discount rates selected based upon rates return measurement date utilizing bond matching approach match expected benefit cash flows selecting expected longterm rate return assets company considers average rate earnings expected funds invested provide benefits plan includes considering trusts asset allocation expected returns likely earned life plan basis consistent prior year watts water technologies inc subsidiaries notes consolidated financial statements continued 14 employee benefit plans continued plan assets weighted average asset allocations asset category follows aallocation december 31 2010 includes 101 million cash received invested december 28 2010 settle january 3 2011 companys written retirement plan investment policy sets forth investment policy objectives constraints watts water technologies inc pension plan retirement plan investment policy set forth pension plan committee defines general investment principles directs investment management policy addressing preservation capital risk aversion adherence investment discipline investment managers make reasonable effort control risk evaluated quarterly commonly accepted benchmarks ensure risk assumed commensurate given investment style objectives portfolio designed achieve balanced return current income modest growth capital achieving returns excess rate inflation investment horizon order preserve purchasing power plan assets plan assets required invested liquid securities derivative investments allowed prohibited investments include limited following futures contracts private placements options limited partnerships venturecapital investments interestonly io principalonly po residual tranche cmos watts water technologies inc stock prohibited transactions include limited following short selling margin transactions allowable assets include cash equivalents fixed income securities equity securities mutual funds gics specific guidelines regarding allocation assets follows equities shall comprise 25 75 total portfolio fixed income shall comprise 30 65 investment performance monitored regular basis investments reallocated stay within specific guidelines equityfixed income allocation 5050 preferred securities one company government agency exceed 10 total fund 20 total fund invested one industry individual treasury securities may represent 50 total fund total allocation treasury bonds notes may represent 100 plans aggregate bond position watts water technologies inc subsidiaries notes consolidated financial statements continued 14 employee benefit plans continued following table presents investments pension plan measured fair value december 31 2010 aincludes investments common stock diverse industries bincludes investments index exchangetraded funds cincludes investment grade bonds diverse industries dincludes investments real estate investment funds exchangetraded funds commodity mutual funds cash flows information related companys pension funds cash flow follows company expects contribute approximately 100 million 2011 expected benefit payments paid pension plans follows watts water technologies inc subsidiaries notes consolidated financial statements continued 14 employee benefit plans continued additionally substantially companys domestic employees eligible participate certain 401k savings plans company matches specified percentage employee contributions subject certain limitations companys match contributions included selling general administrative expense year ended december 31 2010 2009 05 million year respectively year ended december 31 2008 06 million charges european pension plans approximated 35 million 28 million 33 million years ended december 31 2010 2009 2008 respectively costs relate plans administered certain european subsidiaries benefits calculated according government requirements paid employees upon retirement change employment company entered supplemental compensation agreement timothy p horne september 1 1996 per agreement upon ceasing employee company mr horne must make available requested board work minimum 300 500 hours per year consultant return certain annual compensation long physically able mr horne complies consulting provisions agreement shall receive supplemental compensation annual basis 04 million per year subject cost living increases year exchange services performed long physically able event physical disability subsequent commencing consulting services company mr horne continue receive payment annually payment consulting services provided mr horne expensed incurred company mr horne retired effective december 31 2002 therefore supplemental compensation period began january 1 2003 accordance gaap company accrues future postretirement disability benefits period january 1 2003 time mr horne becomes physically unable perform consulting services period disability benefits earned 15 contingencies environmental remediation james jones litigation company party lawsuit filed nora armenta california superior court us james jones company mueller co tyco international armenta case separate lawsuit filed california superior court behalf city banning california 42 cities water districts california company james jones company mueller co city banning case mediation session held california superior court june 910 2009 parties armenta case city banning case agreed principle settle cases agreement principle also reached settle related insurance coverage cases watts industries inc vs zurich american insurance company et al zurich american insurance company vs watts industries inc et al pending california superior court zurich american insurance company vs watts industries inc james jones company pending united states district court northern district illinois eastern division settlement insurance coverage cases effective binding upon approval settlement underlying armenta case city banning case settlement agreement approved plaintiffs armenta city banning cases fairness hearing held november 5 2009 california superior court approved settlement armenta case city banning case based contemporaneous final settlement underlying insurance coverage cases companys contribution settlement 153 million result settlements lawsuits claims dismissed addition watts water technologies inc subsidiaries notes consolidated financial statements continued 15 contingencies environmental remediation continued separate settlement company paid outside counsel additional 50 million services rendered connection described litigation result settlement described litigation company recorded noncash pretax gain discontinued operations approximately 95 million 2009 reduce previously recorded estimates loss related fees amounts noted foreign corrupt practices act investigation 2009 company conducted investigation payments made employees cwv time indirect whollyowned subsidiary company china individuals associated stateowned agencies may violate united states foreign corrupt practices act fcpa company voluntarily disclosed matter securities exchange commission sec department justice doj company engaged negotiations staff sec doj resolve potential violations fcpa relating payments negotiations reached stage company able estimate probable pretax charge connection matters approximately 53 million amount includes estimated disgorgement profits interest reflected results year ended december 31 2010 company recorded charge net tax discontinued operations potential violations pertained cwv classified discontinued operations 2009 company sold cwv january 2010 currently definitive agreement sec staff doj resolution matter including respect disgorgement profits fines penalties interest payment agreement subject approval commissioners sec senior doj personnel therefore assurance companys negotiations sec staff doj result definitive agreement amount loss upon final disposition matters may exceed companys current estimate environmental remediation company named potentially responsible party respect limited number identified contaminated sites levels contamination vary significantly site related levels remediation efforts environmental liabilities recorded based probable cost known estimated minimum cost remediation company accrues estimated environmental liabilities based assumptions subject number factors uncertainties circumstances affect reliability precision estimates include identification additional sites environmental regulations level cleanup required technologies available number financial condition contributors remediation time period remediation may occur company recognizes changes estimates new remediation requirements defined new information becomes available based facts currently known company believe ultimate outcome matters material adverse effect liquidity financial condition results operations environmental matters inherently uncertain exists possibility company may ultimately incur losses matters excess amount accrued however company cannot currently estimate amount additional losses watts water technologies inc subsidiaries notes consolidated financial statements continued 15 contingencies environmental remediation continued asbestos litigation company defending approximately 101 lawsuits different jurisdictions greatest number filed mississippi california state courts alleging injury death result exposure asbestos complaints cases typically name large number defendants identify particular watts products source asbestos exposure date company obtained dismissal every case reached trial discovery failed yield evidence substantial exposure watts products based facts currently known company believe ultimate outcome claims material adverse effect liquidity financial condition results operations litigation lawsuits proceedings claims arising ordinary course operations also pending threatened company based facts currently known company believe ultimate outcome litigation matters material adverse effect liquidity financial condition results operations 16 financial instruments fair value carrying amounts cash equivalents shortterm investments trade receivables trade payables approximate fair value short maturity financial instruments fair value companys 547 senior notes due 2013 585 senior notes due 2016 505 senior notes due 2020 based quoted market prices similar notes level 2 fair value companys variable rate debt approximates carrying value carrying amount estimated fair market value companys longterm debt including current portion follows watts water technologies inc subsidiaries notes consolidated financial statements continued 16 financial instruments continued derivative instruments company measures certain financial assets liabilities fair value recurring basis including foreign currency derivatives deferred compensation plan assets related liability metal derivatives fair value certain financial assets liabilities determined using following inputs december 31 2010 1included net companys consolidated balance sheet 2included accrued expenses liabilities companys consolidated balance sheet 3included noncurrent liabilities companys consolidated balance sheet table provides summary changes fair value financial assets liabilities measured fair value recurring basis using significant unobservable inputs level 3 period december 31 2009 december 31 2010 company elected participate settlement offer ubs ag ubs outstanding auction rate securities ars investments terms settlement offer company issued rights ubs entitling company require ubs purchase underlying ars par value period june 30 2010 july 2 2012 company elected exercise right july 1 2010 received 63 million ubs settlement outstanding ars investments company previously received 02 million ubs first quarter 2010 company recorded income approximately 01 million 04 million income expense consolidated statement operations investment ars 2010 2009 respectively watts water technologies inc subsidiaries notes consolidated financial statements continued 16 financial instruments continued discussed note 5 contingent liability 19 million recognized estimate acquisition date fair value contingent consideration brae acquisition liability classified level 3 fair value hierarchy based weighted probability achievement future performance metric date acquisition observable market shortterm investment securities december 31 2010 consist certificates deposit remaining maturities greater three months date purchase carrying amount reasonable estimate fair value cash equivalents consist instruments remaining maturities three months less date purchase consist primarily us treasury bills money market funds carrying amount reasonable estimate fair value company uses financial instruments time enhance ability manage risk including foreign currency commodity pricing exposures exist part ongoing business operations use derivatives exposes company counterparty credit risk nonperformance market risk related changes currency exchange rates commodity prices company manages exposure counterparty credit risk diversification counterparties companys counterparties derivative transactions substantial commercial banks significant experience using derivative instruments impact market risk fair value cash flows companys derivative instruments monitored company restricts use derivative financial instruments hedging activities company enter contracts trading purposes company enter contracts speculative purposes use derivative instruments approved senior management written guidelines company exposure number foreign currency rates including canadian dollar euro chinese yuan british pound manage risk company generally uses layering methodology whereby end quarter company generally entered forward exchange contracts hedge approximately 50 projected intercompany purchase transactions next twelve months company primarily uses strategy purchases canada us average volume contracts vary generally approximates 9 15 million open contracts end given quarter december 31 2010 company contracts notional amounts aggregating approximately 90 million company accounts forward exchange contracts economic hedge realized unrealized gains losses contracts recognized income expense consolidated statement operations contracts subject company significant market risk exchange movement offset gains losses related foreign currency denominated transactions 2008 company entered series copper swaps fix price per pound copper october 2008 september 2009 1 million pounds delivered 12 months one customer company determined copper swaps qualify hedge accounting accounted financial instruments economic hedge therefore changes fair value copper swaps recorded immediately consolidated statement operations company enter swap forward contracts speculative purposes december 31 2010 2009 company outstanding swaps watts water technologies inc subsidiaries notes consolidated financial statements continued 16 financial instruments continued following table discloses fair values derivative instruments companys balance sheet december 31 2010 2009 following table discloses impact derivative instruments companys operations 2010 2009 2008 leases company leases certain manufacturing facilities sales offices warehouses equipment generally leases carry renewal provisions require company pay maintenance costs future minimum lease payments capital leases noncancelable operating leases december 31 2010 follows watts water technologies inc subsidiaries notes consolidated financial statements continued 16 financial instruments continued carrying amounts assets capital lease include 17 segment information company operates three geographic segments north america europe china segments sells similar products managed separately separate financial results reviewed companys chief operating decisionmaker intercompany sales transactions eliminated sales region based upon location entity recording sale accounting policies segment described summary significant accounting policies see note 2 watts water technologies inc subsidiaries notes consolidated financial statements continued 17 segment information continued following summary companys significant accounts balances segment reconciled consolidated totals corporate expenses primarily compensation expense sarbanesoxley compliance professional fees including legal audit expenses shareholder services benefit administration costs allocated geographic segments viewed corporate functions support activities watts water technologies inc subsidiaries notes consolidated financial statements continued 17 segment information continued north america segment consists us net sales 7122 million 6726 million 7981 million years ended december 31 2010 2009 2008 respectively north american segment also consists us longlived assets 724 million 748 million 866 million december 31 2010 2009 2008 respectively intersegment sales year ended december 31 2010 north america europe china 36 million 76 million 1158 million respectively intersegment sales year ended december 31 2009 north america europe china 36 million 58 million 1104 million respectively intersegment sales year ended december 31 2008 north america europe china 64 million 64 million 1331 million respectively 18 quarterly financial information unaudited watts water technologies inc subsidiaries notes consolidated financial statements continued 19 subsequent events february 9 2011 company announced intention acquire danfoss socla related water control business danfoss announcement made response public disclosure related regulatory filings made german merger control authorities proposed acquisition subject signing definitive purchase agreement conditioned receipt customary regulatory approvals proposed purchase price expected range €115 million €120 million february 8 2011 company declared quarterly dividend eleven cents 011 per share outstanding share class common stock class b common stock january 26 2011 patrick okeefe resigned positions chief executive officer president director connection mr okeefes resignation company entered separation agreement mr okeefe pursuant separation agreement mr okeefe continue employment company january 26 2011 august 3 2011 period receive greater either aggregate compensation 100000 shortterm disability benefits claim shortterm disability plan approved following termination mr okeefes employment company august 3 2011 mr okeefe entitled receive following payments benefits cash severance payment approximately 29 million equal two years mr okeefes 2010 annual salary plus two years bonus mr okeefes target bonus amount 2010 payable 50 initial lump sum payment within ten days august 3 2011 balance monthly installments following 24 months ii accelerated vesting unvested stock options restricted stock awards effective february 3 2011 extension time exercise shorter three years following mr okeefes termination date original term option modification options restricted stock awards result noncash charge approximately 30 million iii ancillary costs vacation auto professional fees total approximately 01 million total pretax costs separation agreement approximately 61 million recorded companys consolidated statement operations first quarter 2011 addition accordance provisions companys management stock purchase plan mr okeefe paid unvested portion including interest accrued dividends restricted stock units six months termination date total amount expected paid management stock purchase plan approximately 15 million january 26 2011 companys board directors appointed david j coghlan serve chief executive officer president member board directors watts water technologies inc subsidiaries schedule iivaluation qualifying accounts amounts millions three years ended december 31 exhibit index 101ins xbrl instance document 101sch xbrl taxonomy extension schema document 101cal xbrl taxonomy extension calculation linkbase document 101def xbrl taxonomy extension definition linkbase document 101lab xbrl taxonomy extension label linkbase document 101pre xbrl taxonomy extension presentation linkbase document 1incorporated reference registrants current report form 8k dated july 12 2010 file 00111499 2incorporated reference registrants current report form 8k dated november 14 1991 file 00111499 3incorporated reference registrants annual report form 10k year ended december 31 2002 file 00111499 4incorporated reference registrants current report form 8k dated april 27 2006 file 00111499 5incorporated reference registrants form s1 336515 part second amendment form s1 dated august 21 1986 6incorporated reference amendment 1 registrants annual report form 10k year ended june 30 1992 file 00111499 7incorporated reference registrants current report form 8k dated may 15 2003 file 00111499 8incorporated reference registrants current report form 8k dated may 14 2008 file 00111499 9incorporated reference registrants annual report form 10k year ended june 30 1996 file 00111499 10incorporated reference registrants form s8 33332685 dated august 1 1997 11incorporated reference registrants annual report form 10k year ended december 31 2009 file 00111499 12incorporated reference registrants annual report form 10k year ended june 30 1997 file 00111499 13incorporated reference notes consolidated financial statements note 2 report 14incorporated reference registrants quarterly report form 10q quarter ended july 3 2005 file 00111499 15incorporated reference registrants annual report form 10k year ended june 30 1999 file 00111499 16incorporated reference registrants quarterly report form 10q quarter ended september 30 2000 file 00111499 17incorporated reference registrants quarterly report form 10q quarter ended july 4 2010 file 00111499 18incorporated reference registrants quarterly report form 10q quarter ended september 26 2004 file 00111499 19incorporated reference registrants quarterly report form 10q quarter ended july 1 2007 file 00111499 20incorporated reference registrants annual report form 10k year ended december 31 2007 file 00111499 21incorporated reference registrants current report form 8k dated june 18 2010 file 00111499 22incorporated reference registrants current report form 8k dated january 26 2011 file 00111499 management contract compensatory plan arrangement attached exhibit 101 report following formatted xbrl extensible business reporting language consolidated balance sheets december 31 2010 december 31 2009 ii consolidated statements operations years ended december 31 2010 2009 2008 iii consolidated statements stockholders equity comprehensive income loss years ended december 31 2010 2009 2008 iv consolidated statements cash flows years ended december 31 2010 2009 2008 v notes consolidated financial statements accordance rule 406t regulation st xbrlrelated information exhibit 101 annual report form 10k deemed filed part registration statement prospectus purposes sections 11 12 securities act deemed filed purposes section 18 exchange act otherwise subject liability sections part item 1 business item 1a risk factors item 1b unresolved staff comments item 2 properties item 3 legal proceedings part ii item 5 market registrants common equity related stockholder matters issuer purchases equity securities item 6 selected financial data item 7 managements discussion analysis financial condition results operations item 7a quantitative qualitative disclosures market risk item 8 financial statements supplementary data item 9 changes disagreements accountants accounting financial disclosure item 9a controls procedures report independent registered public accounting firm item 9b information part iii item 10 directors executive officers corporate governance item 11 executive compensation item 12 security ownership certain beneficial owners management related stockholder matters item 13 certain relationships related transactions director independence item 14 principal accountant fees services part iv item 15 exhibits financial statement schedules signatures report independent registered public accounting firm watts water technologies inc subsidiaries consolidated statements operations amounts millions except per share information watts water technologies inc subsidiaries consolidated balance sheets amounts millions except share information watts water technologies inc subsidiaries consolidated statements stockholders equity comprehensive income loss amounts millions except share information watts water technologies inc subsidiaries consolidated statements cash flows amounts millions watts water technologies inc subsidiaries notes consolidated financial statements watts water technologies inc subsidiaries schedule iivaluation qualifying accounts amounts millions exhibit indexitem 15 exhibits financial statement schedules a1 financial statements following financial statements included separate section report commencing page numbers specified report independent registered public accounting firm consolidated statements operations years ended december 31 2011 2010 2009 consolidated statements comprehensive income years ended december 31 2011 2010 2009 consolidated balance sheets december 31 2011 2010 consolidated statements stockholders equity years ended december 31 2011 2010 2009 consolidated statements cash flows years ended december 31 2011 2010 2009 notes consolidated financial statements 5898 a2 schedules schedule iivaluation qualifying accounts years ended december 31 2011 2010 required schedules provision made applicable accounting regulations securities exchange commission included notes consolidated financial statements a3 exhibits listed exhibit index immediately preceding exhibits filed part annual report form 10k signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized watts water technologies inc david j coghlan david j coghlan chief executive officer president director dated february 28 2012 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated report independent registered public accounting firm board directors stockholders watts water technologies inc audited accompanying consolidated balance sheets watts water technologies inc subsidiaries december 31 2011 2010 related consolidated statements operations comprehensive income stockholders equity cash flows years threeyear period ended december 31 2011 connection audits consolidated financial statements also audited financial statement schedule iivaluation qualifying accounts consolidated financial statements financial statement schedule responsibility companys management responsibility express opinion consolidated financial statements financial statement schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position watts water technologies inc subsidiaries december 31 2011 2010 results operations cash flows years threeyear period ended december 31 2011 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic consolidated financial statements taken whole present fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states watts water technologies incs internal control financial reporting december 31 2011 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso report dated february 28 2012 expressed unqualified opinion effectiveness companys internal control financial reporting kpmg llp boston massachusetts february 28 2012 watts water technologies inc subsidiaries consolidated statements operations amounts millions except per share information accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated statements comprehensive income amounts millions accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated balance sheets amounts millions except share information accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated statements stockholders equity amounts millions except share information accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated statements cash flows amounts millions accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries notes consolidated financial statements 1 description business watts water technologies inc company designs manufactures sells extensive line water safety flow control products primarily water quality water conservation water safety water flow control markets located predominantly north america europe presence asia 2 accounting policies principles consolidation consolidated financial statements include accounts company majority wholly owned subsidiaries upon consolidation significant intercompany accounts transactions eliminated cash equivalents cash equivalents consist instruments remaining maturities three months less date purchase consist primarily certificates deposit money market funds carrying amount reasonable estimate fair value investment securities investment securities december 31 2011 2010 consisted primarily certificates deposit original maturities greater three months trading securities recorded fair value company determines fair value obtaining market value available quoted prices active markets absence quoted prices company uses inputs determine fair value investments changes fair value well realized gains losses sale securities recorded incurred consolidated statements operations income expense allowance doubtful accounts allowance doubtful accounts includes reserves bad debts sales returns allowances cash discounts company analyzes aging accounts receivable individual accounts receivable historical bad debts concentration receivables customer credit worthiness current economic trends changes customer payment terms company specifically analyzes individual accounts receivable establishes specific reserves financially troubled customers addition factors developed certain regions utilizing historical trends sales returns allowances cash discount activities derive reserve returns allowances cash discounts concentration credit company sells products diversified customer base therefore significant concentrations credit risk 2011 2010 customer accounted 10 companys total sales inventories stated lower cost using primarily firstin firstout method market value determined replacement cost net realizable value historical usage used basis determining reserve excess obsolete inventories watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued assets held sale company accounts assets held sale management committed plan sell asset group assets actively marketing asset group assets asset group assets sold current condition reasonable period time plan expected change december 31 2011 company actively marketing two properties 2010 company recorded estimated losses 10 million reduce assets estimated fair value less costs sell amounts recorded component restructuring costs consolidated statements operations see note 4 additional information associated companys restructuring charges goodwill intangible assets goodwill recorded consideration paid acquisitions exceeds fair value net tangible intangible assets acquired goodwill intangible assets indefinite useful lives amortized rather tested annually impairment test performed october 30 2011 impairment goodwill longlived assets changes carrying amount goodwill geographic segment follows goodwill tested impairment least annually frequently events circumstances indicate likely goodwill might impaired change business conditions company performs annual goodwill impairment assessment fourth quarter year watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued company determined future prospects blue ridge atlantic enterprises inc brae reporting unit north america lower originally estimated future sales growth expectations reduced since 2010 acquisition brae company recorded pretax goodwill impairment charge 12 million reporting unit impairment charge offset reduction anticipated earnout payment 12 million company estimated fair value reporting unit using expected present value future cash flows intangible assets estimable lives longlived assets reviewed impairment whenever events changes circumstances indicate carrying amount asset group may recoverable recoverability intangible assets estimable lives longlived assets measured comparison carrying amount asset group future net undiscounted pretax cash flows expected generated asset group comparisons indicate asset recoverable impairment loss recognized amount carrying amount asset group exceeds related estimated fair value estimated fair value based either discounted future pretax operating cash flows appraised values depending nature asset company determines discount rate analysis based weighted average cost capital based market guideline public companies related businesses allocate interest charges asset group measured judgment required estimate future operating cash flows intangible assets include following aggregate amortization expense amortized intangible assets 2011 2010 2009 181 million 143 million 131 million respectively additionally future amortization expense amortizable intangible assets expected 154 million 2012 143 million 2013 143 million 2014 140 million 2015 135 million 2016 amortization expense provided straightline basis estimated useful lives intangible assets weightedaverage remaining life total amortizable intangible assets 106 years patents customer relationships technology trade names amortizable intangibles weightedaverage remaining lives 72 years 74 years 142 years 127 years 432 years respectively indefinitelived intangible assets primarily include trade names trademarks 2011 company determined prospects austroflex rohrisoliersysteme gmbh austroflex part europe segment lower originally estimated due current watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued operating profits plan tempered future growth expectations accordingly company performed evaluation asset group utilizing undiscounted cash flows determined carrying value assets longer recoverable company performed fair value assessment result wrote longlived assets including customer relationships trade names property plant equipment 148 million fair value based discounted cash flows using market participant assumptions utilized estimated weighted average cost capital adjustments indefinitelived intangible assets year ended december 31 2011 relate primarily recording value additional trade name connection acquisition danfoss socla sas socla offset impairment certain trade names european north america segments reassessment 61 million trade names north america europe segments amortizable intangibles property plant equipment property plant equipment recorded cost depreciation provided straightline basis estimated useful lives assets range 10 40 years buildings improvements 3 15 years machinery equipment taxes income taxes assessed governmental authorities sale transactions recorded net basis excluded sales companys consolidated statements operations income taxes income taxes accounted asset liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases operating loss tax credit carry forwards deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized income period includes enactment date company accounts tax benefits item question meets morelikelythannot greater 50 likelihood sustained upon examination taxing authorities threshold company reduced unrecognized tax benefits 2011 approximately 20 million 10 million related federal state foreign audit settlements 10 million reduced exposures europe company estimates reasonably possible portion currently remaining unrecognized tax benefit may recognized end 2012 result conclusion foreign income tax audits amount expense accrued penalties interest 07 million worldwide december 31 2011 company gross unrecognized tax benefits approximately 18 million approximately 16 million recognized would affect effective tax rate difference amount unrecognized tax benefits amount would affect effective tax rate consists federal tax benefit state income tax items watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued reconciliation beginning ending amount unrecognized tax benefits accrued interest related unrecognized tax benefits follows february 2012 united states internal revenue service commenced audit companys 2009 2010 tax years company anticipate material adjustments arise result audit company conducts business variety locations throughout world resulting tax filings numerous domestic foreign jurisdictions company subject tax examinations regularly part normal course business companys major jurisdictions us canada china netherlands uk germany italy france exceptions company longer subject us federal state local nonus income tax examinations years 2005 company accounts interest penalties related uncertain tax positions component income tax expense statute limitations major jurisdictions open us year 2008 later canada 2007 later netherlands 2006 later foreign currency translation financial statements subsidiaries located outside united states generally measured using local currency functional currency balance sheet accounts including goodwill foreign subsidiaries translated united states dollars yearend exchange rates income expense items translated weighted average exchange rates period net translation gains losses included comprehensive income separate component stockholders equity company provide us income taxes foreign currency translation adjustments since provide taxes undistributed earnings foreign subsidiaries gains losses foreign currency transactions subsidiaries included net earnings stockbased compensation chief executive officer separation costs company records compensation expense financial statements sharebased awards based grant date fair value awards stockbased compensation expense includes estimate prevesting forfeitures recognized requisite service periods awards straightline basis generally commensurate vesting term benefits associated tax deductions excess recognized compensation cost reported financing cash flow december 31 2011 company three stockbased compensation plans total unrecognized compensation costs related unvested stockbased compensation arrangements approximately 106 million total weighted average remaining term 24 years 2011 2010 2009 company recognized compensation costs related stockbased programs approximately 53 million 47 million 49 million respectively selling general administrative expenses company recorded approximately 06 million tax benefits 2011 watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued 2009 compensation expense relating stock options 2011 2010 2009 company recorded approximately 15 million 12 million 12 million respectively tax benefit stockbased plans 2011 2010 2009 recognition total stockbased compensation expense impacted basic diluted net income per common share 009 008 respectively january 26 2011 patrick okeefe resigned positions chief executive officer president director pursuant separation agreement company recorded charge 63 million consisting 33 million expected cash severance noncash charge 30 million modification stock options restricted stock awards net income per common share basic net income per common share calculated dividing net income weighted average number common shares outstanding calculation diluted income per share assumes conversion dilutive securities see note 13 net income number shares used compute net income per share basic assuming full dilution reconciled computation diluted net income per share years ended december 31 2011 2010 2009 excludes effect potential exercise options purchase approximately 07 million 05 million 09 million shares respectively exercise price option greater average market price class common stock effect would antidilutive august 2 2011 board directors authorized stock repurchase program company authorized repurchase one million shares class common stock three months ended october 2 2011 company repurchased entire one million shares cost 272 million financial instruments normal course business company manages risks associated commodity prices foreign exchange rates interest rates variety strategies including use hedging transactions executed accordance companys policies companys hedging transactions include limited use various derivative financial commodity instruments matter policy company use derivative instruments unless underlying exposure change value derivative instruments would substantially offset opposite change value underlying hedged items company use derivative instruments trading speculative purposes watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued derivative instruments may designated accounted either hedge recognized asset liability fair value hedge forecasted transaction cash flow hedge fair value hedge effective ineffective portions change fair value derivative instrument along adjustment carrying amount hedged item fair value changes attributable hedged risk recognized earnings cash flow hedge changes fair value derivative instrument highly effective deferred accumulated comprehensive income loss underlying hedged item recognized earnings cash flow hedges december 31 2011 fair value cash flow hedge cease qualify hedge accounting terminated would continue carried balance sheet fair value settled hedge accounting would discontinued prospectively forecasted transaction longer probable occurring amounts previously deferred accumulated comprehensive income would recognized immediately earnings occasion company may enter derivative instrument qualify hedge accounting entered offset changes fair value underlying transaction required recognized earnings natural hedge instruments reflected consolidated balance sheets fair value changes fair value recognized earnings foreign currency derivatives include forward foreign exchange contracts primarily canadian dollars metal derivatives included commodity swaps copper 2009 company used copper swap means hedging exposure metal prices see note 15 portions companys outstanding debt exposed interest rate risks company monitors interest rate exposures ongoing basis maximize overall effectiveness interest rates fair value measurements fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date entity required maximize use observable inputs available minimize use unobservable inputs measuring fair value company certain financial assets liabilities measured fair value recurring basis certain nonfinancial assets liabilities may measured fair value nonrecurring basis fair value disclosures assets liabilities based threelevel hierarchy defined follows level 1 quoted prices active markets identical assets liabilities entity ability access measurement date level 2 observable inputs level 1 prices quoted prices similar assets liabilities quoted prices markets active inputs observable corroborated observable market data substantially full term assets liabilities level 3 unobservable inputs supported little market activity significant fair value assets liabilities watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued assets liabilities subject hierarchy classified entirety based lowest level input significant fair value measurement companys assessment significance particular input fair value measurement entirety requires judgment considers factors specific asset liability shipping handling shipping handling costs included selling general administrative expense amounted 381 million 335 million 314 million years ended december 31 2011 2010 2009 respectively research development research development costs included selling general administrative expense amounted 212 million 186 million 178 million years ended december 31 2011 2010 2009 respectively revenue recognition company recognizes revenue following criteria met company entered binding agreement product shipped title passes sales price customer fixed determinable collectability reasonably assured provisions estimated returns allowances made time sale recorded reduction sales included allowance doubtful accounts consolidated balance sheets company records provisions sales incentives primarily volume rebates adjustment net sales time sale based estimated purchase targets basis presentation certain amounts 2010 2009 consolidated financial statements reclassified permit comparison 2011 presentation reclassifications effect reported results operations stockholders equity estimates preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates new accounting standards june 2011 financial accounting standards board fasb issued accounting standards update asu 201105 comprehensive income asu intends enhance comparability transparency comprehensive income components guidance provides option present total comprehensive income components net income components comprehensive income single continuous statement two separate consecutive statements asu eliminates option present comprehensive income components part statement changes stockholders equity provisions asu applied retrospectively watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued interim annual periods beginning december 15 2011 early application permitted company early adopted provisions asu 201105 opted present separate statement comprehensive income september 2011 accounting guidance issued fasb asc topic 350 intangiblesgoodwill guidance amends requirements goodwill impairment testing company option first assess qualitative factors determine whether existence events circumstances leads determination likely fair value reporting unit less carrying amount assessing totality events circumstances company determines likely fair value reporting unit greater carrying amount performing twostep impairment test unnecessary company early adopted new standard effective annual goodwill impairment testing date october 30 year ended december 31 2011 3 discontinued operations first quarter 2010 company recorded estimated reserve 53 million discontinued operations connection investigation potential violations foreign corrupt practices act fcpa watts valve changsha co ltd cwv former indirect whollyowned subsidiary company china october 13 2011 company entered settlement 38 million securities exchange commission resolve allegations concerning potential violations fcpa cwv see note 14 may 2009 company liquidated team business located ammanford uk team custom designed manufactured manipulated pipe hose tubing assemblies served heating ventilation air conditioning automotive markets western europe management determined business longer fit strategically company sale team feasible may 22 2009 company appointed administrator team united kingdom insolvency act 1986 administration process administrator sole control responsibility teams operations assets liabilities company deconsolidated team administrator obtained control team deconsolidation resulted recognition 181 million pretax noncash loss company evaluated operations team determined would continuing involvement teams operations cash flows result loss control teams cash flows operations eliminated continuing operations company classified teams results operations loss deconsolidation discontinued operations periods presented watts water technologies inc subsidiaries notes consolidated financial statements continued 3 discontinued operations continued condensed operating statements discontinued operations summarized company recognize tax benefits write net assets cwv company believe likely tax benefits would realized revenues reported discontinued operations follows carrying amounts major classes assets liabilities december 31 2011 december 31 2010 associated discontinued operations follows 4 restructuring charges net companys board directors approves major restructuring programs involve discontinuance product lines shutdown facilities time company takes additional restructuring actions including involuntary terminations part major watts water technologies inc subsidiaries notes consolidated financial statements continued 4 restructuring charges net continued program company accounts costs period individual employees notified liability incurred costs included restructuring charges companys consolidated statements operations 2011 board approved integration program association acquisition socla program designed integrate certain operations management structures watts socla organizations total estimated pretax cost 64 million costs incurred 2012 december 31 2011 company revised forecast 51 million due reduced expected severance costs 2011 company initiated several actions part major program september 2011 company announced plan termination would result reduction approximately 10 north american nondirect payroll costs company recorded charge 11 million severance connection plan year ended december 31 2011 also 2011 company initiated restructuring activities respect companys operating facilities europe included closure facility europe restructuring activities expected include pretax costs approximately 26 million including costs severance shut costs total net aftertax charge 18 million costs incurred 2012 total costs incurred 2011 25 million primarily severance addition company recorded income restructuring charges related reduction contingent liability anticipated earnout payment connection brae acquisition 12 million summary pretax cost restructuring program follows company recorded net pretax restructuring charges business segments follows watts water technologies inc subsidiaries notes consolidated financial statements continued 4 restructuring charges net continued also 2011 company recorded tax charge 11 million related restructuring france offset tax benefit 42 million realized connection disposition twvc 2011 actions following table summarizes total expected incurred remaining pretax costs 2011 socla integration program company expects spend remaining costs end 2012 details companys 2011 socla integration reserves year ended december 31 2011 follows company expects exhaust remaining reserve mid2012 following table summarizes expected incurred remaining costs 2011 socla integration actions type 2010 actions february 8 2010 board approved restructuring program respect companys operating facilities france restructuring program included consolidation five facilities two facilities program originally expected include pretax charges totaling approximately 125 million including costs severance relocation cleanup certain asset writedowns company revised forecast 165 million primarily reflect additional severance legal costs watts water technologies inc subsidiaries notes consolidated financial statements continued 4 restructuring charges net continued company recorded certain severance costs related program 2009 amounts related contractual statutory obligations program complete september 13 2010 board approved restructuring program respect certain companys operating facilities united states restructuring program included shutdown two manufacturing facilities north carolina operations facilities consolidated companys manufacturing facilities new hampshire missouri locations program originally included pretax charges totaling approximately 49 million including costs severance shutdown costs equipment writedowns pretax training preproduction setup costs approximately 20 million company revised forecast 25 million due reduced shutdown costs total net aftertax charge restructuring program approximately 15 million restructuring program expected completed first quarter 2012 following table summarizes total expected incurred remaining pretax costs 2010 europe north america footprint consolidationrestructuring programs companys reportable segments details companys 2010 europe north america footprint consolidationrestructuring program reserves december 31 2011 follows watts water technologies inc subsidiaries notes consolidated financial statements continued 4 restructuring charges net continued following table summarizes expected incurred remaining costs companys 2010 europe north america footprint consolidationrestructuring actions type 2009 actions february 2009 board approved plan consolidate manufacturing footprint north america asia final plan provided closure two plants operations moved existing facilities either north america asia relocated new central facility united states project completed 2010 following table summarizes total estimated pretax charges expected incurred remaining cost footprint consolidation restructuring program initiated 2009 companys reportable segments details companys footprint consolidationrestructuring program december 31 2010 follows watts water technologies inc subsidiaries notes consolidated financial statements continued 5 business acquisitions disposition socla april 29 2011 company completed acquisition danfoss socla sas related water controls business certain entities controlled danfoss share asset purchase transaction collectively socla aggregate consideration paid eur 1200 million less eur 37 million working capital related adjustments net purchase price eur 1163 million financed cash hand eurobased borrowings credit agreement net purchase price equal approximately 1724 million based exchange rate euro us dollars april 29 2011 socla manufacturer water protection valves flow control solutions water market heating ventilation air conditioning market major product lines include backflow preventers check valves pressure reducing valves socla based france products distributed commercial residential municipal industrial use soclas annual revenue 2010 approximately 1300 million socla strengthens companys european plumbing flow control products also adds hvac product line company accounting transaction business combination company completed preliminary purchase price allocation resulted recognition 788 million goodwill 406 million intangible assets intangible assets consist primarily customer relationships estimated lives 10 years trade names either 20year lives indefinite lives goodwill attributable workforce socla synergies expected arise result acquisition goodwill expected deductible tax purposes following table summarizes preliminary value assets liabilities acquired millions purchase price allocation acquisition noted preliminary pending final determinations fair values intangible assets certain assumed assets liabilities consolidated statement operations includes results socla since acquisition date includes 948 million revenues 16 million operating income includes acquisition accounting charges 47 million restructuring charges 27 million watts water technologies inc subsidiaries notes consolidated financial statements continued 5 business acquisitions disposition continued supplemental proforma information unaudited company completed acquisition socla beginning 2010 net sales net income continuing operations earnings per share continuing operations would follows net income continuing operations year ended december 31 2011 december 31 2010 adjusted include 07 million 21 million respectively net interest expense related financing 08 million 23 million respectively net amortization expense resulting estimated allocation purchase price amortizable tangible intangible assets net income continuing operations year ended december 31 2011 december 31 2010 also adjusted exclude 43 million 15 million respectively net acquisitionrelated charges thirdparty costs austroflex june 28 2010 company acquired 100 outstanding stock austroflex approximately 337 million austroflex austrianbased manufacturer preinsulated flexible pipe systems district heating solar applications underfloor radiant heating systems acquisition austroflex provides company full range preinsulated pex tubing preinsulated solar tubes underfloor heating insulation distribution capability positions company major supplier preinsulated pipe systems europe company completed purchase price allocation resulted recognition 172 million intangible assets 123 million goodwill intangible assets based fair value estimates comprised primarily customer relationships estimated useful lives 8 years trade names indefinite lives goodwill expected tax deductible certain limit established austrian tax rules austroflex annual sales prior acquisition approximately 230 million 2011 company determined prospects austroflex part europe segment lower originally estimated due current operating profits plan tempered future growth expectations see note 2 brae april 13 2010 company acquired 100 outstanding stock brae located oakboro north carolina 53 million net cash acquired total purchase price 05 million paid closing remaining 48 million contingent upon brae achieving certain performance metric year ending december 31 2014 extent achieved expected paid cash 2015 company recognized liability 19 million estimate acquisition date fair value contingent consideration based net present value 37 million derived weighted probability achievement performance metric date acquisition failure meet performance metric would reduce liability 0 watts water technologies inc subsidiaries notes consolidated financial statements continued 5 business acquisitions disposition continued complete achievement would increase liability full remaining purchase price 48 million change fair value acquisitionrelated contingent consideration subsequent acquisition date recognized earnings period estimated fair value changes excess fair value consideration transferred fair value net assets acquired 27 million allocated goodwill trade name none goodwill expected tax deductible brae provider engineered rain water harvesting solutions addresses commercial industrial residential markets brae annual sales prior acquisition approximately 20 million 2011 company determined future prospects brae lower originally estimated future sales growth expectations tempered since acquisition see note 2 results operations brae included companys north america segment results operations austroflex included companys europe segment since respective acquisition dates material companys consolidated financial statements results socla included three operating segments since acquisition date majority operations recorded european segment march 2010 connection companys manufacturing footprint consolidation company closed operations tianjin watts valve company ltd twvc relocated manufacturing facilities april 12 2010 company signed definitive equity transfer agreement third party sell companys equity ownership remaining assets twvc sale finalized fourth quarter 2011 company received net proceeds approximately 61 million sale company recognized net pretax gain 77 million aftertax gain approximately 114 million 030 per share relating mainly recognition cumulative translation adjustment tax benefit related reversal tax clawback china 6 inventories net inventories consist following raw materials workinprocess finished goods net valuation reserves 262 million 239 million december 31 2011 2010 respectively finished goods 133 million 147 million december 31 2011 2010 respectively consigned watts water technologies inc subsidiaries notes consolidated financial statements continued 7 property plant equipment property plant equipment consist following 8 income taxes significant components companys deferred income tax liabilities assets follows watts water technologies inc subsidiaries notes consolidated financial statements continued 8 income taxes continued provision income taxes continuing operations based following pretax income provision income taxes continuing operations consists following actual income taxes reported continuing operations different would computed applying federal statutory tax rate income continuing operations income taxes reasons difference follows december 31 2011 company foreign net operating loss carry forwards 244 million income tax purposes 24 million losses carried forward indefinitely 74 million losses expire 2016 54 million expire 2017 92 million expire 20182020 net operating losses consist 24 million related austrian operations 192 million dutch operations 28 related chinese operations watts water technologies inc subsidiaries notes consolidated financial statements continued 8 income taxes continued december 31 2011 company valuation allowance 91 million relates us capital losses management believes likely company would use losses within applicable carry forward period company valuation allowance respect deferred tax assets management believes likely company recover net deferred tax assets enacted changes income tax laws material effect company 2011 2010 2009 undistributed earnings companys foreign subsidiaries amounted approximately 2822 million december 31 2011 3130 million december 31 2010 3203 million december 31 2009 earnings considered indefinitely reinvested accordingly provision us federal state income taxes recorded thereon upon distribution earnings form dividends otherwise company subject withholding taxes payable various foreign countries determination amount us income tax liability would incurred practicable complexities associated hypothetical calculation however unrecognized foreign tax credits may available reduce portion us income tax liability withholding taxes approximately 78 million would payable upon remittance previously unremitted earnings december 31 2011 9 accrued expenses liabilities accrued expenses liabilities consist following watts water technologies inc subsidiaries notes consolidated financial statements continued 10 financing arrangements longterm debt consists following principal payments next five years thereafter due follows millions 201220 2013771 201422 2015181 20162250 thereafter750 company maintains letters credit guarantee performance payment third parties accordance specified terms conditions amounts outstanding approximately 349 million december 31 2011 december 31 2010 companys letters credit primarily associated insurance coverage lesser extent foreign purchases companys letters credit generally expire within one year issuance drawn revolving credit facility instruments may exist expire without drawn therefore necessarily represent future cash flow obligations june 18 2010 company entered note purchase agreement certain institutional investors 2010 note purchase agreement pursuant 2010 note purchase agreement company issued senior notes 750 million principal due june 18 2020 company pay interest outstanding balance notes rate 505 per annum payable semiannually june 18 december 18 principal notes shall become due payable company may option upon notice subject terms 2010 note purchase agreement prepay time part notes amount less 1 million paying principal amount plus makewhole amount defined 2010 note purchase agreement 2010 note purchase agreement includes operational financial covenants company required comply including among others maintenance certain financial ratios restrictions additional indebtedness liens dispositions december 31 2011 company compliance covenants related 2010 note purchase agreement june 18 2010 company entered credit agreement credit agreement among company certain subsidiaries company become borrowers credit agreement bank america na administrative agent swing line lender letter credit issuer lenders referred therein credit agreement provides 300 million fiveyear senior unsecured revolving credit facility may increased additional 150 million certain circumstances subject terms credit agreement credit agreement sublimit 750 million letters credit borrowings outstanding watts water technologies inc subsidiaries notes consolidated financial statements continued 10 financing arrangements continued credit agreement bear interest fluctuating rate per annum equal case eurocurrency rate loans british bankers association libor rate plus applicable percentage ranging 170 230 determined reference companys consolidated leverage ratio plus case certain lenders mandatory cost calculated accordance terms credit agreement ii case base rate loans swing line loans highest federal funds rate plus 05 b rate interest effect day announced bank america na prime rate c british bankers association libor rate plus 10 plus applicable percentage ranging 070 130 determined reference companys consolidated leverage ratio addition paying interest credit agreement company also required pay certain fees connection credit facility including limited facility fee letter credit fees credit agreement expires june 18 2015 company may repay loans outstanding credit agreement time without premium penalty customary breakage costs subject terms credit agreement credit agreement company required satisfy maintain specified financial ratios financial condition tests december 31 2011 company compliance covenants related credit agreement 2524 million unused available credit agreement 346 million standby letters credit outstanding credit agreement 130 million eurobased borrowings credit agreement april 27 2006 company completed private placement 2250 million 585 senior unsecured notes due april 2016 2006 note purchase agreement 2006 note purchase agreement includes operational financial covenants company required comply including among others maintenance certain financial ratios restrictions additional indebtedness liens dispositions events default 2006 note purchase agreement include failure comply financial operational covenants well bankruptcy insolvency events company may option upon notice note holders prepay time part notes amount less 10 million paying principal amount plus makewhole amount dependent upon yield respective us treasury securities december 31 2011 company compliance covenants related 2006 note purchase agreement payment interest senior unsecured notes due semiannually april 30th october 30th year may 15 2003 company completed private placement 1250 million senior unsecured notes consisting 500 million principal amount 487 senior notes due 2010 750 million principal amount 547 senior notes due may 2013 payment interest senior unsecured notes due semiannually may 15th november 15th year may 2010 company repaid 500 million principal 487 senior notes due upon maturity december 31 2011 company compliance covenants related note purchase agreement 11 common stock class common stock class b common stock equal dividend liquidation rights share companys class common stock entitled one vote matters submitted stockholders share class b common stock entitled ten votes matters shares class b common stock convertible shares class common stock onetoone basis option holder december 31 2011 company reserved watts water technologies inc subsidiaries notes consolidated financial statements continued 11 common stock continued total 3260320 class common stock issuance stockbased compensation plans 6953680 shares conversion class b common stock class common stock august 2 2011 company announced board directors authorized stock repurchase program one million shares class common stock company also announced discontinuance previous stock repurchase program originally announced november 9 2007 three months ended october 2 2011 company repurchased entire one million shares class common stock authorized board directors cost 272 million result repurchases companys august 2011 repurchase program expired terms 12 stockbased compensation december 31 2011 company maintained three stock incentive plans key employees outside directors granted incentive stock options isos nonqualified stock options nsos purchase companys class common stock one plan 2004 stock incentive plan currently available grant new equity awards currently granted employees stock options granted prior plans became exercisable fiveyear period rate 20 per year expire ten years date grant 2004 stock incentive plan options become exercisable fouryear period rate 25 per year expire ten years grant date isos nsos granted plans may exercise prices less 100 50 fair market value class common stock date grant respectively companys current practice grant options fair market value grant date december 31 2011 1596082 shares class common stock authorized future grants new equity awards companys stock incentive plans company grants shares restricted stock key employees nonemployee members companys board directors 2004 stock incentive plan vest either immediately oneyear period threeyear period rate onethird per year restricted stock awards amortized expense straightline basis vesting period company also management stock purchase plan allows granting restricted stock units rsus key employees annual basis key employees may elect receive portion annual incentive compensation rsus instead cash rsu provides key employee right purchase share class common stock 67 fair market value date grant rsus vest ratably threeyear period grant date aggregate 2000000 shares class common stock may issued management stock purchase plan 2004 stock incentive plan december 31 2011 total unrecognized compensation cost related unvested stock options approximately 49 million total weighted average remaining term 30 years 2011 2010 2009 company recognized compensation cost 16 million 17 million 17 million respectively selling general administrative expenses company recognized additional stock compensation expense 2011 related unvested stock options approximately 22 million connection modification former ceos options related separation agreement watts water technologies inc subsidiaries notes consolidated financial statements continued 12 stockbased compensation continued following summary stock option activity related information december 31 2011 aggregate intrinsic values exercisable options approximately 27 million representing total pretax intrinsic value based companys closing class common stock price 3421 december 31 2011 would received option holders option holders exercised options date total intrinsic value options exercised 2011 2010 2009 approximately 39 million 27 million 03 million respectively upon exercise options company issues shares class common stock following table summarizes information options outstanding december 31 2011 fair value option granted 2004 stock incentive plan estimated date grant using blackscholesmerton model based following weighted average assumptions watts water technologies inc subsidiaries notes consolidated financial statements continued 12 stockbased compensation continued riskfree interest rate based upon us treasury yield curve time grant respective expected life option expected life estimated period time outstanding options volatility calculated using historical data expected dividend yield stock companys best estimate expected future dividend yield company applied estimated forfeiture rate 675 2011 2010 2009 stock options rates calculated based upon historical activity estimate granted shares expected vest actual forfeitures differ expected rates company may required make additional adjustments compensation expense future periods assumptions used determine weighted average grantdate fair value stock options 1019 1236 970 years ended december 31 2011 2010 2009 respectively following summary unvested restricted stock activity related information total fair value shares vested 2011 2010 2009 25 million 15 million 21 million respectively december 31 2011 total unrecognized compensation cost related unvested restricted stock approximately 38 million total weighted average remaining term 22 years 2011 2010 2009 company recognized compensation costs 24 million 18 million 20 million respectively selling general administrative expenses company recognized additional stock compensation expense 2011 related restricted stock approximately 08 million connection modification former ceos stock awards related separation agreement company applied estimated forfeiture rate 90 975 52 2011 2010 2009 respectively restricted stock issued key employees aggregate intrinsic value restricted stock granted outstanding approximated 55 million representing total pretax intrinsic value based companys closing class common stock price 3421 december 31 2011 management stock purchase plan total unrecognized compensation cost related unvested rsus approximately 19 million december 31 2011 total weighted average remaining term 17 years 2011 2010 2009 company recognized compensation cost 13 million 12 million 12 million respectively selling general administrative expenses dividends declared rsus paid individuals remain unpaid december 31 2011 total approximately 03 million watts water technologies inc subsidiaries notes consolidated financial statements continued 12 stockbased compensation continued summary companys rsu activity related information shown following table december 31 2011 aggregate intrinsic values outstanding vested rsus approximately 61 million 29 million respectively representing total pretax intrinsic value based companys closing class common stock price 3421 december 31 2011 would received rsus holders rsus settled date total intrinsic value rsus settled 2011 2010 2009 approximately 12 million 07 million 01 million respectively upon settlement rsus company issues shares class common stock following table summarizes information rsus outstanding december 31 2011 watts water technologies inc subsidiaries notes consolidated financial statements continued 12 stockbased compensation continued fair value share issued management stock purchase plan estimated date grant using blackscholesmerton model based following weighted average assumptions riskfree interest rate based upon us treasury yield curve time grant respective expected life rsus expected life estimated period time outstanding rsus volatility calculated using historical data expected dividend yield stock companys best estimate expected future dividend yield company applied estimated forfeiture rate 63 52 2011 2010 2009 respectively rsus rates calculated based upon historical activity estimate granted shares expected vest actual forfeitures differ expected rates company may required make additional adjustments compensation expense future periods assumptions used determine weighted average grantdate fair value rsus granted 1625 1281 814 2011 2010 2009 respectively company distributed dividends 044 per share 2011 2010 2009 companys class common stock class b common stock 13 employee benefit plans company sponsors funded unfunded noncontributing defined benefit pension plans together cover substantially domestic employees benefits based primarily years service employees compensation funding policy company plans contribute annual amount exceed maximum amount deducted federal income tax purposes october 31 2011 companys board directors voted cease accruals effective december 31 2011 companys pension plan supplemental employees retirement plan company recorded curtailment charge approximately 15 million writeoff previously unrecognized prior service costs reduced projected benefit obligation 125 million board directors also voted enhance companys existing 401 k savings plan net effect plan changes expected reduce future retirement plans expense approximately 20 million annually watts water technologies inc subsidiaries notes consolidated financial statements continued 13 employee benefit plans continued funded status defined benefit plans amounts recognized consolidated balance sheet follows amounts recognized consolidated balance sheet follows amounts recognized accumulated comprehensive income consist watts water technologies inc subsidiaries notes consolidated financial statements continued 13 employee benefit plans continued information pension plans accumulated benefit obligation excess plan assets follows information pension plans plan assets excess accumulated benefit obligation follows components net periodic benefit cost follows estimated net actuarial loss defined benefit pension plans amortized accumulated comprehensive income net periodic benefit cost next year 06 million assumptions weightedaverage assumptions used determine benefit obligations watts water technologies inc subsidiaries notes consolidated financial statements continued 13 employee benefit plans continued weightedaverage assumptions used determine net periodic benefit costs discount rates selected based upon rates return measurement date utilizing bond matching approach match expected benefit cash flows selecting expected longterm rate return assets company considers average rate earnings expected funds invested provide benefits plan includes considering trusts asset allocation expected returns likely earned life plan basis consistent prior year original 2011 discount rate 55 revised 470 october 31 2011 curtailment date plans plan assets weighted average asset allocations asset category follows companys written retirement plan investment policy sets forth investment policy objectives constraints watts water technologies inc pension plan retirement plan investment policy set forth pension plan committee defines general investment principles directs investment management policy addressing preservation capital risk aversion adherence investment discipline investment managers make reasonable effort control risk evaluated quarterly commonly accepted benchmarks ensure risk assumed commensurate given investment style objectives portfolio designed achieve balanced return current income modest growth capital achieving returns excess rate inflation investment horizon order preserve purchasing power plan assets plan assets required invested liquid securities derivative investments allowed prohibited investments include limited following futures contracts private placements options limited partnerships venturecapital investments interestonly io principalonly po residual tranche cmos watts water technologies inc stock prohibited transactions include limited following short selling margin transactions allowable assets include cash equivalents fixed income securities equity securities mutual funds gics watts water technologies inc subsidiaries notes consolidated financial statements continued 13 employee benefit plans continued specific guidelines regarding allocation assets followed using liability driven investment ldi strategy ldi strategy investments made based expected cash flows required fund pension plans liabilities cash flow matching technique requires plans asset allocation heavily weighted toward fixed income securities companys current allocation target 80 fixed income 20 equities investments recent plan curtailment company expects allocation target increase 90 fixed income 2012 investment performance monitored regular basis investments reallocated stay within specific guidelines securities one company government agency exceed 10 total fund 20 total fund invested one industry individual treasury securities may represent 50 total fund total allocation treasury bonds notes may represent 100 plans aggregate bond position following table presents investments pension plan measured fair value december 31 2011 2010 aincludes investments common stock diverse industries bincludes investments index exchangetraded funds cincludes investment grade bonds diverse industries dincludes investments real estate investment funds exchangetraded funds commodity mutual funds accrued interest cash flows information related companys pension funds cash flow follows company expects contribute approximately 06 million 2012 watts water technologies inc subsidiaries notes consolidated financial statements continued 13 employee benefit plans continued expected benefit payments paid pension plans follows additionally substantially companys domestic employees eligible participate certain 401k savings plans company matches specified percentage employee contributions subject certain limitations companys match contributions included selling general administrative expense years ended december 31 2011 2010 2009 05 million year companys largest 401k plan enhanced beginning january 1 2012 revised plan company provide base contribution 2 employees salary regardless whether employee participates plan company make matching contribution 100 first 4 employees contribution charges european pension plans approximated 62 million 35 million 28 million years ended december 31 2011 2010 2009 respectively costs relate plans administered certain european subsidiaries benefits calculated according government requirements paid employees upon retirement change employment company entered supplemental compensation agreement timothy p horne september 1 1996 per agreement upon ceasing employee company mr horne must make available requested board work minimum 300 500 hours per year consultant return certain annual compensation long physically able mr horne complies consulting provisions agreement shall receive supplemental compensation annual basis 04 million per year subject cost living increases year exchange services performed long physically able event physical disability subsequent commencing consulting services company mr horne continue receive payment annually payment consulting services provided mr horne expensed incurred company mr horne retired effective december 31 2002 therefore supplemental compensation period began january 1 2003 accordance gaap company accrues future postretirement disability benefits period january 1 2003 time mr horne becomes physically unable perform consulting services period disability benefits earned mr horne still active consultant accordance terms agreement watts water technologies inc subsidiaries notes consolidated financial statements continued 14 contingencies environmental remediation accrual disclosure policy company defendant numerous legal matters arising ordinary course operations including involving product liability environmental matters commercial disputes company reviews lawsuits legal proceedings ongoing basis follows appropriate accounting guidance making accrual disclosure decisions company establishes accruals matters company assesses probable loss incurred amount loss reasonable estimated net applicable insurance proceeds company establish accruals matters company believe probable loss incurred amount loss reasonable estimated companys assessment whether loss probable based assessment ultimate outcome matter following appeals may continue exposure loss excess amount accrued possible estimate reasonably possible loss range loss amount accrued matters disclosed estimate aggregated disclosed december 31 2011 company estimates aggregate amount reasonably possible loss excess amount accrued legal contingencies approximately 33 million pretax respect estimate reasonably possible loss management estimated upper end range reasonably possible loss based amount money damages claimed applicable ii allegations factual development date iii available defenses based allegations andor iv potentially liable parties estimate based upon currently available information subject significant judgment variety assumptions known unknown uncertainties matters underlying estimate change time actual results may vary significantly current estimate event unfavorable outcome one matters described ultimate liability may excess amounts currently accrued may material companys operating results cash flows particular quarterly annual period however based information currently known management believes ultimate outcome matters described resolved time likely material effect financial position company james jones litigation company party lawsuit filed nora armenta california superior court company james jones company mueller co tyco international armenta case separate lawsuit filed california superior court behalf city banning california 42 cities water districts california company james jones company mueller co city banning case mediation session held california superior court june 910 2009 parties armenta case city banning case agreed principle settle cases agreement principle also reached 2009 settle related insurance coverage cases watts industries inc vs zurich american insurance company et al zurich american insurance company vs watts industries inc et al pending california superior court zurich american insurance company vs watts industries inc james jones company pending united states district court northern district illinois eastern division settlement insurance coverage cases effective binding upon approval settlement underlying armenta case city banning case watts water technologies inc subsidiaries notes consolidated financial statements continued 14 contingencies environmental remediation continued settlement agreement approved plaintiffs armenta city banning cases fairness hearing held november 5 2009 california superior court approved settlement armenta case city banning case based contemporaneous final settlement underlying insurance coverage cases companys contribution settlement 153 million result settlements lawsuits claims dismissed addition separate settlement company paid outside counsel additional 50 million services rendered connection described litigation result settlement described litigation company recorded noncash pretax gain discontinued operations approximately 95 million 2009 reduce previously recorded estimates loss related fees amounts noted foreign corrupt practices act fcpa settlement october 13 2011 company entered settlement sec resolve allegations concerning potential violations fcpa cwv former indirect whollyowned subsidiary company china terms settlement without admitting denying secs allegations company consented entry administrative ceaseanddesist order books records internal controls provisions fcpa company also agreed pay sec 36 million disgorgement prejudgment interest 02 million penalties amounts paid company connection settlement fully accrued company december 31 2010 company believes settlement resolves government investigations concerning cwvs sales practices potential fcpa violations product liability company subject variety potential liabilities connection product liability cases company maintains product liability insurance coverage company believes generally accordance industry practices product liability cases us management establishes product liability accrual utilizing thirdparty actuarial valuations incorporate historical trend factors companys specific claims experience derived loss reports provided thirdparty administrators countries company maintains insurance coverage relatively high deductible payments product liability claims tend smaller experienced us environmental remediation company named potentially responsible party respect limited number identified contaminated sites levels contamination vary significantly site related levels remediation efforts environmental liabilities recorded based probable cost known estimated minimum cost remediation accruals discounted present value unless amount timing expenditures fixed reliably determinable company accrues estimated environmental liabilities based assumptions subject number factors uncertainties circumstances affect reliability precision estimates include identification additional sites environmental regulations level cleanup required technologies available number financial condition contributors remediation time period remediation may occur company recognizes changes estimates new remediation requirements defined new information becomes available watts water technologies inc subsidiaries notes consolidated financial statements continued 14 contingencies environmental remediation continued asbestos litigation company defending approximately 47 lawsuits different jurisdictions alleging injury death result exposure asbestos complaints cases typically name large number defendants identify particular watts products source asbestos exposure date company obtained dismissal every case reached trial discovery failed yield evidence substantial exposure watts products litigation lawsuits proceedings claims arising ordinary course operations also pending threatened company 15 financial instruments fair value carrying amounts cash equivalents shortterm investments trade receivables trade payables approximate fair value short maturity financial instruments fair value companys 547 senior notes due 2013 585 senior notes due 2016 505 senior notes due 2020 based quoted market prices similar notes level 2 fair value companys variable rate debt approximates carrying value carrying amount estimated fair market value companys longterm debt including current portion follows financial instruments company measures certain financial assets liabilities fair value recurring basis including foreign currency derivatives deferred compensation plan assets related liability watts water technologies inc subsidiaries notes consolidated financial statements continued 15 financial instruments continued cash flow hedges december 31 2011 fair value certain financial assets liabilities determined using following inputs december 31 2011 2010 1included net companys consolidated balance sheet 2included noncurrent liabilities companys consolidated balance sheet table provides summary changes fair value financial assets liabilities measured fair value recurring basis using significant unobservable inputs level 3 period december 31 2010 december 31 2011 watts water technologies inc subsidiaries notes consolidated financial statements continued 15 financial instruments continued discussed note 5 2010 contingent liability 19 million recognized estimate acquisition date fair value contingent consideration brae acquisition liability classified level 3 fair value hierarchy based weighted probability achievement future performance metric date acquisition observable market year ended december 31 2011 estimate fair value contingent consideration reduced 11 million based revised probability achievement future performance metric gain resulting decrease contingent liability classified operating earnings restructuring charges net december 31 2009 company short term investments 65 million auction rate securities ars company elected participate settlement offer ubs ab ubs outstanding ars investments terms settlement offer company issued rights ubs entitling company require ubs purchase underlying ars par value period june 30 2010 july 2 2012 company elected exercise right july 1 2010 received 63 million ubs settlement outstanding ars investments shortterm investment securities december 31 2011 consist certificate deposit remaining maturity greater three months date purchase carrying amount reasonable estimate fair value cash equivalents consist instruments remaining maturities three months less date purchase consist primarily certificates deposit money market funds carrying amount reasonable estimate fair value company uses financial instruments time enhance ability manage risk including foreign currency commodity pricing exposures exist part ongoing business operations use derivatives exposes company counterparty credit risk nonperformance market risk related changes currency exchange rates commodity prices company manages exposure counterparty credit risk diversification counterparties companys counterparties derivative transactions substantial commercial banks significant experience using derivative instruments impact market risk fair value cash flows companys derivative instruments monitored company restricts use derivative financial instruments hedging activities company enter contracts trading purposes company enter contracts speculative purposes use derivative instruments approved senior management written guidelines company exposure number foreign currency rates including canadian dollar euro chinese yuan british pound manage risk company generally uses layering methodology whereby end quarter company generally entered forward exchange contracts hedge approximately 50 projected intercompany purchase transactions next twelve months company primarily uses strategy purchases canada us average volume contracts vary generally approximates 9 15 million open contracts end given quarter december 31 2011 company contracts notional amounts aggregating approximately 90 million company accounts forward exchange contracts economic hedge realized unrealized gains losses contracts recognized income expense consolidated statement operations contracts subject company significant market risk exchange movement offset gains losses related foreign currency denominated transactions 2008 company watts water technologies inc subsidiaries notes consolidated financial statements continued 15 financial instruments continued entered series copper swaps fix price per pound copper october 2008 september 2009 1 million pounds delivered 12 months one customer company determined copper swaps qualify hedge accounting accounted financial instruments economic hedge therefore changes fair value copper swaps recorded immediately consolidated statement operations company enter swap forward contracts speculative purposes december 31 2011 2010 company outstanding swaps company recorded income loss approximately 06 million 05 million 08 million 2011 2010 2009 respectively income expense consolidated statement operations impact derivative instruments leases company leases certain manufacturing facilities sales offices warehouses equipment generally leases carry renewal provisions require company pay maintenance costs future minimum lease payments capital leases noncancelable operating leases december 31 2011 follows carrying amounts assets capital lease include watts water technologies inc subsidiaries notes consolidated financial statements continued 16 segment information company operates three geographic segments north america europe asia segments sells similar products managed separately separate financial results reviewed companys chief operating decisionmaker intercompany sales transactions eliminated sales region based upon location entity recording sale accounting policies segment described summary significant accounting policies see note 2 following summary companys significant accounts balances segment reconciled consolidated totals corporate expenses primarily compensation expense sarbanesoxley compliance professional fees including legal audit expenses shareholder services benefit administration costs allocated geographic segments viewed corporate functions support activities corporate costs 2011 include 63 million charges related separation agreement companys former ceo watts water technologies inc subsidiaries notes consolidated financial statements continued 16 segment information continued following includes us net sales us property plant equipment companys north american segment following includes intersegment sales north america europe asia company sells products various end markets around world groups net sales third parties four product categories many companys sales distributors thirdparty manufacturers representatives portion product categorization based managements understanding final product use allocations made align sales product category net sales third parties four product categories follows watts water technologies inc subsidiaries notes consolidated financial statements continued 17 quarterly financial information unaudited 18 subsequent events january 31 2012 company completed acquisition tekmar control systems tekmar share purchase transaction designer manufacturer control systems used heating ventilation air conditioning application tekmar expected enhance companys hydronic systems product offerings us canada initial purchase price paid cad 180 million earnout based future earnings levels achieved total purchase price exceed cad 262 million sales tekmar 2011 approximated cad 110 million february 7 2012 company declared quarterly dividend eleven cents 011 per share outstanding share class common stock class b common stock watts water technologies inc subsidiaries schedule iivaluation qualifying accounts amounts millions three years ended december 31 exhibit index 1incorporated reference registrants current report form 8k dated july 12 2010 file 00111499 2incorporated reference registrants current report form 8k dated november 14 1991 file 00111499 3incorporated reference registrants annual report form 10k year ended december 31 2002 file 00111499 4incorporated reference registrants current report form 8k dated april 27 2006 file 00111499 5incorporated reference registrants form s1 336515 part second amendment form s1 dated august 21 1986 6incorporated reference registrants quarterly report form 10q quarter ended october 2 2011 file 00111499 7incorporated reference registrants current report form 8k dated may 15 2003 file 00111499 8incorporated reference registrants current report form 8k dated may 14 2008 file 00111499 9incorporated reference registrants annual report form 10k year ended june 30 1996 file 00111499 10incorporated reference amendment 1 registrants annual report form 10k year ended june 30 1992 file 00111499 11incorporated reference registrants annual report form 10k year ended december 31 2009 file 00111499 12incorporated reference registrants annual report form 10k year ended june 30 1997 file 00111499 13incorporated reference notes consolidated financial statements note 2 report 14incorporated reference registrants quarterly report form 10q quarter ended july 3 2005 file 00111499 15incorporated reference registrants annual report form 10k year ended june 30 1999 file 00111499 16incorporated reference registrants quarterly report form 10q quarter ended september 30 2000 file 00111499 17incorporated reference registrants quarterly report form 10q quarter ended july 4 2010 file 00111499 18incorporated reference registrants quarterly report form 10q quarter ended september 26 2004 file 00111499 19incorporated reference registrants quarterly report form 10q quarter ended july 1 2007 file 00111499 20incorporated reference registrants annual report form 10k year ended december 31 2007 file 00111499 21incorporated reference registrants current report form 8k dated june 18 2010 file 00111499 22incorporated reference registrants current report form 8k dated january 26 2011 file 00111499 23incorporated reference registrants current report form 8k dated july 6 2011 file 00111499 24incorporated reference registrants annual report form 10k year ended december 31 2010 file 00111499 25incorporated reference registrants current report form 8k dated april 1 2011 file 00111499 management contract compensatory plan arrangement attached exhibit 101 report following formatted xbrl extensible business reporting language consolidated balance sheets december 31 2010 december 31 2009 ii consolidated statements operations years ended december 31 2010 2009 2008 iii consolidated statements stockholders equity comprehensive income loss years ended december 31 2010 2009 2008 iv consolidated statements cash flows years ended december 31 2010 2009 2008 v notes consolidated financial statements accordance rule 406t regulation st xbrlrelated information exhibit 101 annual report form 10k deemed filed part registration statement prospectus purposes sections 11 12 securities act deemed filed purposes section 18 exchange act otherwise subject liability sectionsitem 15 exhibits financial statement schedules a1 financial statements following financial statements included separate section report commencing page numbers specified report independent registered public accounting firm consolidated statements operations years ended december 31 2012 2011 2010 consolidated statements comprehensive income years ended december 31 2012 2011 consolidated balance sheets december 31 2012 2011 consolidated statements stockholders equity years ended december 31 2012 2011 consolidated statements cash flows years ended december 31 2012 2011 2010 notes consolidated financial statements 57 97 a2 schedules schedule iivaluation qualifying accounts years ended december 31 2012 2011 required schedules provision made applicable accounting regulations securities exchange commission included notes consolidated financial statements a3 exhibits listed exhibit index immediately preceding exhibits filed part annual report form 10k signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized watts water technologies inc david j coghlan david j coghlan chief executive officer president director dated february 27 2013 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated report independent registered public accounting firm board directors stockholders watts water technologies inc audited accompanying consolidated balance sheets watts water technologies inc subsidiaries december 31 2012 2011 related consolidated statements operations comprehensive income stockholders equity cash flows years threeyear period ended december 31 2012 connection audits consolidated financial statements also audited financial statement schedule iivaluation qualifying accounts consolidated financial statements financial statement schedule responsibility companys management responsibility express opinion consolidated financial statements financial statement schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position watts water technologies inc subsidiaries december 31 2012 2011 results operations cash flows years threeyear period ended december 31 2012 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states watts water technologies incs internal control financial reporting december 31 2012 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso report dated february 27 2013 expressed unqualified opinion effectiveness companys internal control financial reporting kpmg llp boston massachusetts february 27 2013 watts water technologies inc subsidiaries consolidated statements operations amounts millions except per share information accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated statements comprehensive income amounts millions accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated balance sheets amounts millions except share information accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated statements stockholders equity amounts millions except share information accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated statements cash flows amounts millions accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries notes consolidated financial statements 1 description business watts water technologies inc company designs manufactures sells extensive line water safety flow control products primarily water quality water conservation water safety water flow control markets located predominantly north america europe presence asia 2 accounting policies principles consolidation consolidated financial statements include accounts company majority wholly owned subsidiaries upon consolidation significant intercompany accounts transactions eliminated cash equivalents cash equivalents consist instruments remaining maturities three months less date purchase consist primarily certificates deposit money market funds carrying amount reasonable estimate fair value investment securities investment securities december 31 2012 2011 consisted certificates deposit original maturities greater three months trading securities recorded fair value company determines fair value obtaining market value available quoted prices active markets absence quoted prices company uses inputs determine fair value investments changes fair value well realized gains losses sale securities recorded incurred consolidated statements operations income expense allowance doubtful accounts allowance doubtful accounts includes reserves bad debts sales returns allowances cash discounts company analyzes aging accounts receivable individual accounts receivable historical bad debts concentration receivables customer credit worthiness current economic trends changes customer payment terms company specifically analyzes individual accounts receivable establishes specific reserves financially troubled customers addition factors developed certain regions utilizing historical trends sales returns allowances cash discount activities derive reserve returns allowances cash discounts concentration credit company sells products diversified customer base therefore significant concentrations credit risk 2012 2011 customer accounted 10 companys total sales inventories stated lower cost using primarily firstin firstout method market value determined replacement cost net realizable value historical usage used basis determining reserve excess obsolete inventories watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued assets held sale company accounts assets held sale management committed plan sell asset group assets actively marketing asset group assets asset group assets sold current condition reasonable period time plan expected change december 31 2012 company completed disposition assets held sale connection disposal one assets held sale classified discontinued operations see note 3 2012 2010 company recorded estimated losses 16 million 10 million respectively reduce assets estimated fair value less costs sell amounts recorded component goodwill longlived asset impairment charges consolidated statements operations goodwill intangible assets goodwill recorded consideration paid acquisitions exceeds fair value net tangible intangible assets acquired goodwill intangible assets indefinite useful lives amortized rather tested least annually impairment test performed october 28 2012 impairment goodwill longlived assets changes carrying amount goodwill geographic segment follows goodwill tested impairment least annually frequently events circumstances indicate likely goodwill might impaired change business watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued conditions company performs annual goodwill impairment assessment fourth quarter year january 31 2012 company completed acquisition tekmar control systems tekmar share purchase transaction initial purchase price paid cad 180 million postclosing adjustments related working capital earnout based attainment certain future earnings levels initial purchase price paid equal approximately 178 million based exchange rate canadian dollar us dollar january 31 2012 total purchase price exceed cad 262 million company accounting transaction business combination company completed purchase price allocation resulted recognition 117 million goodwill 101 million intangible assets operating results emea reporting unit hindered downturn economic environment europe continued fall expectations six months ended july 1 2012 triggering decision update impairment analysis second quarter result updated fair value assessment determined fair value emea reporting unit continued exceed carrying value result decrease discount rate reduction net debt offset lower shortterm projections company determined future prospects blue ridge atlantic enterprises inc brae reporting unit north america lower originally estimated future sales growth expectations reduced since 2010 acquisition brae company recorded pretax goodwill impairment charges 10 million 12 million 2012 2011 respectively reporting unit impairment charges offset reduction anticipated earnout payments equal amounts company estimated fair value reporting unit using expected present value future cash flows intangible assets estimable lives longlived assets reviewed impairment whenever events changes circumstances indicate carrying amount asset group may recoverable recoverability intangible assets estimable lives longlived assets measured comparison carrying amount asset group future net undiscounted pretax cash flows expected generated asset group comparisons indicate asset recoverable impairment loss recognized amount carrying amount asset group exceeds related estimated fair value estimated fair value based either discounted future pretax operating cash flows appraised values depending nature asset company determines discount rate analysis based weighted average cost capital based market guideline public companies related businesses allocate interest charges asset group measured judgment required estimate future operating cash flows watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued intangible assets include following aggregate amortization expense amortized intangible assets 2012 2011 2010 156 million 179 million 143 million respectively additionally future amortization expense amortizable intangible assets expected 149 million 2013 148 million 2014 146 million 2015 140 million 2016 137 million 2017 amortization expense provided straightline basis estimated useful lives intangible assets weightedaverage remaining life total amortizable intangible assets 92 years patents customer relationships technology trade names amortizable intangibles weightedaverage remaining lives 64 years 65 years 118 years 116 years 416 years respectively indefinitelived intangible assets primarily include trade names trademarks 2011 company determined prospects austroflex rohrisoliersysteme gmbh austroflex part emea segment lower originally estimated due current operating profits plan tempered future growth expectations accordingly company performed evaluation asset group utilizing undiscounted cash flows determined carrying value assets longer recoverable company performed fair value assessment result wrote longlived assets including customer relationships trade names property plant equipment 148 million fair value based discounted cash flows using market participant assumptions utilized estimated weighted average cost capital adjustments indefinitelived intangible assets year ended december 31 2012 relate primarily impairment charge 04 million trade name north america segment concurrent reclassification amortizable intangibles property plant equipment property plant equipment recorded cost depreciation provided straightline basis estimated useful lives assets range 10 40 years buildings improvements 3 15 years machinery equipment watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued taxes income taxes assessed governmental authorities sale transactions recorded net basis excluded sales companys consolidated statements operations income taxes income taxes accounted asset liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases operating loss tax credit carry forwards deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized income period includes enactment date company recognizes tax benefits item question meets morelikelythannot greater 50 likelihood sustained upon examination taxing authorities threshold 2012 unrecognized tax benefits company increased net amount 28 million result ongoing federal audit unrecognized tax benefits increased approximately 40 million adjustment temporary differences impact overall income tax expense company decreased unrecognized tax benefits approximately 12 million 06 million related reduced exposures us 06 million associated settlements europe company estimates reasonably possible approximately 36 million currently remaining unrecognized tax benefit may recognized end 2013 result conclusion federal income tax audit amount expense accrued penalties interest 07 million worldwide december 31 2012 company gross unrecognized tax benefits approximately 46 million approximately 06 million recognized would affect effective tax rate difference amount unrecognized tax benefits amount would affect effective tax rate consists federal tax benefit state income tax items temporary differences resulting federal audit reconciliation beginning ending amount unrecognized tax benefits accrued interest related unrecognized tax benefits follows february 2012 united states internal revenue service commenced audit companys 2009 2010 2011 tax years company anticipate material adjustments mentioned result audit company conducts business variety locations throughout world resulting tax filings numerous domestic foreign jurisdictions company subject tax examinations regularly part normal course business companys major jurisdictions us canada china netherlands uk germany italy watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued france exceptions company longer subject us federal state local nonus income tax examinations years 2006 statute limitations major jurisdictions open us year 2009 later canada 2008 later netherlands 2007 later company accounts interest penalties related uncertain tax positions component income tax expense foreign currency translation financial statements subsidiaries located outside united states generally measured using local currency functional currency balance sheet accounts including goodwill foreign subsidiaries translated united states dollars yearend exchange rates income expense items translated weighted average exchange rates period net translation gains losses included comprehensive income separate component stockholders equity company provide us income taxes foreign currency translation adjustments since provide taxes undistributed earnings foreign subsidiaries gains losses foreign currency transactions subsidiaries included net earnings stockbased compensation former chief executive officer separation costs former chief financial officer retention costs company records compensation expense financial statements sharebased awards based grant date fair value awards stockbased compensation expense includes estimate prevesting forfeitures recognized requisite service periods awards straightline basis generally commensurate vesting term benefits associated tax deductions excess recognized compensation cost reported financing cash flow december 31 2012 company three stockbased compensation plans total unrecognized compensation costs related unvested stockbased compensation arrangements approximately 156 million total weighted average remaining term 26 years 2012 2011 2010 company recognized compensation costs related stockbased programs approximately 58 million 53 million 47 million respectively selling general administrative expenses company recorded approximately 07 million tax benefits 2012 2011 2010 compensation expense relating stock options 2012 2011 2010 company recorded approximately 14 million 15 million 12 million respectively tax benefit stockbased plans 2012 2011 2010 recognition total stockbased compensation expense impacted basic diluted net income per common share 010 009 008 respectively may 23 2012 william c mccartney provided notice intention retire chief financial officer company june 14 2012 company entered retention agreement mr mccartney pursuant retention agreement mr mccartney continued employment company december 14 2012 assisted transitioning responsibilities duties new chief financial officer company recorded pretax charge approximately 15 million retention period consisting expected cash payments 07 million noncash charge 08 million modification stock options restricted stock awards january 26 2011 patrick okeefe resigned positions chief executive officer president director pursuant separation agreement company recorded charge watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued 63 million consisting 33 million expected cash severance noncash charge 30 million modification stock options restricted stock awards net income per common share basic net income per common share calculated dividing net income weighted average number common shares outstanding calculation diluted income per share assumes conversion dilutive securities see note 12 net income number shares used compute net income per share basic assuming full dilution reconciled computation diluted net income per share years ended december 31 2012 2011 2010 excludes effect potential exercise options purchase approximately 02 million 07 million 05 million shares respectively exercise price option greater average market price class common stock effect would antidilutive may 16 2012 board directors authorized stock repurchase program two million shares companys class common stock repurchase program completed july 2012 company repurchased entire two million shares class common stock cost approximately 658 million august 2 2011 board directors authorized stock repurchase program company authorized repurchase one million shares class common stock three months ended october 2 2011 company repurchased entire one million shares cost 272 million financial instruments normal course business company manages risks associated commodity prices foreign exchange rates interest rates variety strategies including use hedging transactions executed accordance companys policies companys hedging transactions include limited use various derivative financial commodity instruments matter policy company use derivative instruments unless underlying exposure change value derivative instruments would substantially offset opposite change value underlying hedged items company use derivative instruments trading speculative purposes watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued derivative instruments may designated accounted either hedge recognized asset liability fair value hedge forecasted transaction cash flow hedge fair value hedge effective ineffective portions change fair value derivative instrument along adjustment carrying amount hedged item fair value changes attributable hedged risk recognized earnings cash flow hedge changes fair value derivative instrument highly effective deferred accumulated comprehensive income loss underlying hedged item recognized earnings cash flow hedges december 31 2012 december 31 2011 fair value cash flow hedge cease qualify hedge accounting terminated would continue carried balance sheet fair value settled hedge accounting would discontinued prospectively forecasted transaction longer probable occurring amounts previously deferred accumulated comprehensive income would recognized immediately earnings occasion company may enter derivative instrument qualify hedge accounting entered offset changes fair value underlying transaction required recognized earnings natural hedge instruments reflected consolidated balance sheets fair value changes fair value recognized earnings foreign currency derivatives include forward foreign exchange contracts primarily canadian dollars metal derivatives included commodity swaps copper portions companys outstanding debt exposed interest rate risks company monitors interest rate exposures ongoing basis maximize overall effectiveness interest rates fair value measurements fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date entity required maximize use observable inputs available minimize use unobservable inputs measuring fair value company certain financial assets liabilities measured fair value recurring basis certain nonfinancial assets liabilities may measured fair value nonrecurring basis fair value disclosures assets liabilities based threelevel hierarchy defined follows level 1 quoted prices active markets identical assets liabilities entity ability access measurement date level 2 observable inputs level 1 prices quoted prices similar assets liabilities quoted prices markets active inputs observable corroborated observable market data substantially full term assets liabilities level 3 unobservable inputs supported little market activity significant fair value assets liabilities watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued assets liabilities subject hierarchy classified entirety based lowest level input significant fair value measurement companys assessment significance particular input fair value measurement entirety requires judgment considers factors specific asset liability shipping handling shipping handling costs included selling general administrative expense amounted 380 million 381 million 335 million years ended december 31 2012 2011 2010 respectively research development research development costs included selling general administrative expense amounted 207 million 209 million 186 million years ended december 31 2012 2011 2010 respectively revenue recognition company recognizes revenue following criteria met company entered binding agreement product shipped title passes sales price customer fixed determinable collectability reasonably assured provisions estimated returns allowances made time sale recorded reduction sales included allowance doubtful accounts consolidated balance sheets company records provisions sales incentives primarily volume rebates adjustment net sales time sale based estimated purchase targets basis presentation certain amounts 2011 2010 consolidated financial statements reclassified permit comparison 2012 presentation reclassifications effect reported results operations stockholders equity estimates preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates new accounting standards july 2012 fasb issued amendment requirements indefinitelived intangible asset impairment testing company option first assess qualitative factors determine whether existence events circumstances leads determination likely fair value indefinitelived intangible asset less carrying amount assessing totality events circumstances company determines likely fair value indefinitelived intangible asset greater carrying amount performing watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued impairment test unnecessary company adopted new standard effective annual impairment testing date october 28 year ending december 31 2012 3 discontinued operations december 21 2012 company completed sale outstanding shares subsidiary flomatic corporation flomatic sale excluded backflow product line flomatic retained company flomatic corporation located glens falls new york specializes manufacturing selling check valves foot valves automatic hydraulic control valves well water industry company acquired flomatic part acquisition danfoss socla sas socla april 2011 company evaluated operations flomatic determined would substantial continuing involvement flomatics operations cash flows result flomatics cash flows operations eliminated continuing operations company classified discontinued operations periods presented first quarter 2010 company recorded estimated reserve 53 million discontinued operations connection investigation potential violations foreign corrupt practices act fcpa watts valve changsha co ltd cwv former indirect whollyowned subsidiary company china october 13 2011 company entered settlement 38 million securities exchange commission resolve allegations concerning potential violations fcpa cwv see note 14 company received 11 million payment service provider related issues concerning former divested operation condensed operating statements discontinued operations summarized company recognize tax benefit loss disposal flomatic shares company believe likely tax benefit would realized revenues reported discontinued operations follows watts water technologies inc subsidiaries notes consolidated financial statements continued 3 discontinued operations continued carrying amounts major classes assets liabilities december 31 2012 december 31 2011 associated discontinued operations follows 4 restructuring charges net companys board directors approves major restructuring programs involve discontinuance product lines shutdown facilities time company takes additional restructuring actions including involuntary terminations part major program company accounts costs period individual employees notified liability incurred costs included restructuring charges companys consolidated statements operations april 2011 board approved integration program association acquisition socla program designed integrate certain operations management structures socla total estimated pretax cost 64 million costs incurred 2012 company revised forecast 42 million primarily reflect reduced severance costs total net aftertax charge 28 million costs fully incurred 2012 company also periodically initiates actions part major program 2012 company commenced restructuring activities north america relocate certain production activities included closure manufacturing site total expected costs 22 million including severance shutdown costs net tax charge 13 million incurred mid2013 december 2012 company initiated restructuring activities europe relocate certain manufacturing activities total expected costs 17 million including severance relocation costs 2011 company initiated several actions part major program september 2011 company announced plan termination would result reduction approximately 10 north american nondirect payroll costs company recorded charge 11 million severance connection plan year ended december 31 2011 also 2011 company initiated restructuring activities respect companys operating facilities europe included closure facility europe restructuring activities included pretax costs approximately 40 million including costs severance shutdown costs incurred december 31 2012 watts water technologies inc subsidiaries notes consolidated financial statements continued 4 restructuring charges net continued 2012 2011 company recorded credit restructuring charges net related reduction contingent liability anticipated earnout payment connection brae acquisition 10 million 12 million respectively summary pretax cost restructuring program follows company recorded net pretax restructuring business segments follows also 2011 company recorded tax charge 11 million related restructuring france offset net tax benefit 37 million realized connection disposition twvc 2011 actions following table summarizes total expected incurred remaining pretax costs 2011 socla integration program watts water technologies inc subsidiaries notes consolidated financial statements continued 4 restructuring charges net continued details companys 2011 socla integration reserves years ended december 31 2012 2011 follows company expects exhaust remaining reserve mid2013 following table summarizes expected incurred remaining severance costs 2011 socla integration actions type 2010 actions february 8 2010 board approved restructuring program respect companys operating facilities france restructuring program included consolidation five facilities two facilities program originally expected include pretax charges totaling approximately 125 million including costs severance relocation cleanup certain asset writedowns company revised forecast 171 million primarily reflect additional severance legal costs company recorded certain severance costs related program 2009 amounts related contractual statutory obligations 2010 restructuring program substantially complete september 13 2010 board approved restructuring program respect certain companys operating facilities united states restructuring program included shutdown two manufacturing facilities north carolina operations facilities consolidated companys manufacturing facilities new hampshire missouri locations program originally included pretax charges totaling approximately 49 million including costs severance shutdown costs equipment writedowns pretax training preproduction setup costs approximately 20 million company revised forecast 25 million due reduced shutdown costs total net aftertax charge restructuring program approximately 15 million restructuring program completed 2012 watts water technologies inc subsidiaries notes consolidated financial statements continued 4 restructuring charges net continued following table summarizes total expected incurred remaining pretax costs 2010 europe north america footprint consolidationrestructuring programs companys reportable segments details companys 2010 europe north america footprint consolidationrestructuring program reserves december 31 2012 follows following table summarizes expected incurred remaining costs companys 2010 europe north america footprint consolidationrestructuring actions type watts water technologies inc subsidiaries notes consolidated financial statements continued 5 business acquisitions disposition tekmar january 31 2012 company completed acquisition tekmar share purchase transaction designer manufacturer control systems used heating ventilation air conditioning applications tekmar expected enhance companys hydronic systems product offerings us canada part north america segment initial purchase price paid cad 180 million earnout based future earnings levels achieved initial purchase price paid equal approximately 178 million based exchange rate canadian dollar us dollars january 31 2012 total purchase price exceed cad 262 million sales tekmar 2011 approximated 110 million company accounting transaction business combination company completed purchase price allocation resulted recognition 117 million goodwill 101 million intangible assets intangible assets consist primarily acquired technology estimated life 10 years distributor relationships estimated life 7 years trade name estimated life 20 years goodwill expected deductible tax purposes results tekmar material companys consolidated financial statements socla april 29 2011 company completed acquisition socla related water controls business certain entities controlled danfoss share asset purchase transaction final consideration paid eur 1163 million purchase price financed cash hand eurobased borrowings credit agreement purchase price equal approximately 1724 million based exchange rate euro us dollars april 29 2011 socla manufacturer water protection valves flow control solutions water market heating ventilation air conditioning market major product lines include backflow preventers check valves pressure reducing valves socla based france products distributed commercial residential municipal industrial use socla strengthens companys european plumbing flow control products also adds hvac product line company accounted transaction business combination company completed purchase price allocation resulted recognition 831 million goodwill 399 million intangible assets intangible assets consist primarily customer relationships estimated lives 10 years trade names either 20 year lives indefinite lives goodwill attributable workforce socla synergies expected arise result acquisition watts water technologies inc subsidiaries notes consolidated financial statements continued 5 business acquisitions disposition continued goodwill expected deductible tax purposes following table summarizes value assets liabilities acquired millions consolidated statement operations year ended december 31 2011 includes results socla since acquisition date includes 948 million revenues 16 million operating income includes acquisition accounting charges 47 million restructuring charges 27 million supplemental proforma information unaudited company completed acquisition socla beginning 2010 net sales net income continuing operations earnings per share continuing operations would follows net income continuing operations years ended december 31 2011 december 31 2010 adjusted include 07 million 21 million respectively net interest expense related financing 08 million 23 million respectively net amortization expense resulting estimated allocation purchase price amortizable tangible intangible assets net income continuing operations years ended december 31 2011 december 31 2010 also adjusted exclude 43 million 15 million respectively net acquisitionrelated charges thirdparty costs supplemental proforma information adjusted exclude revenues net income flomatic eliminated continuing operations company classified discontinued operations see note 3 watts water technologies inc subsidiaries notes consolidated financial statements continued 5 business acquisitions disposition continued austroflex june 28 2010 company acquired 100 outstanding stock austroflex approximately 337 million austroflex austrianbased manufacturer preinsulated flexible pipe systems district heating solar applications underfloor radiant heating systems acquisition austroflex provides company full range preinsulated pex tubing preinsulated solar tubes underfloor heating insulation distribution capability positions company major supplier preinsulated pipe systems europe company completed purchase price allocation resulted recognition 172 million intangible assets 123 million goodwill intangible assets based fair value estimates comprised primarily customer relationships estimated useful lives 8 years trade names indefinite lives goodwill expected tax deductible certain limit established austrian tax rules austroflex annual sales prior acquisition approximately 230 million 2011 company determined prospects austroflex part europe segment lower originally estimated due current operating profits plan tempered future growth expectations see note 2 results operations tekmar included companys north america segment results operations austroflex included companys emea segment since respective acquisition dates material companys consolidated financial statements results socla included emea asia operating segments since acquisition date majority operations recorded emea segment twvc march 2010 connection companys manufacturing footprint consolidation company closed operations tianjin watts valve company ltd twvc relocated manufacturing facilities april 12 2010 company signed definitive equity transfer agreement third party sell companys equity ownership remaining assets twvc sale finalized fourth quarter 2011 company received net proceeds approximately 61 million sale recorded receivable remaining proceeds company recognized net pretax gain 77 million aftertax gain approximately 114 million relating mainly recognition cumulative translation adjustment tax benefit related reversal tax claw back china 2012 company recorded charge 16 million related adjustment gain disposal twvc 6 inventories net inventories consist following watts water technologies inc subsidiaries notes consolidated financial statements continued 6 inventories net continued raw materials workinprocess finished goods net valuation reserves 281 million 263 million december 31 2012 2011 respectively finished goods 135 million 133 million december 31 2012 2011 respectively consigned 7 property plant equipment property plant equipment consist following 8 income taxes significant components companys deferred income tax liabilities assets follows watts water technologies inc subsidiaries notes consolidated financial statements continued 8 income taxes continued provision income taxes continuing operations based following pretax income provision income taxes continuing operations consists following actual income taxes reported continuing operations different would computed applying federal statutory tax rate income continuing operations income taxes reasons difference follows december 31 2012 company foreign net operating loss carry forwards 212 million income tax purposes 74 million losses carried forward indefinitely 11 million losses expire 2017 127 million expire 2020 net operating losses consist 50 million related austrian operations 24 million italian operations 132 million dutch operations 06 million related chinese operations watts water technologies inc subsidiaries notes consolidated financial statements continued 8 income taxes continued december 31 2012 december 31 2011 company valuation allowance 101 million 91 million respectively relates us capital losses management believes ability company use losses within applicable carry forward period rise level likely threshold company valuation allowance respect deferred tax assets management believes likely company recover deferred tax assets changes enacted income tax laws material effect company 2012 2011 2010 undistributed earnings companys foreign subsidiaries amounted approximately 3297 million december 31 2012 2822 million december 31 2011 3130 million december 31 2010 earnings considered indefinitely reinvested accordingly provision us federal state income taxes recorded thereon upon distribution earnings form dividends otherwise company subject withholding taxes payable various foreign countries determination amount us income tax liability would incurred practicable complexities associated hypothetical calculation however unrecognized foreign tax credits may available reduce portion us income tax liability withholding taxes approximately 98 million would payable upon remittance previously unremitted earnings december 31 2012 9 accrued expenses liabilities accrued expenses liabilities consist following watts water technologies inc subsidiaries notes consolidated financial statements continued 10 financing arrangements longterm debt consists following principal payments next five years thereafter due follows millions 2013771 201422 201522 20162281 2017 thereafter750 company maintains letters credit guarantee performance payment third parties accordance specified terms conditions amounts outstanding approximately 348 million december 31 2012 349 million december 31 2011 companys letters credit primarily associated insurance coverage lesser extent foreign purchases companys letters credit generally expire within one year issuance drawn revolving credit facility instruments may exist expire without drawn therefore necessarily represent future cash flow obligations june 18 2010 company entered note purchase agreement certain institutional investors 2010 note purchase agreement pursuant 2010 note purchase agreement company issued senior notes 750 million principal due june 18 2020 company pay interest outstanding balance notes rate 505 per annum payable semiannually june 18 december 18 principal notes shall become due payable company may option upon notice subject terms 2010 note purchase agreement prepay time part notes amount less 1 million paying principal amount plus makewhole amount dependent upon yield respective us treasury securities 2010 note purchase agreement includes operational financial covenants company required comply including among others maintenance certain financial ratios restrictions additional indebtedness liens dispositions december 31 2012 company compliance covenants related 2010 note purchase agreement june 18 2010 company entered credit agreement credit agreement among company certain subsidiaries company become borrowers credit agreement bank america na administrative agent swing line lender letter credit issuer lenders referred therein credit agreement provides 300 million fiveyear senior unsecured revolving credit facility may increased additional 150 million certain circumstances subject terms credit agreement credit watts water technologies inc subsidiaries notes consolidated financial statements continued 10 financing arrangements continued agreement sublimit 750 million letters credit borrowings outstanding credit agreement bear interest fluctuating rate per annum equal case eurocurrency rate loans british bankers association libor rate plus applicable percentage ranging 170 230 determined reference companys consolidated leverage ratio plus case certain lenders mandatory cost calculated accordance terms credit agreement ii case base rate loans swing line loans highest federal funds rate plus 05 b rate interest effect day announced bank america na prime rate c british bankers association libor rate plus 10 plus applicable percentage ranging 070 130 determined reference companys consolidated leverage ratio addition paying interest credit agreement company also required pay certain fees connection credit facility including limited facility fee letter credit fees credit agreement expires june 18 2015 company may repay loans outstanding credit agreement time without premium penalty customary breakage costs subject terms credit agreement credit agreement company required satisfy maintain specified financial ratios financial condition tests december 31 2012 company compliance covenants related credit agreement 2654 million unused available credit agreement 346 million standby letters credit outstanding credit agreement borrowings outstanding credit agreement april 27 2006 company completed private placement 2250 million 585 senior unsecured notes due april 2016 2006 note purchase agreement 2006 note purchase agreement includes operational financial covenants company required comply including among others maintenance certain financial ratios restrictions additional indebtedness liens dispositions events default 2006 note purchase agreement include failure comply financial operational covenants well bankruptcy insolvency events company may option upon notice note holders prepay time part notes amount less 10 million paying principal amount plus makewhole amount dependent upon yield respective us treasury securities december 31 2012 company compliance covenants related 2006 note purchase agreement payment interest senior unsecured notes due semiannually april 30th october 30th year may 15 2003 company completed private placement 1250 million senior unsecured notes consisting 500 million principal amount 487 senior notes due 2010 750 million principal amount 547 senior notes due may 2013 payment interest senior unsecured notes due semiannually may 15th november 15th year may 2010 company repaid 500 million principal 487 senior notes due upon maturity december 31 2012 company compliance covenants related note purchase agreement company expects pay 2013 notes existing cash use line credit combination 11 common stock class common stock class b common stock equal dividend liquidation rights share companys class common stock entitled one vote matters submitted stockholders share class b common stock entitled ten votes matters shares class b common stock convertible shares class common stock watts water technologies inc subsidiaries notes consolidated financial statements continued 11 common stock continued onetoone basis option holder december 31 2012 company reserved total 2732358 class common stock issuance stockbased compensation plans 6588680 shares conversion class b common stock class common stock may 16 2012 board directors authorized stock repurchase program two million shares companys class common stock repurchase program completed july 2012 company repurchased entire two million shares class common stock cost approximately 658 million august 2 2011 board directors authorized stock repurchase program company authorized repurchase one million shares class common stock three months ended october 2 2011 company repurchased entire one million shares cost 272 million 12 stockbased compensation december 31 2012 company maintained three stock incentive plans key employees outside directors granted incentive stock options isos nonqualified stock options nsos purchase companys class common stock one plan 2004 stock incentive plan currently available grant new stock options currently granted employees 2004 stock incentive plan options become exercisable fouryear period rate 25 per year expire ten years grant date isos nsos granted plans may exercise prices less 100 50 fair market value class common stock date grant respectively companys current practice grant options fair market value grant date december 31 2012 573965 shares class common stock authorized future grants new equity awards companys 2004 stock incentive plan company grants shares restricted stock key employees stock awards nonemployee members companys board directors 2004 stock incentive plan stock awards nonemployee members companys board directors vest immediately employees restricted stock awards vest threeyear period rate onethird per year restricted stock awards amortized expense straightline basis vesting period company also management stock purchase plan allows granting restricted stock units rsus key employees annual basis key employees may elect receive portion annual incentive compensation rsus instead cash rsu provides key employee right purchase share class common stock 67 fair market value date grant rsus vest ratably threeyear period grant date aggregate 2000000 shares class common stock may issued management stock purchase plan december 31 2012 901937 shares class common stock authorized future grants companys management stock purchase plan 2004 stock incentive plan december 31 2012 total unrecognized compensation cost related unvested stock options approximately 76 million total weighted average remaining term 30 years 2012 2011 2010 company recognized compensation cost 21 million 16 million 17 million respectively selling general administrative expenses company recognized additional stock compensation expense 2012 approximately 06 million connection watts water technologies inc subsidiaries notes consolidated financial statements continued 12 stockbased compensation continued modification former chief financial officers options related retention agreement company recognized additional stock compensation expense 2011 approximately 22 million connection modification former chief executive officers options related separation agreement following summary stock option activity related information december 31 2012 aggregate intrinsic values exercisable options approximately 43 million representing total pretax intrinsic value based companys closing class common stock price 4299 december 31 2012 would received option holders option holders exercised options date total intrinsic value options exercised 2012 2011 2010 approximately 57 million 39 million 27 million respectively upon exercise options company issues shares class common stock following table summarizes information options outstanding december 31 2012 watts water technologies inc subsidiaries notes consolidated financial statements continued 12 stockbased compensation continued fair value option granted 2004 stock incentive plan estimated date grant using blackscholesmerton model based following weighted average assumptions riskfree interest rate based upon us treasury yield curve time grant respective expected life option expected life estimated period time outstanding options volatility calculated using historical data expected dividend yield stock companys best estimate expected future dividend yield company applied estimated forfeiture rate 675 2012 2011 2010 stock options rate calculated based upon historical activity estimate granted shares expected vest actual forfeitures differ expected rates company may required make additional adjustments compensation expense future periods assumptions used determine weighted average grantdate fair value stock options 1349 1019 1236 years ended december 31 2012 2011 2010 respectively following summary unvested restricted stock activity related information total fair value shares vested 2012 2011 2010 25 million 25 million 15 million respectively december 31 2012 total unrecognized compensation cost related unvested restricted stock approximately 70 million total weighted average remaining term 22 years 2012 2011 2010 company recognized compensation costs 29 million 24 million 18 million respectively selling general administrative expenses company recognized additional stock compensation expense 2012 approximately 02 million connection modification former chief financial officers restricted stock awards related retention agreement company recognized additional stock compensation expense 2011 related restricted stock approximately 08 million connection modification former chief executive officers stock awards related separation agreement watts water technologies inc subsidiaries notes consolidated financial statements continued 12 stockbased compensation continued company applied estimated forfeiture rate 90 975 2012 2011 2010 respectively restricted stock issued key employees aggregate intrinsic value restricted stock granted outstanding approximated 102 million representing total pretax intrinsic value based companys closing class common stock price 4299 december 31 2012 management stock purchase plan total unrecognized compensation cost related unvested rsus approximately 10 million december 31 2012 total weighted average remaining term 14 years 2012 2011 2010 company recognized compensation cost 08 million 13 million 12 million respectively selling general administrative expenses dividends declared rsus paid individuals remain unpaid december 31 2012 total approximately 01 million summary companys rsu activity related information shown following table december 31 2012 aggregate intrinsic values outstanding vested rsus approximately 39 million 18 million respectively representing total pretax intrinsic value based companys closing class common stock price 4299 december 31 2012 would received rsus holders rsus settled date total intrinsic value rsus settled 2012 2011 2010 approximately 38 million 12 million 07 million respectively upon settlement rsus company issues shares class common stock watts water technologies inc subsidiaries notes consolidated financial statements continued 12 stockbased compensation continued following table summarizes information rsus outstanding december 31 2012 fair value share issued management stock purchase plan estimated date grant using blackscholesmerton model based following weighted average assumptions riskfree interest rate based upon us treasury yield curve time grant respective expected life rsus expected life estimated period time outstanding rsus volatility calculated using historical data expected dividend yield stock companys best estimate expected future dividend yield company applied estimated forfeiture rate 63 2012 2011 2010 rsus rate calculated based upon historical activity estimate granted shares expected vest actual forfeitures differ expected rates company may required make additional adjustments compensation expense future periods assumptions used determine weighted average grantdate fair value rsus granted 1568 1625 1281 2012 2011 2010 respectively company distributed dividends 044 per share 2012 2011 2010 companys class common stock class b common stock 13 employee benefit plans company sponsors funded unfunded noncontributing defined benefit pension plans together cover substantially domestic employees benefits based primarily years service employees compensation funding policy company plans contribute annual amount exceed maximum amount deducted federal income tax purposes october 31 2011 companys board directors voted cease accruals effective december 31 2011 companys pension plan supplemental employees retirement plan company recorded curtailment charge approximately 15 million writeoff previously watts water technologies inc subsidiaries notes consolidated financial statements continued 13 employee benefit plans continued unrecognized prior service costs reduced projected benefit obligation 125 million board directors also voted enhance companys existing 401k savings plan funded status defined benefit plans amounts recognized consolidated balance sheets follows amounts recognized consolidated balance sheets follows amounts recognized accumulated comprehensive income consist watts water technologies inc subsidiaries notes consolidated financial statements continued 13 employee benefit plans continued information pension plans accumulated benefit obligation excess plan assets follows information pension plans plan assets excess accumulated benefit obligation follows components net periodic benefit cost follows estimated net actuarial loss defined benefit pension plans amortized accumulated comprehensive income net periodic benefit cost next year 10 million assumptions weightedaverage assumptions used determine benefit obligations watts water technologies inc subsidiaries notes consolidated financial statements continued 13 employee benefit plans continued weightedaverage assumptions used determine net periodic benefit costs discount rates selected based upon rates return measurement date utilizing bond matching approach match expected benefit cash flows selecting expected longterm rate return assets company considers average rate earnings expected funds invested provide benefits plan includes considering trusts asset allocation expected returns likely earned life plan basis consistent prior year original 2011 discount rate 55 revised 470 october 31 2011 curtailment date plans plan assets companys written retirement plan investment policy sets forth investment policy objectives constraints watts water technologies inc pension plan retirement plan investment policy set forth pension plan committee defines general investment principles directs investment management policy addressing preservation capital risk aversion adherence investment discipline investment managers make reasonable effort control risk evaluated quarterly commonly accepted benchmarks ensure risk assumed commensurate given investment style objectives portfolio designed achieve balanced return current income modest growth capital achieving returns excess rate inflation investment horizon order preserve purchasing power plan assets plan assets required invested liquid securities derivative investments allowed prohibited investments include limited following futures contracts private placements options limited partnerships venturecapital investments interestonly io principalonly po residual tranche collateralized mortgage obligation cmos watts water technologies inc stock prohibited transactions include limited following short selling margin transactions allowable assets include cash equivalents fixed income securities equity securities mutual funds guaranteed investment contracts specific guidelines regarding allocation assets followed using liability driven investment ldi strategy ldi strategy investments made based expected cash flows required fund pension plans liabilities cash flow matching technique requires plans asset allocation heavily weighted toward fixed income securities companys current allocation target 85 fixed income 15 equities investments recent plan curtailment company expects allocation target increase 90 fixed income 2013 investment performance monitored regular basis investments reallocated stay within specific guidelines securities one company government agency exceed 10 watts water technologies inc subsidiaries notes consolidated financial statements continued 13 employee benefit plans continued total fund 20 total fund invested one industry individual treasury securities may represent 50 total fund total allocation treasury bonds notes may represent 100 plans aggregate bond position weighted average asset allocations asset category follows following table presents investments pension plan measured fair value december 31 2012 2011 aincludes investments common stock diverse industries bincludes investments index exchangetraded funds cincludes investment grade bonds diverse industries dincludes investments real estate investment funds exchangetraded funds commodity mutual funds accrued interest cash flows information related companys pension funds cash flow follows watts water technologies inc subsidiaries notes consolidated financial statements continued 13 employee benefit plans continued company expects contribute approximately 06 million 2013 expected benefit payments paid pension plans follows additionally companys domestic employees eligible participate companys 401k savings plan effective january 1 2012 company provided base contribution 2 employees salary regardless whether employee participates plan company matched contribution 100 first 4 employees contribution companys match contribution year ended december 31 2012 40 million 2011 2010 company matched specified percentage employee contributions subject certain limitations companys match contributions years ended december 31 2011 2010 05 million year charges european pension plans approximated 60 million 62 million 35 million years ended december 31 2012 2011 2010 respectively costs relate plans administered certain european subsidiaries benefits calculated according government requirements paid employees upon retirement change employment company entered supplemental compensation agreement timothy p horne september 1 1996 per agreement upon ceasing employee company mr horne must make available requested board work minimum 300 500 hours per year consultant return certain annual compensation long physically able mr horne retired effective december 31 2002 therefore supplemental compensation period began january 1 2003 mr horne complies consulting provisions agreement shall receive supplemental compensation annual basis subject cost living increases year exchange services performed long physically able payment consulting services provided mr horne expensed incurred company years ended 2012 2011 2010 mr horne received payments 06 million 05 million 05 million respectively event physical disability mr horne continue receive payment annually accordance gaap company accrues future postretirement disability benefits period january 1 2003 time mr horne becomes physically unable perform consulting services period disability benefits earned mr horne still active consultant accordance terms agreement 14 contingencies environmental remediation accrual disclosure policy company defendant numerous legal matters arising ordinary course operations including involving product liability environmental matters commercial disputes watts water technologies inc subsidiaries notes consolidated financial statements continued 14 contingencies environmental remediation continued company reviews lawsuits legal proceedings ongoing basis follows appropriate accounting guidance making accrual disclosure decisions company establishes accruals matters company assesses probable loss incurred amount loss reasonable estimated net applicable insurance proceeds company establish accruals matters company believe probable loss incurred amount loss reasonable estimated companys assessment whether loss probable based assessment ultimate outcome matter following appeals may continue exposure loss excess amount accrued possible estimate reasonably possible loss range loss amount accrued matters disclosed estimate aggregated disclosed company records legal costs associated legal contingencies incurred december 31 2012 company estimates aggregate amount reasonably possible loss excess amount accrued legal contingencies approximately 42 million pretax respect estimate reasonably possible loss management estimated upper end range reasonably possible loss based amount money damages claimed applicable ii allegations factual development date iii available defenses based allegations andor iv potentially liable parties estimate based upon currently available information subject significant judgment variety assumptions known unknown uncertainties matters underlying estimate change time actual results may vary significantly current estimate event unfavorable outcome one matters described ultimate liability may excess amounts currently accrued may material companys operating results cash flows particular quarterly annual period however based information currently known management believes ultimate outcome matters described resolved time likely material effect financial position company march 8 2012 watts water technologies inc watts regulator co watts plumbing technologies inc named defendants putative nationwide class action complaint filed us district court northern district california seeking recover damages relief based alleged failure toilet connectors complaint seeks among items damages unspecified amount replacement costs injunctive relief attorneys fees costs company unable estimate range reasonably possible loss matter damages specified proceedings early stages ii uncertainty likelihood class certified ultimate size class iii uncertainty pending motions iv significant factual issues resolved v novel legal issues presented however based information currently known company believe proceedings material effect financial position results operations cash flows liquidity foreign corrupt practices act fcpa settlement october 13 2011 company entered settlement sec resolve allegations concerning potential violations fcpa cwv former indirect whollyowned subsidiary company china terms settlement without admitting denying secs allegations company consented entry administrative ceaseanddesist order watts water technologies inc subsidiaries notes consolidated financial statements continued 14 contingencies environmental remediation continued books records internal controls provisions fcpa company also agreed pay sec 36 million disgorgement prejudgment interest 02 million penalties amounts paid company connection settlement fully accrued company december 31 2010 company believes settlement resolves government investigations concerning cwvs sales practices potential fcpa violations 2012 company received 11 million payment service provider related issues concerning former divested operation product liability company subject variety potential liabilities connection product liability cases company maintains product liability insurance coverage company believes generally accordance industry practices product liability cases us management establishes product liability accrual utilizing thirdparty actuarial valuations incorporate historical trend factors companys specific claims experience derived loss reports provided thirdparty administrators countries company maintains insurance coverage relatively high deductible payments product liability claims tend smaller experienced us environmental remediation company named potentially responsible party respect limited number identified contaminated sites levels contamination vary significantly site related levels remediation efforts environmental liabilities recorded based probable cost known estimated minimum cost remediation accruals discounted present value unless amount timing expenditures fixed reliably determinable company accrues estimated environmental liabilities based assumptions subject number factors uncertainties circumstances affect reliability precision estimates include identification additional sites environmental regulations level cleanup required technologies available number financial condition contributors remediation time period remediation may occur company recognizes changes estimates new remediation requirements defined new information becomes available asbestos litigation company defending approximately 42 lawsuits different jurisdictions alleging injury death result exposure asbestos complaints cases typically name large number defendants identify particular watts water products source asbestos exposure date company obtained dismissal every case reached trial discovery failed yield evidence substantial exposure watts water products litigation lawsuits proceedings claims arising ordinary course operations also pending threatened company watts water technologies inc subsidiaries notes consolidated financial statements continued 15 financial instruments fair value carrying amounts cash equivalents shortterm investments trade receivables trade payables approximate fair value short maturity financial instruments fair value companys 547 senior notes due 2013 585 senior notes due 2016 505 senior notes due 2020 based quoted market prices similar notes level 2 fair value companys variable rate debt approximates carrying value carrying amount estimated fair market value companys longterm debt including current portion follows financial instruments company measures certain financial assets liabilities fair value recurring basis including foreign currency derivatives deferred compensation plan assets related liability cash flow hedges december 31 2012 fair value certain financial assets liabilities determined using following inputs december 31 2012 2011 watts water technologies inc subsidiaries notes consolidated financial statements continued 15 financial instruments continued 1included net companys consolidated balance sheet 2included noncurrent liabilities companys consolidated balance sheet table provides summary changes fair value financial assets liabilities measured fair value recurring basis using significant unobservable inputs level 3 period december 31 2011 december 31 2012 2010 contingent liability 19 million recognized estimate acquisition date fair value contingent consideration brae acquisition liability classified level 3 fair value hierarchy based weighted probability achievement future performance metric date acquisition observable market year ended december 31 2011 year ended december 31 2012 estimate fair value contingent consideration reduced 11 million subsequently 02 million based revised probability achievement future performance metric failure meet performance metric would reduce liability zero complete achievement would increase liability full remaining purchase price 48 million connection tekmar control systems acquisition 2012 contingent liability 51 million recognized estimate acquisition date fair value contingent consideration liability classified level 3 fair value hierarchy based probability achievement future performance metric date acquisition observable market year ended december 31 2012 estimate fair value contingent consideration reduced 01 million based revised probability achievement future performance metric failure meet performance metrics would reduce liability zero complete achievement would increase liability full remaining purchase price 82 million watts water technologies inc subsidiaries notes consolidated financial statements continued 15 financial instruments continued shortterm investment securities december 31 2012 consist certificate deposit remaining maturity greater three months date purchase carrying amount reasonable estimate fair value cash equivalents consist instruments remaining maturities three months less date purchase consist primarily certificates deposit money market funds carrying amount reasonable estimate fair value company uses financial instruments time enhance ability manage risk including foreign currency commodity pricing exposures exist part ongoing business operations use derivatives exposes company counterparty credit risk nonperformance market risk related changes currency exchange rates commodity prices company manages exposure counterparty credit risk diversification counterparties companys counterparties derivative transactions substantial commercial banks significant experience using derivative instruments impact market risk fair value cash flows companys derivative instruments monitored company restricts use derivative financial instruments hedging activities company enter contracts trading purposes company enter contracts speculative purposes use derivative instruments approved senior management written guidelines company exposure number foreign currency rates including canadian dollar euro chinese yuan british pound manage risk company generally uses layering methodology whereby end quarter company generally entered forward exchange contracts hedge approximately 50 projected intercompany purchase transactions next twelve months company primarily uses strategy purchases canada us average volume contracts vary generally approximates 5 15 million open contracts end given quarter december 31 2012 company contracts notional amounts aggregating approximately 45 million company accounts forward exchange contracts economic hedge realized unrealized gains losses contracts recognized income expense consolidated statement operations contracts subject company significant market risk exchange movement offset gains losses related foreign currency denominated transactions december 31 2012 2011 company outstanding swaps company recorded income loss approximately 01 million 06 million 05 million 2012 2011 2010 respectively expense income net consolidated statement operations impact derivative instruments watts water technologies inc subsidiaries notes consolidated financial statements continued 15 financial instruments continued leases company leases certain manufacturing facilities sales offices warehouses equipment generally leases carry renewal provisions require company pay maintenance costs future minimum lease payments capital leases noncancelable operating leases december 31 2012 follows carrying amounts assets capital lease include 16 segment information company operates three geographic segments north america emea asia segments sells similar products managed separately separate financial results reviewed companys chief operating decisionmaker intercompany sales transactions eliminated sales region based upon location entity recording sale accounting policies segment described summary significant accounting policies see note 2 watts water technologies inc subsidiaries notes consolidated financial statements continued 16 segment information continued following summary companys significant accounts balances segment reconciled consolidated totals corporate expenses primarily administrative compensation expense internal controls costs professional fees including legal audit expenses shareholder services benefit administration costs allocated geographic segments viewed corporate functions support activities watts water technologies inc subsidiaries notes consolidated financial statements continued 16 segment information continued following includes us net sales us property plant equipment companys north american segment following includes intersegment sales north america emea asia company sells products various end markets around world groups net sales third parties four product categories many companys sales distributors thirdparty manufacturers representatives portion product categorization based managements understanding final product use allocations made align sales product category net sales third parties four product categories follows watts water technologies inc subsidiaries notes consolidated financial statements continued 17 quarterly financial information unaudited 18 subsequent events february 19 2013 company declared quarterly dividend eleven cents 011 per share outstanding share class common stock class b common stock watts water technologies inc subsidiaries schedule iivaluation qualifying accounts amounts millions three years ended december 31 exhibit index exhibit description 101def xbrl taxonomy extension definition linkbase document 101lab xbrl taxonomy extension label linkbase document 101pre xbrl taxonomy extension presentation linkbase document 1incorporated reference registrants current report form 8k dated july 12 2010 file 00111499 2incorporated reference registrants current report form 8k dated november 14 1991 file 00111499 3incorporated reference registrants annual report form 10k year ended december 31 2002 file 00111499 4incorporated reference registrants current report form 8k dated april 27 2006 file 00111499 5incorporated reference registrants form s1 336515 part second amendment form s1 dated august 21 1986 6incorporated reference registrants quarterly report form 10q quarter ended september 30 2012 file 00111499 7incorporated reference registrants current report form 8k dated may 15 2003 file 00111499 8incorporated reference registrants current report form 8k dated may 14 2008 file 00111499 9incorporated reference registrants annual report form 10k year ended june 30 1996 file 00111499 10incorporated reference amendment 1 registrants annual report form 10k year ended june 30 1992 file 00111499 11incorporated reference registrants annual report form 10k year ended december 31 2011 file 00111499 12incorporated reference registrants annual report form 10k year ended june 30 1997 file 00111499 13incorporated reference notes consolidated financial statements note 2 report 14incorporated reference registrants quarterly report form 10q quarter ended july 3 2005 file 00111499 15incorporated reference registrants annual report form 10k year ended june 30 1999 file 00111499 16incorporated reference registrants quarterly report form 10q quarter ended september 30 2000 file 00111499 17incorporated reference registrants quarterly report form 10q quarter ended july 4 2010 file 00111499 18incorporated reference registrants quarterly report form 10q quarter ended september 26 2004 file 00111499 19incorporated reference registrants quarterly report form 10q quarter ended july 1 2007 file 00111499 20incorporated reference registrants annual report form 10k year ended december 31 2007 file 00111499 21incorporated reference registrants current report form 8k dated june 18 2010 file 00111499 22incorporated reference registrants current report form 8k dated june 14 2012 file 00111499 23incorporated reference registrants annual report form 10k year ended december 31 2010 file 00111499 management contract compensatory plan arrangement attached exhibit 101 report following formatted xbrl extensible business reporting language consolidated statements operations years ended december 31 2012 2011 2010 ii consolidated statements comprehensive income years ended december 31 2012 2011 2010 iii consolidated balance sheets december 31 2012 december 31 2011 iv consolidated statements stockholders equity years ended december 31 2012 2011 2010 v consolidated statements cash flows years ended december 31 2012 2011 2010 vi notes consolidated financial statementsitem 15 exhibits financial statement schedules a1 financial statements following financial statements included separate section report commencing page numbers specified report independent registered public accounting firm consolidated statements operations years ended december 31 2014 2013 2012 consolidated statements comprehensive loss income years ended december 31 2014 2013 2012 consolidated balance sheets december 31 2014 2013 consolidated statements stockholders equity years ended december 31 2014 2013 2012 consolidated statements cash flows years ended december 31 2014 2013 2012 notes consolidated financial statements a2 schedules schedule iivaluation qualifying accounts years ended december 31 2014 2013 2012 required schedules provision made applicable accounting regulations securities exchange commission included notes consolidated financial statements a3 exhibits listed exhibit index immediately preceding exhibits filed part annual report form 10k signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized watts water technologies inc robert j pagano jr robert j pagano jr chief executive officer president interim chief financial officer dated february 26 2015 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated report independent registered public accounting firm board directors stockholders watts water technologies inc audited accompanying consolidated balance sheets watts water technologies inc subsidiaries december 31 2014 2013 related consolidated statements operations comprehensive loss income stockholders equity cash flows years threeyear period ended december 31 2014 connection audits consolidated financial statements also audited financial statement schedule iivaluation qualifying accounts consolidated financial statements financial statement schedule responsibility companys management responsibility express opinion consolidated financial statements financial statement schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position watts water technologies inc subsidiaries december 31 2014 2013 results operations cash flows years threeyear period ended december 31 2014 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states watts water technologies incs internal control financial reporting december 31 2014 based criteria established internal controlintegrated framework 1992 issued committee sponsoring organizations treadway commission coso report dated february 26 2015 expressed unqualified opinion effectiveness companys internal control financial reporting kpmg llp boston massachusetts february 26 2015 watts water technologies inc subsidiaries consolidated statements operations amounts millions except per share information accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated statements comprehensive loss income amounts millions accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated balance sheets amounts millions except share information accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated statements stockholders equity amounts millions except share information accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated statements cash flows amounts millions accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries notes consolidated financial statements 1 description business watts water technologies inc company subsidiaries designs manufactures sells extensive line water safety flow control products improve quality conservation safety control water predominantly americas europe middle east africa emea presence asiapacific 2 accounting policies principles consolidation consolidated financial statements include accounts company majority wholly owned subsidiaries upon consolidation significant intercompany accounts transactions eliminated cash equivalents cash equivalents consist instruments remaining maturities three months less date purchase consist primarily certificates deposit money market funds carrying amount reasonable estimate fair value allowance doubtful accounts allowance doubtful accounts includes reserves bad debts sales returns allowances cash discounts company analyzes aging accounts receivable individual accounts receivable historical bad debts concentration receivables customer credit worthiness current economic trends changes customer payment terms company specifically analyzes individual accounts receivable establishes specific reserves financially troubled customers addition factors developed certain regions utilizing historical trends sales returns allowances cash discount activities derive reserve returns allowances cash discounts concentration credit company sells products diversified customer base therefore significant concentrations credit risk 2014 2013 2012 customer accounted 10 companys total sales inventories stated lower cost market using primarily firstin firstout method market value determined replacement cost net realizable value historical usage used basis determining reserve excess obsolete inventories goodwill intangible assets goodwill recorded consideration paid acquisitions exceeds fair value net tangible intangible assets acquired goodwill intangible assets indefinite useful lives amortized rather tested least annually impairment watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued impairment goodwill longlived assets changes carrying amount goodwill geographic segment follows goodwill tested impairment least annually frequently events circumstances indicate likely goodwill might impaired change business conditions company performs annual goodwill impairment assessment fourth quarter year december 1 2014 company completed acquisition aerco international inc aerco share purchase transaction aggregate purchase price including estimated working capital adjustment approximately 2722 million subject final postclosing working capital adjustment company accounted transaction business combination company completed purchase price allocation resulted recognition 1743 million goodwill 1024 million intangible assets end fourth quarter 2014 management determined likely significant portion asiapacific reporting units third party intersegment net sales expected decline result initial phase americas asiapacific transformation restructuring program based factor company performed quantitative impairment analysis asiapacific reporting unit company completed fair value assessment net assets reporting unit recorded impairment 129 million fourth quarter 2014 company estimated fair value reporting unit using present value expected future cash flows reflect impact certain product line rationalization efforts associated initial phase americas asiapacific transformation restructuring program including sale certain assets second step impairment test carrying watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued value goodwill exceeded implied fair value goodwill resulting full impairment tax benefit associated impairment 129 million charge eliminated goodwill asiapacific reporting unit see note 19 discussion companys exit plans impacting americas asiapacific company recorded pretax goodwill impairment charges 03 million 10 million 2013 2012 respectively blue ridge atlantic enterprises inc brae reporting unit company determined future prospects blue ridge atlantic enterprises inc brae reporting unit americas lower originally estimated future sales growth expectations reduced number times since 2010 acquisition brae goodwill balance fully impaired 2013 goodwill impairment charges offset reduction anticipated earnout payments equal amounts remaining earnout liability december 31 2013 company estimated fair value reporting unit using expected present value future cash flows emea reporting unit represents emea geographic segment excluding blücher reporting unit goodwill balance 1958 million december 31 2014 company continues monitor emea reporting units performance considering current economic environment europe impact operating results growth expectations annual impairment date october 26 2014 company performed qualitative fair value assessment including evaluation certain key assumptions company concluded fair value emea reporting unit continued exceed carrying value indefinitelived intangibles tested impairment least annually frequently events circumstances change business conditions indicate likely intangible asset might impaired company performs annual indefinitelived intangibles impairment assessment fourth quarter year 2014 2013 2012 impairment assessments company performed quantitative assessments indefinitelived intangible assets methodology employed relief royalty method subset income approach based results assessment company recognized noncash pretax impairment charges 2014 2013 2012 approximately 13 million 07 million 04 million respectively impairment charge 13 million 2014 consists 05 million impairment charge trade name americas segment 08 million impairment charge trade name emea segment gross carrying amount table reflects impairment charges intangible assets estimable lives longlived assets reviewed impairment whenever events changes circumstances indicate carrying amount asset group may recoverable recoverability intangible assets estimable lives longlived assets measured comparison carrying amount asset group future net undiscounted pretax cash flows expected generated asset group comparisons indicate asset recoverable impairment loss recognized amount carrying amount asset group exceeds related estimated fair value estimated fair value based either discounted future pretax operating cash flows appraised values depending nature asset company determines discount rate analysis based weighted average cost capital using market guideline public companies related businesses allocate interest charges asset group measured judgment required estimate future operating cash flows watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued intangible assets include following company acquired 1024 million intangible assets part aerco acquisition consisting primarily customer relationships valued 785 million developed technology 158 million trade name 74 million weightedaverage amortization period total asset category customer relationships developed technology trade name 15 years 16 years 10 years 20 years respectively aggregate amortization expense amortized intangible assets 2014 2013 2012 152 million 147 million 154 million respectively additionally future amortization expense amortizable intangible assets expected 205 million 2015 201 million 2016 197 million 2017 162 million 2018 140 million 2019 amortization expense provided straightline basis estimated useful lives intangible assets weightedaverage remaining life total amortizable intangible assets 122 years patents customer relationships technology trade names amortizable intangibles weightedaverage remaining lives 50 years 119 years 103 years 145 years 333 years respectively indefinitelived intangible assets primarily include trade names trademarks property plant equipment property plant equipment recorded cost depreciation provided straightline basis estimated useful lives assets range 10 40 years buildings improvements 3 15 years machinery equipment leasehold improvements depreciated lesser economic useful life asset remaining lease term taxes income taxes assessed governmental authorities sale transactions recorded net basis excluded sales companys consolidated statements operations income taxes income taxes accounted asset liability method deferred tax assets liabilities recognized future tax consequences attributable differences watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued financial statement carrying amounts existing assets liabilities respective tax bases operating loss tax credit carry forwards deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized income period includes enactment date company recognizes tax benefits item question meets morelikelythannot greater 50 likelihood sustained upon examination taxing authorities threshold 2014 unrecognized tax benefits company increased net amount 10 million unrecognized tax benefits increased approximately 13 million primarily due findings european audit whereby unrecognized tax benefits decreased approximately 02 million related settlement completion state tax audit december 31 2014 company gross unrecognized tax benefits approximately 18 million approximately 13 million recognized would affect effective tax rate difference amount unrecognized tax benefits amount would affect effective tax rate consists federal tax benefit state income tax items reconciliation beginning ending amount unrecognized tax follows company conducts business variety locations throughout world resulting tax filings numerous domestic foreign jurisdictions company subject tax examinations regularly part normal course business companys major jurisdictions us canada china netherlands uk germany italy france exceptions company longer subject us federal state local nonus income tax examinations years 2010 statute limitations major jurisdictions open us year 2011 later canada 2011 later netherlands 2012 later company accounts interest penalties related uncertain tax positions component income tax expense foreign currency translation financial statements subsidiaries located outside united states generally measured using local currency functional currency balance sheet accounts including goodwill foreign subsidiaries translated united states dollars yearend exchange rates income expense items translated weighted average exchange rates period net translation gains losses included comprehensive income separate component stockholders equity company provide us income taxes foreign currency translation adjustments since provide taxes undistributed earnings foreign subsidiaries gains losses foreign currency transactions subsidiaries included net earnings watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued stockbased compensation company records compensation expense financial statements sharebased awards based grant date fair value awards stockbased compensation expense includes estimate prevesting forfeitures recognized requisite service periods awards straightline basis generally commensurate vesting term benefits associated tax deductions excess recognized compensation cost reported financing cash flow december 31 2014 company one stockbased compensation plan total unrecognized compensation costs related unvested stockbased compensation arrangements approximately 202 million total weighted average remaining term 19 years 2014 2013 2012 company recognized compensation costs related stockbased programs approximately 86 million 96 million 66 million respectively 2014 company began recognizing certain stock compensation costs cost goods sold based allocation costs three operating segments 2014 stock compensation expense 06 million recorded cost goods sold 80 million recorded selling general administrative expenses 2013 2012 compensation costs recognized selling general administrative expenses 2014 2013 2012 company recorded approximately 07 million 12 million 07 million respectively tax benefits compensation expense relating stock options 2014 2013 2012 company recorded approximately 16 million 19 million 14 million respectively tax benefit stockbased plans 2014 2013 2012 recognition total stockbased compensation expense impacted basic diluted net income per common share 018 014 010 respectively net income per common share basic net income per common share calculated dividing net income weighted average number common shares outstanding calculation diluted income per share assumes conversion dilutive securities see note 12 net income number shares used compute net income per share basic assuming full dilution reconciled computation diluted net income per share years ended december 31 2014 2013 2012 excludes effect potential exercise options purchase approximately 03 million 02 million 02 million shares respectively exercise price option greater average market price class common stock effect would antidilutive watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued april 30 2013 board directors authorized repurchase 900 million companys class common stock time open market privately negotiated transactions timing number shares repurchased determined companys management based evaluation market conditions repurchases may also made rule 10b51 plan would permit shares repurchased company might otherwise precluded insider trading laws repurchase program may suspended discontinued time subject terms rule 10b51 plan company may enter respect repurchase program 2014 company repurchased approximately 670000 shares class common stock cost approximately 396 million 2013 company repurchased approximately 454000 shares class common stock cost approximately 230 million may 16 2012 board directors authorized stock repurchase program two million shares companys class common stock repurchase program completed july 2012 company repurchased entire two million shares class common stock cost approximately 658 million financial instruments normal course business company manages risks associated commodity prices foreign exchange rates interest rates variety strategies including use hedging transactions executed accordance companys policies companys hedging transactions include limited use various derivative financial commodity instruments matter policy company use derivative instruments unless underlying exposure change value derivative instruments would substantially offset opposite change value underlying hedged items company use derivative instruments trading speculative purposes derivative instruments may designated accounted either hedge recognized asset liability fair value hedge forecasted transaction cash flow hedge fair value hedge effective ineffective portions change fair value derivative instrument along adjustment carrying amount hedged item fair value changes attributable hedged risk recognized earnings cash flow hedge changes fair value derivative instrument highly effective deferred accumulated comprehensive income loss underlying hedged item recognized earnings cash flow hedges december 31 2014 december 31 2013 fair value cash flow hedge cease qualify hedge accounting terminated would continue carried balance sheet fair value settled hedge accounting would discontinued prospectively forecasted transaction longer probable occurring amounts previously deferred accumulated comprehensive income would recognized immediately earnings occasion company may enter derivative instrument qualify hedge accounting entered offset changes fair value underlying transaction required recognized earnings natural hedge instruments reflected consolidated balance sheets fair value changes fair value recognized earnings foreign currency derivatives include forward foreign exchange contracts primarily canadian dollars metal derivatives include commodity swaps copper watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued portions companys outstanding debt exposed interest rate risks company monitors interest rate exposures ongoing basis maximize overall effectiveness interest rates fair value measurements fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date entity required maximize use observable inputs available minimize use unobservable inputs measuring fair value company certain financial assets liabilities measured fair value recurring basis certain nonfinancial assets liabilities may measured fair value nonrecurring basis fair value disclosures assets liabilities based threelevel hierarchy defined follows level 1 quoted prices active markets identical assets liabilities entity ability access measurement date level 2 observable inputs level 1 prices quoted prices similar assets liabilities quoted prices markets active inputs observable corroborated observable market data substantially full term assets liabilities level 3 unobservable inputs supported little market activity significant fair value assets liabilities assets liabilities subject hierarchy classified entirety based lowest level input significant fair value measurement companys assessment significance particular input fair value measurement entirety requires judgment considers factors specific asset liability shipping handling shipping handling costs included selling general administrative expense amounted 618 million 613 million 584 million years ended december 31 2014 2013 2012 respectively 2013 2012 shipping handling costs disclosed updated include handling costs order comparable current year research development research development costs included selling general administrative expense amounted 225 million 215 million 204 million years ended december 31 2014 2013 2012 respectively revenue recognition company recognizes revenue following criteria met company entered binding agreement product shipped title passes sales price customer fixed determinable collectability reasonably assured provisions estimated returns allowances made time sale recorded reduction sales included allowance doubtful accounts consolidated balance sheets company watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued records provisions sales incentives primarily volume rebates adjustment net sales time sale based estimated purchase targets basis presentation certain amounts 2013 2012 consolidated financial statements reclassified permit comparison 2014 presentation reclassifications effect reported results operations stockholders equity estimates preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates new accounting standards january 2015 financial accounting standards board fasb issued accounting standards update asu 201501 income statementextraordinary unusual items simplifying income statement presentation eliminating concept extraordinary items asu 201501 eliminates us gaap concept extraordinary items part initiative reduce complexity accounting standards asu 201501 effective first quarter 2016 public companies calendar year ends early adoption permitted provided guidance applied beginning fiscal year adoption asu may applied prospectively retrospectively prior periods presented adoption guidance expected material impact companys financial statements june 2014 financial accounting standards board fasb issued accounting standards update asu 201412 compensationstock compensation accounting share based payments terms award provide performance target could achieved requisite service period asu 201412 clarifies performance targets could achieved requisite period treated performance conditions performance conditions would reflected estimating grant date fair value award instead would accounted achievement performance condition becomes probable asu 201412 effective first quarter 2016 public companies calendar year ends early adoption permitted adoption guidance expected material impact companys financial statements may 2014 fasb issued asu 201409 revenue contracts customers asu 201409 converges revenue recognition us gaap international financial reporting standards ifrs us gaap standard generally eliminates transaction industryspecific revenue recognition guidance includes current guidance longterm constructiontype contracts software arrangements real estate sales telecommunication arrangements franchise sales new standard revenue recognized based fivestep model asu 201409 effective first quarter 2017 public companies calendar year ends early adoption permitted public companies us gaap company assessing impact standard companys financial statements watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued april 2014 fasb issued asu 201408 presentation financial statements property plant equipment reporting discontinued operations disclosures disposals components entity asu 201408 change definition discontinued operations limit discontinued operations presentation disposals components representing strategic shift major effect operations financial results issuer asu 201408 effective first quarter 2015 public companies calendar year ends early adoption permitted company early adopted asu 2014 adoption guidance material impact companys financial statements 3 discontinued operations august 1 2013 company completed sale outstanding shares indirect whollyowned subsidiary watts insulation gmbh austroflex receiving net cash proceeds 79 million company chose divest austroflex meet performance expectations loss tax disposal business approximately 22 million year ended december 31 2011 company wrote austroflexs long lived assets 148 million company substantial continuing involvement austroflexs operations cash flows therefore austroflexs results operations presented discontinued operations periods presented december 21 2012 company completed sale outstanding shares subsidiary flomatic corporation flomatic sale excluded backflow product line flomatic retained company flomatic corporation located glens falls new york specialized manufacturing selling check valves foot valves automatic hydraulic control valves well water industry product line core companys business company acquired flomatic part acquisition socla april 2011 company determined would substantial continuing involvement flomatics operations cash flows therefore flomatics results operations presented discontinued operations periods presented condensed operating statements discontinued operations summarized company recognize tax benefit loss disposal flomatic austroflex shares company believe likely tax benefit would realized watts water technologies inc subsidiaries notes consolidated financial statements continued 3 discontinued operations continued revenues reported discontinued operations follows 4 restructuring charges net companys board directors approves major restructuring programs involve discontinuance significant product lines shutdown significant facilities time company takes additional restructuring actions including involuntary terminations part major program company accounts costs period individual employees notified liability incurred costs included restructuring charges companys consolidated statements operations summary pretax cost restructuring program follows company recorded pretax restructuring charges business segments follows 2013 actions july 30 2013 board directors authorized restructuring program respect companys emea segment reduce european manufacturing footprint improve organizational watts water technologies inc subsidiaries notes consolidated financial statements continued 4 restructuring charges net continued operational efficiency better align costs expected revenues response changing market conditions restructuring program expected include pretax charge earnings totaling approximately 81 million expected recorded end fiscal 2015 2014 total expected costs planned actions reduced 140 million 81 million primarily related reduced severance costs favorable foreign exchange rates weakening euro approximately 15 million expected severance asset writedown costs initially anticipated 2013 actions included 2014 emea actions discussed total 2013 actions charge include costs severance benefits relocation site cleanup professional fees certain asset writedowns total net aftertax charge restructuring program expected approximately 57 million net aftertax charges incurred 2014 2013 27 million 29 million respectively details companys 2013 european footprint program reserve year ended december 31 2014 2013 follows following table summarizes total expected incurred remaining pretax costs 2013 european restructuring program actions type attributable emea reportable segment actions company also periodically initiates actions part major program total actions pretax restructuring expense 113 million 59 million 52 million 2014 2013 2012 respectively watts water technologies inc subsidiaries notes consolidated financial statements continued 4 restructuring charges net continued fourth quarter 2014 management initiated certain restructuring actions strategic initiatives respect companys emea segment response ongoing economic challenges europe additional product rationalization restructuring actions primarily include expected severance benefits limited costs relating asset write offs professional fees relocation total pretax charge restructuring initiatives expected approximately 99 million approximately 69 million pretax severance charges incurred fourth quarter 2014 remaining expected costs relate severance asset writeoffs professional fees relocation costs expected completed end fourth quarter fiscal 2016 following table summarizes total expected incurred remaining pretax costs emea restructuring actions strategic initiatives began fourth quarter 2014 company initiated restructuring activities americas asiapacific corporate reduce costs reductionsinforce total pretax restructuring expense incurred relating initiatives 31 million remaining expected costs 2013 company initiated restructuring activities respect companys operating facilities emea included relocation closure manufacturing facility italy relocation initiatives europe total pretax restructuring expense incurred relating initiatives 13 million 46 million 2014 2013 respectively remaining expected costs 2012 company initiated restructuring activities north america europe continued 2013 restructuring activities americas included relocation certain production activities included closure manufacturing site severance shutdown costs north america 13 million costs incurred 2013 2012 relating activities remaining expected costs 5 business acquisitions disposition aerco december 1 2014 company completed acquisition aerco share purchase transaction aggregate purchase price approximately 2722 million financed borrowing companys credit agreement purchase price includes estimated working capital adjustment 77 million subject final postclosing working capital adjustment aerco leading provider commercial highefficiency boilers water heaters heating solutions north america aerco based new york products distributed commercial municipal use primarily north america aerco strengthens watts strategic vision expand heat source products strengthens companys solutions system offerings watts water technologies inc subsidiaries notes consolidated financial statements continued 5 business acquisitions disposition continued company accounted transaction business combination company completed purchase price allocation resulted recognition 1743 million goodwill 1024 million intangible assets intangible assets consist primarily customer relationships valued 785 million estimated lives 16 years developed technology valued 158 million estimated lives 10 years trade name valued 74 million 20 year life goodwill attributable workforce aerco strategic platform adjacency allow watts extend product offerings result acquisition approximately 194 million goodwill deductible tax purposes following table summarizes value assets liabilities acquired millions consolidated statement operations year ended december 31 2014 includes results aerco since acquisition date includes 53 million revenues 14 million operating loss includes acquisition accounting charges 08 million supplemental proforma information unaudited company completed acquisition aerco beginning 2013 net sales net income continuing operations earnings per share continuing operations would follows net income continuing operations years ended december 31 2014 december 31 2013 adjusted include 31 million 33 million respectively net interest expense related financing 39 million 43 million respectively net amortization expense resulting estimated allocation purchase price amortizable tangible intangible assets net income continuing operations year ended december 31 2014 also adjusted exclude 33 million net acquisitionrelated charges thirdparty costs watts water technologies inc subsidiaries notes consolidated financial statements continued 5 business acquisitions disposition continued tekmar january 31 2012 company completed acquisition tekmar share purchase transaction designer manufacturer control systems used heating ventilation air conditioning applications tekmar enhances companys hydronic systems product offerings us canada part americas segment initial purchase price paid equal approximately 178 million contingent liability 51 million recognized estimate acquisition date fair value earnout company accounted transaction business combination company completed purchase price allocation resulted recognition 117 million goodwill 101 million intangible assets intangible assets consist primarily acquired technology estimated life 10 years distributor relationships estimated life 7 years trade name estimated life 20 years goodwill deductible tax purposes results tekmar material companys consolidated financial statements results operations tekmar included companys americas segment since acquisition date portion contingent consideration paid 2014 2013 amount 22 million 12 million respectively based performance metrics achieved 2013 2012 contingent liability increased 05 million 10 million years ended december 31 2014 2013 respectively based performance metrics achieved expected achieved final payment based 2014 performance made 2015 6 inventories net inventories consist following raw materials workinprocess finished goods net valuation reserves 273 million 299 million december 31 2014 2013 respectively finished goods 164 million 167 million december 31 2014 2013 respectively consigned watts water technologies inc subsidiaries notes consolidated financial statements continued 7 property plant equipment property plant equipment consist following 8 income taxes significant components companys deferred income tax liabilities assets follows watts water technologies inc subsidiaries notes consolidated financial statements continued 8 income taxes continued provision income taxes continuing operations based following pretax income provision income taxes continuing operations consists following actual income taxes reported continuing operations different would computed applying federal statutory tax rate income continuing operations income taxes reasons difference follows december 31 2014 company foreign net operating loss carry forwards 419 million income tax purposes considering valuation allowances 264 million losses carried forward indefinitely 100 million expire 2020 55 million expire 2023 net watts water technologies inc subsidiaries notes consolidated financial statements continued 8 income taxes continued operating losses consist 264 million related austrian operations 155 million dutch operations december 31 2014 company us capital loss carry forwards 62 million income tax purposes considering valuation allowances 26 million expire 2015 21 million expire 2016 10 million expire 2017 05 million expire 2018 december 31 2014 december 31 2013 company valuation allowances 125 million 131 million respectively december 31 2014 62 million relates us capital losses 63 million relates austrian net operating losses december 31 2013 61 million related us capital losses 70 million related austrian net operating losses management believes ability company use losses within applicable carry forward period rise level likely threshold company valuation allowance deferred tax assets management believes likely company recover net deferred tax assets management believes likely future reversals deferred tax liabilities together forecasted income sufficient fully recover deferred tax assets changes enacted income tax laws material effect company 2014 2013 2012 undistributed earnings companys foreign subsidiaries amounted approximately 3860 million december 31 2014 3972 million december 31 2013 3297 million december 31 2012 earnings considered indefinitely reinvested accordingly provision us federal state income taxes recorded thereon upon distribution earnings form dividends otherwise company subject withholding taxes payable various foreign countries determination amount us income tax liability would incurred practicable complexities associated hypothetical calculation however unrecognized foreign tax credits may available reduce portion us income tax liability withholding taxes approximately 120 million would payable upon remittance previously unremitted earnings december 31 2014 9 accrued expenses liabilities accrued expenses liabilities consist following watts water technologies inc subsidiaries notes consolidated financial statements continued 10 financing arrangements longterm debt consists following principal payments next five years thereafter due follows millions 201519 20162263 201714 201801 20192750 thereafter750 company maintains letters credit guarantee performance payment third parties accordance specified terms conditions amounts outstanding approximately 236 million december 31 2014 december 31 2013 companys letters credit primarily associated insurance coverage lesser extent foreign purchases companys letters credit generally expire within one year issuance drawn revolving credit facility instruments may exist expire without drawn therefore necessarily represent future cash flow obligations february 18 2014 company terminated prior credit agreement entered new credit agreement credit agreement among company certain subsidiaries company become borrowers credit agreement jpmorgan chase bank na administrative agent swing line lender letter credit issuer lenders referred therein credit agreement provides 500 million fiveyear senior unsecured revolving credit facility may increased additional 500 million certain circumstances subject terms credit agreement credit agreement sublimit 100 million letters credit borrowings outstanding credit agreement bear interest fluctuating rate per annum equal applicable percentage equal case eurocurrency rate loans british bankers association libor rate plus applicable percentage ranging 0975 145 determined reference companys consolidated leverage ratio plus case certain lenders mandatory cost calculated accordance terms credit agreement ii case base rate loans swing line loans highest federal funds rate plus 05 b rate interest effect day announced jpmorgan chase bank na prime rate c british bankers association libor rate plus 10 plus applicable percentage ranging 000 045 determined reference companys consolidated leverage ratio addition paying interest credit agreement company also required pay certain fees connection credit facility including limited unused facility fee letter credit fees credit agreement matures february 18 2019 subject extension certain circumstances subject terms credit agreement company may repay loans outstanding credit agreement time without watts water technologies inc subsidiaries notes consolidated financial statements continued 10 financing arrangements continued premium penalty customary breakage costs subject terms credit agreement december 31 2014 company compliance covenants related credit agreement 2014 million unused available credit agreement 236 million standby letters credit outstanding credit agreement company 275 million borrowings outstanding credit agreement december 31 2014 credit agreement imposes various restrictions company subsidiaries including restrictions pertaining incurrence additional indebtedness ii limitations liens iii making distributions dividends payments iv mergers consolidations acquisitions v dispositions assets vi maintenance certain consolidated leverage ratios consolidated interest coverage ratios vii transactions affiliates viii changes governing documents ix changes control june 18 2010 company entered note purchase agreement certain institutional investors 2010 note purchase agreement pursuant 2010 note purchase agreement company issued senior notes 750 million principal due june 18 2020 company pay interest outstanding balance notes rate 505 per annum payable semiannually june 18th december 18th principal notes shall become due payable company may option upon notice subject terms 2010 note purchase agreement prepay time part notes amount less 10 million paying principal amount plus makewhole amount dependent upon yield respective us treasury securities 2010 note purchase agreement includes operational financial covenants company required comply including among others maintenance certain financial ratios restrictions additional indebtedness liens dispositions december 31 2014 company compliance covenants related 2010 note purchase agreement april 27 2006 company completed private placement 2250 million 585 senior unsecured notes due april 2016 2006 note purchase agreement 2006 note purchase agreement includes operational financial covenants company required comply including among others maintenance certain financial ratios restrictions additional indebtedness liens dispositions events default 2006 note purchase agreement include failure comply financial operational covenants well bankruptcy insolvency events company may option upon notice note holders prepay time part notes amount less 10 million paying principal amount plus makewhole amount dependent upon yield respective us treasury securities december 31 2014 company compliance covenants related 2006 note purchase agreement payment interest senior unsecured notes due semiannually april 30th october 30th year may 15 2003 company completed private placement 1250 million senior unsecured notes consisting 500 million principal amount 487 senior notes due 2010 750 million principal amount 547 senior notes due may 2013 may 2010 company repaid 500 million principal 487 senior notes due upon maturity period ended june 30 2013 company repaid available cash 750 million unsecured senior notes matured may 15 2013 watts water technologies inc subsidiaries notes consolidated financial statements continued 11 common stock class common stock class b common stock equal dividend liquidation rights share companys class common stock entitled one vote matters submitted stockholders share class b common stock entitled ten votes matters shares class b common stock convertible shares class common stock onetoone basis option holder december 31 2014 company reserved total 28552065 class common stock issuance stockbased compensation plans 6479290 shares conversion class b common stock class common stock april 30 2013 board directors authorized repurchase 90 million companys class common stock time open market privately negotiated transactions timing number shares repurchased determined companys management based evaluation market conditions repurchases may also made rule 10b51 plan would permit shares repurchased company might otherwise precluded insider trading laws repurchase program may suspended discontinued time subject terms rule 10b51 plan company may enter respect repurchase program 2014 company repurchased approximately 670000 shares class common stock cost approximately 396 million 2013 company repurchased approximately 454000 shares class common stock cost approximately 230 million may 16 2012 board directors authorized stock repurchase program two million shares companys class common stock repurchase program completed july 2012 company repurchased entire two million shares class common stock cost approximately 658 million 12 stockbased compensation december 31 2014 company maintains one stock incentive plan second amended restated 2004 stock incentive plan 2004 stock incentive plan key employees granted nonqualified stock options purchase companys class common stock options typically become exercisable fouryear period rate 25 per year expire ten years grant date however options granted 2014 become exercisable threeyear period rate onethird per year options granted plan may exercise prices less 100 fair market value class common stock date grant companys current practice grant options fair market value grant date december 31 2014 1706591 shares class common stock authorized future grants new equity awards companys 2004 stock incentive plan company grants shares restricted stock deferred shares key employees stock awards nonemployee members companys board directors 2004 stock incentive plan stock awards nonemployee members companys board directors vest immediately employees restricted stock awards deferred shares typically vest threeyear period rate onethird per year except restricted stock awards deferred shares granted 2014 vest twoyear period rate 50 per year beginning 2014 company granted performance stock units key employees 2004 stock incentive plan performance stock units cliff vest end threeyear performance period upon vesting number shares companys class common stock awarded performance stock unit recipient determined based companys attainment certain watts water technologies inc subsidiaries notes consolidated financial statements continued 12 stockbased compensation continued performance goals set time performance stock units granted performance goals 2014 performance stock units based compound annual growth rate companys revenue threeyear performance period companys return invested capital roic third year performance period performance period 2014 performance stock units january 1 2014 december 31 2016 2014 performance stock units also provide overall minimum roic threshold company must exceed order shares companys class common stock earned number shares class common stock may earned performance stock unit recipient ranges 0 200 target number shares designated recipient time grant performance stock units amortized expense vesting period based companys expected performance relative performance goals met awards earned previously recognized compensation expense reversed company also management stock purchase plan allows granting restricted stock units rsus key employees annual basis key employees may elect receive portion annual incentive compensation rsus instead cash rsu provides key employee right purchase share class common stock 67 fair market value date grant rsus vest either annually three year period grant date upon third anniversary grant date receipt shares underlying rsus deferred minimum three years greater number years chosen employee aggregate 2000000 shares class common stock may issued management stock purchase plan december 31 2014 913526 shares class common stock authorized future grants companys management stock purchase plan 2004 stock incentive plan december 31 2014 total unrecognized compensation cost related unvested stock options approximately 56 million total weighted average remaining term 22 years 2014 2013 2012 company recognized compensation cost 26 million 38 million 27 million respectively following summary stock option activity related information watts water technologies inc subsidiaries notes consolidated financial statements continued 12 stockbased compensation continued december 31 2014 aggregate intrinsic value exercisable options approximately 30 million representing total pretax intrinsic value based companys closing class common stock price 6344 december 31 2014 would received option holders option holders exercised options date total intrinsic value options exercised 2014 2013 2012 approximately 82 million 74 million 57 million respectively upon exercise options company issues shares class common stock following table summarizes information options outstanding december 31 2014 fair value option granted 2004 stock incentive plan estimated date grant using blackscholesmerton model based following weighted average assumptions riskfree interest rate based upon us treasury yield curve time grant respective expected life option expected life estimated period time outstanding options volatility calculated using historical data expected dividend yield stock companys best estimate expected future dividend yield assumptions used determine weighted average grantdate fair value stock options 2004 2030 1349 years ended december 31 2014 2013 2012 respectively watts water technologies inc subsidiaries notes consolidated financial statements continued 12 stockbased compensation continued following summary unvested restricted stock deferred shares activity related information total fair value shares vested 2014 2013 2012 59 million 56 million 25 million respectively december 31 2014 total unrecognized compensation cost related unvested restricted stock deferred shares approximately 90 million total weighted average remaining term 17 years 2014 2013 2012 company recognized compensation costs 48 million 51 million 31 million respectively aggregate intrinsic value restricted stock deferred shares granted outstanding approximated 122 million representing total pretax intrinsic value based companys closing class common stock price 6344 december 31 2014 following summary unvested performance share award activity related information december 31 2014 total unrecognized compensation cost related unvested performance shares approximately 50 million total weighted average remaining term 20 years 2014 company recognized compensation costs 07 million aggregate intrinsic value performance shares granted outstanding approximated 07 million representing total pretax intrinsic value based companys closing class common stock price 6344 december 31 2014 watts water technologies inc subsidiaries notes consolidated financial statements continued 12 stockbased compensation continued management stock purchase plan total unrecognized compensation cost related unvested rsus approximately 06 million december 31 2014 total weighted average remaining term 14 years 2014 2013 2012 company recognized compensation cost 05 million 07 million 08 million respectively dividends declared rsus paid individuals remain unpaid december 31 2014 total approximately 01 million summary companys rsu activity related information shown following table december 31 2014 aggregate intrinsic values outstanding vested rsus approximately 25 million 11 million respectively representing total pretax intrinsic value based companys closing class common stock price 6344 december 31 2014 would received rsus holders rsus settled date total intrinsic value rsus settled 2014 2013 2012 approximately 17 million 28 million 38 million respectively upon settlement rsus company issues shares class common stock following table summarizes information rsus outstanding december 31 2014 watts water technologies inc subsidiaries notes consolidated financial statements continued 12 stockbased compensation continued fair value share issued management stock purchase plan estimated date grant using blackscholesmerton model based following weighted average assumptions riskfree interest rate based upon us treasury yield curve time grant respective expected life rsus expected life estimated period time outstanding rsus volatility calculated using historical data expected dividend yield stock companys best estimate expected future dividend yield assumptions used determine weighted average grantdate fair value rsus granted 2257 1805 1568 2014 2013 2012 respectively company distributed dividends 058 per share 2014 050 per share 2013 044 per share 2012 respectively companys class common stock class b common stock 13 employee benefit plans majority us employees company sponsors funded noncontributing defined benefit pension plan watts water technologies inc pension plan pension plan unfunded noncontributing defined benefit pension plan watts water technologies inc supplemental employees retirement plan serp benefits based primarily years service employees compensation funding policy company plans contribute annual amount exceed maximum amount deducted federal income tax purposes october 31 2011 companys board directors voted cease accruals effective december 31 2011 companys pension plan serp april 28 2014 companys board directors voted terminate companys pension plan serp pension plan terminated effective july 31 2014 distribution plan assets pursuant termination made plan termination satisfies regulatory requirements prescribed internal revenue service irs pension benefit guaranty corporation expected occur late 2015 serp terminated effective may 15 2014 company settle liabilities serp accordance section 409a internal revenue code paying lump sums plan participants least twelve twenty four months following termination date board directors authorized company make contributions pension plan serp may necessary make plans sufficient settle plan liabilities company expects distributions two plans completed december 31 2015 except retirees receiving payments pension plan pay status participants pension plan choice receiving either single lump sum payment annuity retirees watts water technologies inc subsidiaries notes consolidated financial statements continued 13 employee benefit plans continued pay status continue receive payments pension plan benefits pursuant current annuity elections company plans purchase annuity contracts insurance company retirees participants choose annuities payment option pension plan participants serp paid lump sum lump sum payments paid participants represent actuarial equivalent value participants remaining accrued benefits pension plan serp applicable distribution dates calculated accordance terms plans based participants ages distribution dates third quarter ended september 28 2014 company remeasured pension liability net loss accumulated comprehensive income reflect plan termination basis pension plan serp result pension liability increased 171 million net loss increased 105 million net tax benefits 66 million fourth quarter ended december 31 2014 annual valuation plans resulted 07 million increase pension liability net loss increased 04 million net tax benefits 03 million funded status defined benefit plans amounts recognized consolidated balance sheets follows amounts recognized consolidated balance sheets follows watts water technologies inc subsidiaries notes consolidated financial statements continued 13 employee benefit plans continued amounts recognized accumulated comprehensive income consist information pension plans accumulated benefit obligation excess plan assets follows components net periodic benefit cost follows fiscal year 2015 estimated net actuarial loss defined benefit pension plans amortized accumulated comprehensive income net periodic benefit cost 15 million assumptions weightedaverage assumptions used determine benefit obligations weightedaverage assumptions used determine net periodic benefit costs watts water technologies inc subsidiaries notes consolidated financial statements continued 13 employee benefit plans continued discount rates selected based upon rates return measurement date utilizing bond matching approach match expected benefit cash flows selecting expected longterm rate return assets company considers average rate earnings expected funds invested provide benefits plan includes considering trusts asset allocation expected returns likely earned life plan basis consistent prior year plan assets companys written retirement plan investment policy sets forth investment policy objectives constraints watts water technologies inc pension plan retirement plan investment policy set forth pension plan committee defines general investment principles directs investment management policy addressing preservation capital risk aversion adherence investment discipline investment managers make reasonable effort control risk evaluated twice year commonly accepted benchmarks ensure risk assumed commensurate given investment style objectives portfolio designed achieve balanced return current income modest growth capital achieving returns excess rate inflation investment horizon order preserve purchasing power plan assets plan assets required invested liquid securities derivative investments allowed prohibited investments include limited following futures contracts private placements options limited partnerships venturecapital investments interestonly io principalonly po residual tranche collateralized mortgage obligation cmos watts water technologies inc stock prohibited transactions include limited following short selling margin transactions allowable assets include cash equivalents fixed income securities equity securities mutual funds guaranteed investment contracts specific guidelines regarding allocation assets followed using liability driven investment ldi strategy ldi strategy investments made based expected cash flows required fund pension plans liabilities cash flow matching technique requires plans asset allocation heavily weighted toward fixed income securities companys current allocation target 95 fixed income 5 equities investments anticipation expected termination plan 2015 investment performance monitored regular basis investments reallocated stay within specific guidelines securities one company government agency exceed 10 total fund 20 total fund invested one industry individual treasury securities may represent 50 total fund total allocation treasury bonds notes may represent 100 plans aggregate bond position watts water technologies inc subsidiaries notes consolidated financial statements continued 13 employee benefit plans continued weighted average asset allocations asset category follows following table presents investments pension plan measured fair value december 31 2014 2013 aincludes investments common stock diverse industries bincludes investments index exchangetraded funds cincludes investment grade bonds diverse industries dincludes investments real estate investment funds exchangetraded funds commodity mutual funds accrued interest cash flows information related companys pension funds cash flow follows company expects contribute approximately 426 million 2015 pension plan serp order fully fund settle plans expected contribution considers expected shortfall based plan termination basis december 31 2015 expected contribution watts water technologies inc subsidiaries notes consolidated financial statements continued 13 employee benefit plans continued subject change based distribution date fair value plan assets distribution market interest rates annuity purchase rates distribution demographic experience 2014 elected forms payment expected benefit payments paid pension plans follows 1benefits pension plan serp expected distributed december 31 2015 additionally companys domestic employees eligible participate companys 401k savings plan effective january 1 2012 company provides base contribution 2 employees salary regardless whether employee participates plan company matches contribution 100 first 4 employees contribution companys match contribution years ended december 31 2014 2013 2012 44 million 42 million 40 million respectively charges emea pension plans approximated 55 million 58 million 60 million years ended december 31 2014 2013 2012 respectively costs relate plans administered certain european subsidiaries benefits calculated according government requirements paid employees upon retirement change employment company entered supplemental compensation agreement timothy p horne september 1 1996 per agreement upon ceasing employee company mr horne must make available requested board work minimum 300 500 hours per year consultant return certain annual compensation long physically able mr horne retired effective december 31 2002 therefore supplemental compensation period began january 1 2003 mr horne complies consulting provisions agreement shall receive supplemental compensation annual basis subject cost living increases year exchange services performed long physically able payment consulting services provided mr horne expensed incurred company mr horne received payments 06 million 2014 2013 2012 event physical disability mr horne continue receive payment annually accordance generally accepted accounting principles gaap company accrues future postretirement disability benefits period january 1 2003 time mr horne becomes physically unable perform consulting services period disability benefits earned mr horne still active consultant accordance terms agreement watts water technologies inc subsidiaries notes consolidated financial statements continued 14 contingencies environmental remediation accrual disclosure policy company defendant numerous legal matters arising ordinary course operations including involving product liability environmental matters commercial disputes company reviews lawsuits legal proceedings ongoing basis follows appropriate accounting guidance making accrual disclosure decisions company establishes accruals matters company assesses probable loss incurred amount loss reasonably estimated company establish accruals matters company believe probable loss incurred amount loss reasonably estimated companys assessment whether loss probable based assessment ultimate outcome matter following appeals fasb issued asc 450 contingencies event reasonably possible chance future event events occurring remote less likely event remote chance future event events occurring slight thus references upper end range reasonably possible loss cases company able estimate range reasonably possible loss mean upper end range loss cases company believes risk loss slight may continue exposure loss excess amount accrued possible estimate reasonably possible loss range loss amount accrued matters disclosed estimate aggregated disclosed company records legal costs associated legal contingencies incurred except legal costs associated product liability claims included actuarial estimates used determining product liability accrual december 31 2014 company estimates aggregate amount reasonably possible loss excess amount accrued legal contingencies approximately 58 million pretax respect estimate reasonably possible loss management estimated upper end range reasonably possible loss based amount money damages claimed applicable ii allegations factual development date iii available defenses based allegations andor iv potentially liable parties estimate based upon currently available information subject significant judgment variety assumptions known unknown uncertainties matters underlying estimate change time actual results may vary significantly current estimate event unfavorable outcome one matters described ultimate liability may excess amounts currently accrued may material companys operating results cash flows particular quarterly annual period however based information currently known management believes ultimate outcome matters resolved time likely material adverse effect financial condition company though outcome could material companys operating results particular period depending part upon operating results period connector class actions november december 2014 watts water technologies inc watts regulator co named defendants three separate putative nationwide class action complaints meyers v watts water technologies inc united states district court southern district ohio ponzo v watts regulator co united states district court district massachusetts sharp v watts water technologies inc subsidiaries notes consolidated financial statements continued 14 contingencies environmental remediation continued regulator co united states district court district massachusetts seeking recover damages relief based alleged failure water heater connectors complaints seek among items damages unspecified amount replacement costs injunctive relief declaratory relief attorneys fees costs february 2015 watts water technologies inc watts regulator co named defendants putative nationwide class action complaint klug v watts water technologies inc et al united states district court district nebraska seeking recover damages relief based alleged failure floodsafe connectors complaint seeks among items damages unspecified amount injunctive relief declaratory relief attorneys fees costs company unable estimate range reasonably possible loss matters damages specified proceedings early stages ii uncertainty likelihood class certified ultimate size class iii uncertainty resolution certain legal procedural motions iv significant factual issues resolved v novel legal issues presented trabakoolas et al v watts water technologies inc et al march 8 2012 watts water technologies inc watts regulator co watts plumbing technologies co ltd among companies named defendants putative nationwide class action complaint filed us district court northern district california seeking recover damages relief based alleged failure toilet connectors december 12 2013 company reached agreement principle settle claims total settlement amount 230 million company responsible 140 million insurance proceeds 90 million july 18 2014 court granted final approval class settlement fairness hearing issued subsequent written order formalizing approval august 5 2014 appeal taken order became final september 4 2014 litigation terminated fourth quarter 2013 company recorded liability 226 million related trabakoolas matter 127 million included current liabilities 99 million noncurrent liabilities addition 90 million receivable recorded current assets related insurance proceeds due separate settlement agreement liability reduced 138 million payments related notice claims administration plaintiff attorneys fees partial funding settlement amount made twelve months ended december 31 2014 90 million receivable insurance proceeds received september 28 2014 remaining liability 88 million december 31 2014 paid equal annual installments four years product liability company subject variety potential liabilities connection product liability cases company maintains highdeductible product liability insurance coverage company believes generally accordance industry practices product liability cases us management establishes product liability accrual includes legal costs associated accrued claims utilizing thirdparty actuarial valuations incorporate historical trend factors companys specific claims experience derived loss reports provided thirdparty administrators product liability accrual established net applicable insurance coverage watts water technologies inc subsidiaries notes consolidated financial statements continued 14 contingencies environmental remediation continued changes nature product liability claims actual settlement amounts could affect adequacy estimates require changes provisions liability estimate ultimate liability may less reported environmental remediation company named potentially responsible party respect limited number identified contaminated sites levels contamination vary significantly site related levels remediation efforts environmental liabilities recorded based probable cost known estimated minimum cost remediation accruals discounted present value unless amount timing expenditures fixed reliably determinable company accrues estimated environmental liabilities based assumptions subject number factors uncertainties circumstances affect reliability precision estimates include identification additional sites environmental regulations level cleanup required technologies available number financial condition contributors remediation time period remediation may occur company recognizes changes estimates new remediation requirements defined new information becomes available asbestos litigation company defending approximately 240 lawsuits different jurisdictions alleging injury death result exposure asbestos complaints cases typically name large number defendants identify particular company products source asbestos exposure date discovery failed yield evidence substantial exposure company products judgments entered company litigation lawsuits proceedings claims arising ordinary course operations also pending threatened company 15 financial instruments fair value carrying amounts cash equivalents shortterm investments trade receivables trade payables approximate fair value short maturity financial instruments fair value companys 585 senior notes due 2016 505 senior notes due 2020 based quoted market prices similar notes level 2 fair value companys borrowings outstanding credit agreement companys variable rate debt approximates carrying value carrying amount estimated fair market value companys longterm debt including current portion follows watts water technologies inc subsidiaries notes consolidated financial statements continued 15 financial instruments continued financial instruments company measures certain financial assets liabilities fair value recurring basis including foreign currency derivatives deferred compensation plan assets related liability cash flow hedges december 31 2014 fair value certain financial assets liabilities determined using following inputs december 31 2014 2013 1included companys consolidated balance sheet assets net 2included companys consolidated balance sheet accrued compensation benefits 3included companys consolidated balance sheet accrued expenses liabilities december 31 2014 noncurrent liabilities accrued expenses liabilities december 31 2013 watts water technologies inc subsidiaries notes consolidated financial statements continued 15 financial instruments continued table provides summary changes fair value financial assets liabilities measured fair value recurring basis using significant unobservable inputs level 3 period december 31 2013 december 31 2014 connection tekmar control systems acquisition 2012 contingent liability 51 million recognized estimate acquisition date fair value contingent consideration liability classified level 3 fair value hierarchy based probability achievement future performance metric date acquisition observable market failure meet performance metrics would reduce liability zero complete achievement would increase liability full remaining purchase price 82 million contingent liability increased 05 million 2014 10 million 2013 based revised estimates fair value contingent consideration portions contingent consideration paid first quarter 2014 second quarter 2013 amount 22 million 12 million respectively based performance metrics achieved earnout completed based fiscal year 2014 earnings final payment made 2015 cash equivalents consist instruments remaining maturities three months less date purchase consist primarily certificates deposit money market funds carrying amount reasonable estimate fair value company uses financial instruments time enhance ability manage risk including foreign currency commodity pricing exposures exist part ongoing business operations use derivatives exposes company counterparty credit risk nonperformance market risk related changes currency exchange rates commodity prices company manages exposure counterparty credit risk diversification counterparties companys counterparties derivative transactions substantial commercial banks significant experience using derivative instruments impact market risk fair value cash flows companys derivative instruments monitored company restricts use derivative financial instruments hedging activities company enter contracts trading purposes company enter contracts speculative purposes use derivative instruments approved senior management written guidelines company exposure number foreign currency rates including canadian dollar euro chinese yuan british pound manage risk company generally uses layering methodology whereby end quarter company generally entered forward exchange contracts hedge approximately 50 projected intercompany purchase transactions next twelve months company primarily uses strategy purchases canada us average volume contracts vary generally approximates 0 100 million open contracts end given quarter december 31 2014 company open forward exchange contracts december 31 2013 company contracts notional amounts aggregating approximately 10 million company accounts forward exchange contracts economic hedge elected designate derivative instruments watts water technologies inc subsidiaries notes consolidated financial statements continued 15 financial instruments continued hedging instruments realized unrealized gains losses contracts recognized income expense consolidated statement operations contracts subject company significant market risk exchange movement primarily offset gains losses related foreign currency denominated transactions company recorded income approximately 0 2014 01 million 2013 2012 expense income net consolidated statement operations impact derivative instruments leases company leases certain manufacturing facilities sales offices warehouses equipment generally leases carry renewal provisions require company pay maintenance costs future minimum lease payments capital leases noncancelable operating leases december 31 2014 follows carrying amounts assets capital lease include watts water technologies inc subsidiaries notes consolidated financial statements continued 16 segment information company operates three geographic segments americas emea asiapacific segments sells similar products managed separately separate financial results reviewed companys chief operating decisionmaker intercompany sales transactions eliminated sales region based upon location entity recording sale accounting policies segment described summary significant accounting policies see note 2 january 1 2014 company began allocating certain expenses three operating segments previously recorded corporate expenses primarily include stock compensation legal expenses audit expenses directly attributable benefit three operating segments 2013 2012 results retrospectively revised comparative purposes watts water technologies inc subsidiaries notes consolidated financial statements continued 16 segment information continued following summary companys significant accounts balances segment reconciled consolidated totals corporate expenses primarily administrative compensation expense compliance costs professional fees including corporaterelated legal audit expenses shareholder services benefit administration costs watts water technologies inc subsidiaries notes consolidated financial statements continued 16 segment information continued following includes us net sales us property plant equipment companys americas segment following includes intersegment sales americas emea asiapacific company sells products various end markets around world groups net sales third parties four product categories net sales third parties four product categories follows watts water technologies inc subsidiaries notes consolidated financial statements continued 17 accumulated comprehensive income loss accumulated comprehensive income loss consists following watts water technologies inc subsidiaries notes consolidated financial statements continued 18 quarterly financial information unaudited fourth quarter 2014 company recorded goodwill impairment charge 129 million relating asiapacific reporting unit impairment charges 13 million relating indefinitelived trade names 80 million restructuring charges 35 million deployment costs relating emea americas transformation programs 45 million acquisition costs relating aerco acquisition fourth quarter 2013 company recorded legal costs related agreement settle claims trabakoolas et al v watts water technologies inc et al matter pending united states district court northern district california net settlement expense recorded income continuing operations 136 million please see note 14 additional information also fourth quarter 2013 company recorded customer rebate expense approximately 30 million related accrual adjustments 2013 19 subsequent events february 12 2015 company declared quarterly dividend fifteen cents 015 per share outstanding share class common stock class b common stock watts water technologies inc subsidiaries notes consolidated financial statements continued 19 subsequent events continued february 17 2015 board directors company approved initial phase restructuring program relating transformation companys americas asiapacific businesses primarily involves product line rationalization efforts expected ultimately eliminate 175 million 200 million combined americas asiapacific net sales primarily within companys doityourself diy distribution channel program expected include pretax charge earnings approximately 40 million 50 million 25 million 30 million consist noncash charges fourth quarter year ended december 31 2014 company recorded 152 million pretax charge relating program consisting goodwill impairment 129 million indefinitelived intangible asset impairment 05 million transformation deployment costs 18 million goodwill impairment charge based quantitative assessment asiapacific reporting unit goodwill performed result likely asiapacific reporting units third party intersegment net sales would significantly reduced result program company estimated fair value reporting unit using expected present value future cash flows remaining total pretax charge program expected include costs severance benefits 8 million 10 million facility decommissioning cleanup related exit costs 3 million 4 million accelerated depreciation amortization longlived assets 8 million 10 million transformation deployment costs including inventory charges consulting fees associated costs 58 million 108 million total net aftertax charge program expected 30 million 40 million inclusive asiapacific charges expected tax benefit remaining costs program expected incurred 2015 company expects generate approximately 50 million aftertax cash proceeds sale assets associated program end fiscal 2017 company estimates consolidated operating margins increase approximately 10 percentage point result actions 2017 watts water technologies inc subsidiaries schedule iivaluation qualifying accounts amounts millions exhibit index 1incorporated reference registrants current report form 8k dated april 29 2013 file 00111499 2incorporated reference registrants current report form 8k dated november 14 1991 file 00111499 3incorporated reference registrants annual report form 10k year ended december 31 2002 file 001 11499 4incorporated reference registrants current report form 8k dated april 27 2006 file 00111499 5incorporated reference registrants form s1 336515 part second amendment form s1 dated august 21 1986 6intentionally omitted 7incorporated reference registrants current report form 8k dated november 6 2014 file 001 11499 8incorporated reference registrants current report form 8k dated may 15 2013 file 00111499 9incorporated reference registrants annual report form 10k year ended june 30 1996 file 00111499 10incorporated reference registrants quarterly report form 10q quarter ended june 30 2013 file 001 11499 11incorporated reference registrants annual report form 10k year ended december 31 2011 file 001 11499 12incorporated reference registrants annual report form 10k year ended june 30 1997 file 00111499 13incorporated reference notes consolidated financial statements note 2 report 14incorporated reference registrants quarterly report form 10q quarter ended july 3 2005 file 001 11499 15incorporated reference registrants annual report form 10k year ended june 30 1999 file 00111499 16incorporated reference registrants quarterly report form 10q quarter ended september 30 2000 file 001 11499 17incorporated reference registrants annual report form 10k year ended december 31 2007 file 001 11499 18incorporated reference registrants current report form 8k dated june 18 2010 file 00111499 19incorporated reference registrants current report form 8k dated february 18 2014 file 00111499 20incorporated reference registrants current report form 8k dated may 26 2014 file 00111499 21incorporated reference registrants current report form 8k dated may 4 2014 file 00111499 22incorporated reference registrants quarterly report form 10q quarter ended march 30 2014 file 001 11499 23incorporated reference registrants quarterly report form 10q quarter ended june 29 2014 file 001 11499 management contract compensatory plan arrangement attached exhibit 101 report following formatted xbrl extensible business reporting language consolidated statements operations years ended december 31 2014 2013 2012 ii consolidated statements comprehensive loss income years ended december 31 2014 2013 2012 iii consolidated balance sheets december 31 2014 december 31 2013 iv consolidated statements stockholders equity years ended december 31 2014 2013 2012 v consolidated statements cash flows years ended december 31 2014 2013 2012 vi notes consolidated financial statements watts water technologies inc hereby agrees furnish supplemental copy omitted schedule similar attachment agreement securities exchange commission upon requestitem 15 exhibits financial statement schedules a1 financial statements following financial statements included separate section report commencing page numbers specified a2 schedules required schedules provision made applicable accounting regulations securities exchange commission included notes consolidated financial statements a3 exhibits listed exhibit index immediately preceding exhibits filed part annual report form 10k item 16 form 10k summary none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized dated february 24 2017 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated signature title date robert j pagano jr chief executive officer president director february 24 2017 robert j pagano jr principal executive officer todd trapp chief financial officer february 24 2017 todd trapp principal financial officer virginia halloran chief accounting officer february 24 2017 virginia halloran principal accounting officer robert l ayers director february 21 2017 robert l ayers bernard baert director february 17 2017 bernard baert richard j cathcart director february 20 2017 richard j cathcart christopher l conway director february 18 2017 christopher l conway david dunbar director february 16 2017 david dunbar jes munk hansen director february 20 2017 jes munk hansen w craig kissel chairman board february 17 2017 w craig kissel joseph noonan director february 17 2017 joseph noonan merilee raines director february 17 2017 merilee raines joseph w reitmeier director february 17 2017 joseph w reitmeier report independent registered public accounting firm board directors stockholders watts water technologies inc audited accompanying consolidated balance sheets watts water technologies inc subsidiaries december 31 2016 2015 related consolidated statements operations comprehensive income loss stockholders’ equity cash flows years threeyear period ended december 31 2016 connection audits consolidated financial statements also audited financial statement schedule iivaluation qualifying accounts consolidated financial statements financial statement schedule responsibility company’s management responsibility express opinion consolidated financial statements financial statement schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position watts water technologies inc subsidiaries december 31 2016 2015 results operations cash flows years threeyear period ended december 31 2016 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states watts water technologies inc internal control financial reporting december 31 2016 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission coso report dated february 24 2017 expressed unqualified opinion effectiveness company’s internal control financial reporting report dated february 24 2017 effectiveness internal control financial reporting december 31 2016 contains explanatory paragraph states management excluded assessment effectiveness watts water technologies inc subsidiaries’ internal control financial reporting december 31 2016 pvi industries llc “pvi” internal control financial reporting associated total assets 792 million 701 million represents goodwill intangible assets included within scope assessment total revenue 89 million included consolidated financial statements watts water technologies inc subsidiaries year ended december 31 2016 audit internal control financial reporting watts water technologies inc also excluded evaluation internal control financial reporting pvi kpmg llp boston massachusetts february 24 2017 watts water technologies inc subsidiaries consolidated statements operations amounts millions except per share information accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated statements comprehensive income loss amounts millions accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated balance sheets amounts millions except share information accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated statements stockholders’ equity amounts millions except share information accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated statements cash flows amounts millions accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries notes consolidated financial statements 1 description business watts water technologies inc company leading supplier products solutions manage conserve flow fluids energy buildings residential commercial markets americas europe middle east africa emea asiapacific 140 years company designed produced valve systems safeguard regulate water systems energy efficient heating hydronic systems drainage systems water filtration technology helps conserve water 2 accounting policies principles consolidation consolidated financial statements include accounts company majority wholly owned subsidiaries upon consolidation intercompany accounts transactions eliminated cash equivalents cash equivalents consist instruments remaining maturities three months less date purchase consist primarily certificates deposit money market funds carrying amount reasonable estimate fair value allowance doubtful accounts allowance doubtful accounts includes reserves bad debts sales returns allowances cash discounts company analyzes aging accounts receivable individual accounts receivable historical bad debts concentration receivables customer credit worthiness current economic trends changes customer payment terms company specifically analyzes individual accounts receivable establishes specific reserves financially troubled customers addition factors developed certain regions utilizing historical trends sales returns allowances cash discount activities derive reserve returns allowances cash discounts concentration credit company sells products diversified customer base therefore significant concentrations credit risk 2016 2015 2014 customer accounted 10 company’s total sales inventories stated lower cost market using primarily firstin firstout method market value determined replacement cost net realizable value historical usage used basis determining reserve excess obsolete inventories goodwill intangible assets goodwill recorded consideration paid acquisitions exceeds fair value net tangible intangible assets acquired goodwill intangible assets indefinite useful lives amortized rather tested impairment least annually frequently events circumstances indicate “more likely not” might impaired change business conditions triggering events identified year ended december 31 2016 company performs annual goodwill indefinitelived intangible assets impairment assessment fourth quarter year 2016 company eight reporting units one reporting units water quality goodwill company performed qualitative analysis remaining reporting units include blücher dormont us drains aerco emea residential commercial asiapacific october 30 2016 testing date company approximately 4934 million goodwill balance sheet result qualitative analyses company determined fair values reporting units likely greater carrying amounts 2016 company need proceed beyond qualitative analysis goodwill impairments recorded fourth quarter 2015 company performed quantitative impairment analysis emea reporting unit connection annual strategic plan due underperformance budget primarily caused continued challenging european macroeconomic environment company estimated fair value reporting unit using weighted calculation income approach market approach income approach calculated present value expected future cash flows included impact recent underperformance reporting unit due continued challenging macroeconomic environment europe company’s lowered expectations reporting unit included strategic plan guideline public company method market approach calculated estimated fair values based valuation multiples derived stock prices enterprise values publicly traded companies comparable company second step impairment test carrying value goodwill exceeded implied fair value goodwill resulting pretax impairment charge 1297 million tax benefit associated impairment 34 million resulting net impairment charge 1263 million goodwill changes carrying amount goodwill geographic segment follows 1 americas goodwill additions 2016 include 42 million goodwill resulting insignificant acquisition november 2 2016 company acquired 100 shares pvi riverside holdings inc parent company pvi industries llc “pvi” aggregate purchase price recorded including estimated working capital adjustment approximately 792 million company accounted transaction purchased business combination company completed preliminary purchase price allocation resulted recognition 391 million goodwill 310 million intangible assets december 31 2016 february 26 2016 company acquired additional 50 outstanding shares aerco korea co ltd “aerco korea” aggregate purchase price approximately 4 million prior february 26 2016 company held 40 interest aerco korea operated joint venture december 30 2016 company acquired remaining 10 outstanding shares aerco korea 08 million company completed valuation assets liabilities acquired resulted recognition 37 million goodwill 16 million intangible assets november 30 2015 company completed acquisition 80 outstanding shares apex valves limited “apex” new zealand company commitment purchase remaining 20 ownership within three years closing aggregate purchase price approximately 204 million company recorded liability 55 million estimate acquisition date fair value contractual call option purchase remaining 20 company accounted transaction business combination company completed purchase price allocation resulted recognition 129 million goodwill 101 million intangible assets longlived assets indefinitelived intangibles tested impairment least annually frequently events circumstances change business conditions indicate “more likely not” intangible asset might impaired company performs annual indefinitelived intangibles impairment assessment fourth quarter year 2016 2015 2014 impairment assessments company performed quantitative assessments indefinitelived intangible assets methodology employed relief royalty method subset income approach based results assessment company recognized noncash pretax impairment charges 2016 2015 2014 approximately 04 million 06 million 13 million respectively impairment charge 04 million 2016 consists impairment charge trade name emea segment 06 million 2015 consists 05 million impairment charge trade name americas segment 01 million impairment charge trade name emea segment impairment charge 13 million 2014 consists 05 million impairment charge trade name americas segment 08 million impairment charge trade name emea segment gross carrying amount table reflects impairment charges intangible assets estimable lives longlived assets reviewed impairment whenever events changes circumstances indicate carrying amount asset group may recoverable recoverability intangible assets estimable lives long lived assets measured comparison carrying amount asset group future net undiscounted pretax cash flows expected generated asset group comparisons indicate asset recoverable impairment loss recognized amount carrying amount asset group exceeds related estimated fair value estimated fair value based either discounted future pretax operating cash flows appraised values depending nature asset company determines discount rate analysis based weighted average cost capital using market guideline public companies related businesses allocate interest charges asset group measured judgment required estimate future operating cash flows intangible assets include following company acquired 310 million intangible assets part pvi acquisition 2016 consisting customer relationships valued 176 million technology 102 million trade name 32 million weightedaverage amortization period total asset category customer relationships technology trade name 161 years 15 years 10 years 20 years respectively company acquired 16 million intangible assets part aerco korea acquisition 2016 consisting entirely customer relationships weightedaverage amortization period customer relationships acquired 10 years company acquired 101 million intangible assets part apex acquisition 2015 consisting primarily customer relationships valued 84 million trade name 17 million weightedaverage amortization period total asset category customer relationships trade name 13 years 10 years 15 years respectively aggregate amortization expense amortized intangible assets 2016 2015 2014 208 million 209 million 152 million respectively additionally future amortization expense amortizable intangible assets expected 216 million 2017 184 million 2018 148 million 2019 144 million 2020 127 million 2021 amortization expense provided straightline basis estimated useful lives intangible assets weightedaverage remaining life total amortizable intangible assets 115 years patents customer relationships technology trade names amortizable intangibles weightedaverage remaining lives 36 years 117 years 91 years 151 years 197 years respectively indefinitelived intangible assets primarily include trade names trademarks property plant equipment property plant equipment recorded cost depreciation provided straightline basis estimated useful lives assets range 10 40 years buildings improvements 3 15 years machinery equipment leasehold improvements depreciated lesser economic useful life asset remaining lease term taxes income taxes assessed governmental authorities sale transactions recorded net basis excluded sales company’s consolidated statements operations income taxes income taxes accounted asset liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases operating loss tax credit carry forwards deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized income period includes enactment date company recognizes tax benefits item question meets morelikelythannot greater 50 likelihood sustained upon examination taxing authorities threshold 2016 unrecognized tax benefits company increased net amount 09 million unrecognized tax benefits increased approximately 11 million mainly related european tax positions unrecognized tax benefits decreased 02 million whereby approximately 02 million primarily related settlement completion massachusetts audit various statue expirations december 31 2016 company gross unrecognized tax benefits approximately 51 million approximately 24 million recognized would affect effective tax rate difference amount unrecognized tax benefits amount would affect effective tax rate consists federal tax benefit state income tax items allowable correlative adjustments available certain jurisdictions reconciliation beginning ending amount unrecognized tax follows company estimates reasonably possible balance unrecognized tax benefits december 31 2016 may decrease approximately 03 million next twelve months result lapses statutes limitations january 2017 united states internal revenue service commenced audit company’s 2015 tax year company anticipate material adjustments arise result audit company conducts business variety locations throughout world resulting tax filings numerous domestic foreign jurisdictions company subject tax examinations regularly part normal course business company’s major jurisdictions us france germany canada netherlands statute limitations us subject tax examination 2013 later france germany canada netherlands subject tax examination 20112013 later jurisdictions exceptions longer subject tax examinations state local international jurisdictions tax years 2011 company accounts interest penalties related uncertain tax positions component income tax expense foreign currency translation financial statements subsidiaries located outside united states generally measured using local currency functional currency balance sheet accounts including goodwill foreign subsidiaries translated united states dollars yearend exchange rates income expense items translated weighted average exchange rates period net translation gains losses included comprehensive income separate component stockholders’ equity company provide us income taxes foreign currency translation adjustments since provide taxes undistributed earnings foreign subsidiaries gains losses foreign currency transactions subsidiaries included net earnings stockbased compensation company records compensation expense financial statements sharebased awards based grant date fair value awards stockbased compensation expense includes estimate prevesting forfeitures recognized requisite service periods awards straightline basis generally commensurate vesting term benefits associated tax deductions excess recognized compensation cost reported financing cash flow december 31 2016 company one stockbased compensation plan total unrecognized compensation costs related unvested stockbased compensation arrangements approximately 162 million total weighted average remaining term 162 years 2016 2015 2014 company recognized compensation costs related stockbased programs approximately 134 million 109 million 86 million respectively 2014 company began recognizing certain stock compensation costs cost goods sold based allocation costs three operating segments 2016 2015 stock compensation expense 09 million 04 million respectively recorded cost goods sold 125 million 105 million respectively recorded selling general administrative expenses 2016 2015 2014 company recorded approximately 08 million 03 million 07 million respectively tax benefits compensation expense relating stock options 2016 2015 2014 company recorded approximately 28 million 20 million 16 million respectively tax benefit stockbased plans 2016 2015 2014 recognition total stockbased compensation expense impacted basic diluted net income per common share 029 025 010 respectively net income loss per common share basic net income loss per common share calculated dividing net income loss weighted average number common shares outstanding calculation diluted net income loss per share assumes conversion dilutive securities see note 11 net income loss number shares used compute net income loss per share basic assuming full dilution reconciled computation diluted net income loss per share years ended december 31 2016 2015 2014 excludes effect potential exercise options purchase approximately 01 million 03 million 03 million shares respectively exercise price option greater average market price class common stock effect would antidilutive financial instruments normal course business company manages risks associated commodity prices foreign exchange rates interest rates variety strategies including use hedging transactions executed accordance company’s policies company’s hedging transactions include limited use various derivative financial commodity instruments matter policy company use derivative instruments unless underlying exposure change value derivative instruments would substantially offset opposite change value underlying hedged items company use derivative instruments trading speculative purposes derivative instruments may designated accounted either hedge recognized asset liability fair value hedge forecasted transaction cash flow hedge fair value hedge effective ineffective portions change fair value derivative instrument along adjustment carrying amount hedged item fair value changes attributable hedged risk recognized earnings cash flow hedge changes fair value derivative instrument highly effective deferred accumulated comprehensive income loss underlying hedged item recognized earnings company two interest rate swaps designated cash flow hedges one foreign currency swap nondesignated cash flow hedge december 31 2016 company cash flow hedges december 31 2015 refer note 15 details fair value cash flow hedge cease qualify hedge accounting terminated would continue carried balance sheet fair value settled hedge accounting would discontinued prospectively forecasted transaction longer probable occurring amounts previously deferred accumulated comprehensive income would recognized immediately earnings occasion company may enter derivative instrument qualify hedge accounting entered offset changes fair value underlying transaction required recognized earnings natural hedge instruments reflected consolidated balance sheets fair value changes fair value recognized earnings company’s foreign currency derivative includes forward foreign exchange contract related current rate exposure hong kong dollar euro regarding intercompany loan portions company’s outstanding debt exposed interest rate risks company monitors interest rate exposures ongoing basis maximize overall effectiveness interest rates fair value measurements fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date entity required maximize use observable inputs available minimize use unobservable inputs measuring fair value company certain financial assets liabilities measured fair value recurring basis certain nonfinancial assets liabilities may measured fair value nonrecurring basis fair value disclosures assets liabilities based threelevel hierarchy defined follows level 1 quoted prices active markets identical assets liabilities entity ability access measurement date level 2 observable inputs level 1 prices quoted prices similar assets liabilities quoted prices markets active inputs observable corroborated observable market data substantially full term assets liabilities level 3 unobservable inputs supported little market activity significant fair value assets liabilities assets liabilities subject hierarchy classified entirety based lowest level input significant fair value measurement company’s assessment significance particular input fair value measurement entirety requires judgment considers factors specific asset liability refer note 15 details shipping handling shipping handling costs included selling general administrative expense amounted 479 million 535 million 618 million years ended december 31 2016 2015 2014 respectively research development research development costs included selling general administrative expense amounted 265 million 235 million 225 million years ended december 31 2016 2015 2014 respectively revenue recognition company recognizes revenue following criteria met company entered binding agreement product shipped title passes sales price customer fixed determinable collectability reasonably assured provisions estimated returns allowances made time sale recorded reduction sales included allowance doubtful accounts consolidated balance sheets company records provisions sales incentives primarily volume rebates adjustment net sales time sale based estimated purchase targets basis presentation certain amounts 2015 2014 consolidated financial statements reclassified permit comparison 2016 presentation reclassifications effect reported results operations stockholders equity estimates preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates new accounting standards january 2017 financial accounting standards board fasb issued accounting standards update asu 201704 “intangiblesgoodwill topic 350 simplifying test goodwill impairment” new guidance eliminates need determine fair value individual assets liabilities reporting unit measure goodwill impairment goodwill impairment amount reporting unit’s carrying value exceeds fair value revised guidance applied prospectively effective calendar yearend sec filers 2020 early adoption permitted impairment tests performed january 1 2017 new guidance expected material impact companys financial statements january 2017 fasb issued asu 201701 “business combinations topic 805clarifying definition business” clarifies definition business assist entities evaluating whether transactions accounted acquisitions disposals assets businesses standard introduces screen determining assets acquired business clarifies business must include minimum input substantive process contribute output considered business standard effective fiscal years beginning december 15 2017 including interim periods within reporting period adoption guidance expected material impact company’s financial statements october 2016 fasb issued asu 201616 “intraentity transfers assets inventory” asu 201616 provides guidance timing recognition tax consequences intraentity transfer asset inventory asu 201616 effective public companies fiscal years beginning december 15 2017 early adoption permitted asu requires modified retrospective application cumulativeeffect adjustment retained earnings beginning period adoption guidance expected material impact company’s financial statements august 2016 fasb issued asu 201615 “classification certain cash receipts cash payments” asu 201615 provides guidance classification specific types cash receipts cash payments within statement cash flows asu 201615 effective public companies fiscal years beginning december 15 2017 early adoption permitted asu requires retrospective application prior periods presented financial statements adoption guidance expected material impact company’s financial statements april 2016 fasb issued asu 201610 “revenue contracts customersidentifying performance obligations licensing” asu 201610 clarifies guidance identifying performance obligations licensing implementation guidance determined asu 201409 “revenue contracts customers topic 606” yet effective adoption asu 201610 expected material impact company’s financial statements march 2016 fasb issued asu 201609 “improvements employee sharebased payment accounting” asu 201609 simplifies several aspects accounting sharebased payment transactions including income tax consequences classification awards equity liabilities forfeitures classification statement cash flows company adopt new standard first quarter 2017 although impact adopting update company’s consolidated financial statements expected material effect impact depend market factors timing intrinsic value future sharebased compensation award vests exercises company elected account forfeitures occur rather estimate expected forfeitures net cumulative effect change recognized adjustment retained earnings january 1 2017 subsequent adoption company notes potential volatility effective tax rate windfall shortfall tax benefits related stockbased compensation plans recorded directly results operations march 2016 fasb issued asu 201608 “revenue contracts customersprincipal versus agent consideration” asu 201608 clarifies guidance principal versus agent considerations determined asu 201409 “revenue contracts customers topic 606” yet effective adoption guidance expected material impact company’s financial statements february 2016 fasb issued asu 201602 “leases topic 842” asu 201602 requires lessee recognize statement financial position liability make lease payments rightofuse asset representing right use underlying asset lease term finance operating leases asu 201602 effective financial statements issued annual periods beginning december 15 2018 interim periods thereafter earlier application permitted entities company assessing impact standard company’s financial statements november 2015 fasb issued asu 201517 “income taxes balance sheet classification deferred taxes” asu 201517 requires deferred tax liabilities assets classified noncurrent classified statement financial position asu 201517 effective financial statements issued annual periods beginning december 15 2016 interim periods thereafter earlier application permitted entities beginning interim annual reporting period applied either prospectively retrospectively periods presented adoption guidance expected material impact company’s financial statements july 2015 fasb issued asu 201511 “inventory simplifying measurement inventory” new standard changes inventory measurement lower cost market lower cost net realizable value standard eliminates requirement consider replacement cost net realizable value less normal profit margin measuring inventory asu 201511 effective first quarter 2017 public companies calendar year ends applied prospectively early adoption permitted adoption guidance expected material impact company’s financial statements fasb issued asu 201503 “interestimputation interest subtopic 83530 simplifying presentation debt issuance costs” effective public companies beginning first interim period december 15 2015 asu 201503 requires debt issuance costs related recognized debt liability presented balance sheet direct deduction carrying amount debt liability consistent debt discounts opposed asset considered change accounting principle company applied new guidance april 3 2016 retrospective basis therefore company restated longterm debt asset balances balance sheet december 31 2015 comparative purposes refer note 10 details may 2014 fasb issued asu 201409 revenue contracts customers asu 201409 converges revenue recognition us gaap international financial reporting standards ifrs us gaap standard generally eliminates transaction industryspecific revenue recognition guidance includes current guidance longterm constructiontype contracts software arrangements real estate sales telecommunication arrangements franchise sales new standard revenue recognized based fivestep model fasb issued asu 201514 august 2015 deferred effective date asu 201409 public companies periods beginning december 15 2017 early adoption permitted company plans adopt new standard effective january 1 2018 company currently reviewing revenue arrangements order evaluate impact standard company’s financial statements method adoption 3 restructuring charges net company’s board directors approves major restructuring programs may involve discontinuance significant product lines shutdown significant facilities time company takes additional restructuring actions including involuntary terminations part major program company accounts costs period liability incurred costs included restructuring charges company’s consolidated statements operations summary pretax cost restructuring program follows company recorded pretax restructuring business segments follows 2015 actions 2015 board directors company approved transformation program relating company’s americas asiapacific businesses primarily involved exit lowmargin noncore product lines “phase one” company eliminated approximately 165 million combined americas asiapacific net sales primarily within company’s doityourself diy distribution channel part rationalization exercise company entered agreement sell operating subsidiary china dedicated exclusively manufacturing products rationalized sale finalized second quarter 2016 company recognized pretax gain 87 million received proceeds sale 84 million second phase program involves consolidation manufacturing facilities distribution center network optimization second phase program involves reducing square footage company’s americas facilities together phase one reduced americas net operating footprint approximately 30 second phase designed improve utilization remaining facilities better leverage cost structure reduce working capital improve execution customer delivery requirements december 31 2016 second phase substantially complete expected completed third quarter 2017 combined basis total estimated pretax cost company’s transformation program related americas asiapacific businesses approximately 65 million including restructuring costs 195 million goodwill intangible asset impairments 135 million transformation deployment costs approximately 32 million transformation deployment costs include consulting project management fees inventory writeoffs associated costs program expected incurred 2017 following table summarizes type total expected incurred remaining pretax restructuring costs company’s transformation program related americas asiapacific businesses phase one phase two combined following table summarizes total incurred year ended december 31 2016 incurred program date expected pretax restructuring costs business segment company’s americas asiapacific 2015 transformation program details restructuring reserve activity company’s americas asiapacific 2015 transformation program year ended december 31 2016 follows actions company periodically initiates actions part major program fourth quarter 2015 fourth quarter 2014 management initiated certain restructuring actions strategic initiatives respect company’s emea segment response ongoing economic challenges europe additional product rationalization restructuring actions included severance benefits limited costs relating asset write offs professional fees relocation total “other actions” pretax restructuring expense 26 million year ended december 31 2016 included “other actions” 2014 2015 emea restructuring initiatives addition minor initiatives company incurred restructuring expenses year ended december 31 2016 total pretax charge emea 2015 restructuring initiatives expected approximately 10 million approximately 87 million incurred december 31 2016 program date remaining expected costs relate severance legal costs expected completed 2017 total pretax charge emea 2014 restructuring initiatives approximately 67 million incurred december 31 2016 following table summarizes total expected incurred remaining pretax restructuring costs emea 2015 restructuring actions details company’s emea 2015 restructuring reserve activity year ended december 31 2016 follows following table summarizes total expected incurred remaining pretax restructuring costs emea 2014 restructuring actions details company’s emea 2014 restructuring reserve activity year ended december 31 2016 follows 4 sale business gain sale china operating subsidiary september 22 2015 company signed agreement sell operating subsidiary china dedicated production noncore products sale finalized second quarter 2016 company received proceeds 84 million sale fourth quarter 2016 company recognized pretax gain 87 million includes noncash accumulated currency translation adjustment 73 million net aftertax gain approximately 83 million sale certain americas product lines september 15 2015 company completed sale certain assets related company’s fittings brass tubular vinyl tubing product lines third party allcash transaction company received net cash proceeds approximately 331 million inventory adjustments transaction fees total net assets sold 334 million resulting immaterial loss carrying amounts net assets sold follows 5 business acquisitions pvi industries llc november 2 2016 company acquired 100 shares pvi aggregate purchase price recorded including estimated working capital adjustment approximately 792 million subject final postclosing working capital adjustments pvi leading manufacturer commercial stainless steel water heating equipment focused high capacity market north america based fort worth texas pvi’s water heater product offering complements aerco’s boiler products allowing company address customers’ heating hot water requirements results operations pvi included company’s americas segment since date acquisition company determined proforma actual results including pvi’s net sales net income earnings per share material company’s financial results therefore included disclosures company accounted transaction purchased business combination acquisition funded partially available cash partially borrowings company’s credit agreement company completed preliminary purchase price allocation resulted recognition 391 million goodwill 310 million intangible assets intangible assets acquired consist customer relationships valued 176 million estimated lives 15 years developed technology valued 102 million estimated lives 10 years trade name valued 32 million estimated lives 20 years goodwill attributable workforce pvi strategic platform adjacency allow watts extend product offerings result acquisition approximately 69 million goodwill deductible tax purposes following table summarizes value assets liabilities acquired millions aerco korea february 26 2016 company acquired additional 50 outstanding shares aerco korea aggregate purchase price approximately 4 million prior february 26 2016 company held 40 interest aerco korea operated joint venture company acquired remaining 10 ownership fourth quarter 2016 owns 100 aerco korea aerco korea strengthens watts’ strategic vision expand solutions sales korean market company accounted transaction step acquisition within business combination company recognized 17 million pretax gain previously held 40 ownership interest first quarter 2016 company completed valuation assets liabilities acquired resulted recognition 33 million goodwill 16 million intangible assets 08 million estimate acquisition date fair value commitment purchase remaining 10 ownership december 31 2017 intangible assets acquired consisted entirely customer relationships amortization period customer relationships 10 years goodwill deductible tax purposes balance sheet results operations aerco korea included company’s asiapacific segment since acquisition date results aerco korea material company’s consolidated financial statements apex november 30 2015 company completed acquisition 80 outstanding shares apex specializes design manufacturing control valves low high pressure hot water filtration systems apex also produces extensive range float reservoir valves agricultural industry aggregate purchase price approximately 204 million company recorded longterm liability 55 million estimate acquisition date fair value contractual call option purchase remaining 20 within three years closing company accounted transaction business combination company completed purchase price allocation resulted recognition 129 million goodwill 101 million intangible assets intangible assets consist primarily customer relationships estimated life 10 years trade name estimated life 15 years goodwill deductible tax purposes results operations apex included company’s asiapacific segment since acquisition date results apex material company’s consolidated financial statements 6 inventories net inventories consist following raw materials workinprocess finished goods net valuation reserves 284 million 286 million december 31 2016 2015 respectively finished goods 130 million 148 million december 31 2016 2015 respectively consigned 7 property plant equipment property plant equipment consist following 8 income taxes significant components company’s deferred income tax liabilities assets follows provision income taxes based following pretax income provision income taxes consists following actual income taxes reported different would computed applying federal statutory tax rate income taxes reasons differences follows december 31 2016 company foreign net operating loss carry forwards 272 million income tax purposes considering valuation allowances 229 million losses carried forward indefinitely 43 million expire 2023 net operating losses consist 229 million related austrian operations 43 million dutch operations december 31 2016 company us capital loss carry forwards 15 million income tax purposes considering valuation allowances 10 million expire 2017 05 million expire 2018 december 31 2016 december 31 2015 company valuation allowances 72 million 95 million respectively december 31 2016 15 million relates us capital losses 57 million relates austrian net operating losses december 31 2015 36 million related us capital losses 59 million related austrian net operating losses management believes ability company use losses within applicable carry forward period rise level likely threshold company valuation allowance deferred tax assets management believes likely company recover net deferred tax assets management believes likely future reversals deferred tax liabilities together forecasted income sufficient fully recover deferred tax assets changes enacted income tax laws material effect company 2016 2015 2014 undistributed earnings company’s foreign subsidiaries amounted approximately 3461 million december 31 2016 3661 million december 31 2015 3860 million december 31 2014 earnings considered indefinitely reinvested accordingly provision us federal state income taxes recorded thereon upon distribution earnings form dividends otherwise company subject withholding taxes payable various foreign countries determination amount us income tax liability would incurred practicable complexities associated hypothetical calculation however unrecognized foreign tax credits may available reduce portion us income tax liability 9 accrued expenses liabilities accrued expenses liabilities consist following 10 financing arrangements company’s debt consists following principal payments next five years thereafter due follows millions 20171391 2018225 2019300 20201050 20213570 february 12 2016 company terminated prior credit agreement entered new credit agreement “credit agreement” among company certain subsidiaries company become borrowers credit agreement jpmorgan chase bank na administrative agent swing line lender letter credit issuer lenders referred therein credit agreement provides 500 million fiveyear senior unsecured revolving credit facility “revolving credit facility” sublimit 100 million letters credit agreement also provides 300 million fiveyear term loan facility “term loan facility” available company single draw borrowings outstanding revolving credit facility bear interest fluctuating rate per annum equal applicable percentage defined case eurocurrency rate loans ice benchmark administration libor rate plus applicable percentage ranging 0975 145 determined reference company’s consolidated leverage ratio ii case base rate loans swing line loans highest federal funds rate plus 05 b rate interest effect day announced jpmorgan chase bank na “prime rate” c ice benchmark administration libor rate plus 10 plus applicable percentage ranging 000 045 determined reference company’s consolidated leverage ratio borrowings outstanding term loan facility bear interest fluctuating rate per annum equal applicable percentage defined ice benchmark administration libor rate plus applicable percentage ranging 1125 175 determined reference company’s consolidated leverage ratio interest rates december 31 2016 revolving credit facility term loan facility 194 213 respectively loan term loan facility amortizes follows 0 per annum first year 75 second third years 10 fourth fifth years remaining unpaid balance paid full maturity date payments due made ratably year quarterly installments addition paying interest credit agreement company also required pay certain fees connection credit facility including limited unused facility fee letter credit fees credit agreement matures february 12 2021 subject extension certain circumstances subject terms credit agreement company may repay loans outstanding credit agreement time without premium penalty customary breakage costs subject terms credit agreement repaid amounts borrowed term loan facility may borrowed company maintains letters credit guarantee performance payment third parties accordance specified terms conditions amounts outstanding approximately 256 million december 31 2016 248 million december 31 2015 company’s letters credit primarily associated insurance coverage company’s letters credit generally expire within one year issuance drawn revolving credit facility instruments may exist expire without drawn therefore necessarily represent future cash flow obligations april 28 2016 company borrowed 230 million revolving credit facility pay amounts outstanding 225 million 585 senior notes due april 30 2016 “april 2016 notes” november 1 2016 company borrowed 45 million revolving credit facility order finance acquisition pvi december 16 2016 watts international holdings limited “watts international” wholly owned subsidiary company entered facility agreement “facility agreement” among watts international original borrower original guarantor watts water technologies emea bv wholly owned subsidiary company “watts emea” original guarantor jpmorgan chase bank na sole bookrunner sole lead arranger “jp morgan chase bank” jp morgan europe limited agent financial parties lenders referred therein facility agreement provides €110 million 364 day term loan facility available company single draw december 20 2016 watts international borrowed full amount available borrowing facility agreement loan made december 20 2016 bears interest rate per annum equal euro interbank offered rate euribor provided rate less zero euribor shall deemed zero plus ii margin 1875 provided event default continuing watts international’s consolidated leverage ratio specified level margin shall decrease 150 accrued interest loan payable last day interest period first interest period set one month may changed subsequently period one two three months period agreed lenders loan facility agreement required repaid following schedule €15000000 june 30 2017 €15000000 september 29 2017 remaining balance december 19 2017 watts international’s obligations facility agreement guaranteed watts emea cross guarantee watts international facility agreement matures december 19 2017 subject terms facility agreement watts international may prepay portion loan outstanding facility agreement time subject prepaying minimum amount without premium penalty customary breakage costs subject terms facility agreement repaid amounts borrowed facility agreement may borrowed registrant ceases control watts international lenders may cancel commitments declare loan immediately due payable facility agreement imposes various restrictions watts international subsidiaries including restrictions pertaining incurrence additional indebtedness ii limitations liens iii making distributions dividends payments iv mergers consolidations acquisitions v dispositions assets vi requirement meet certain consolidated leverage ratio certain consolidated cash debt ratio substantially proceeds borrowings made december 20 2016 facility agreement used pay 113 million outstanding revolving credit facility december 31 2016 company 3124 million unused available credit agreement 256 million standby letters credit outstanding credit agreement company 300 million borrowings outstanding term loan december 31 2016 december 31 2016 company compliance covenants related credit agreement facility agreement 2015 company party credit agreement prior credit agreement among company certain subsidiaries company become borrowers prior credit agreement jpmorgan chase bank na administrative agent swing line lender letter credit issuer lenders referred therein prior credit agreement provided 500 million fiveyear senior unsecured revolving credit facility could increased additional 500 million certain circumstances subject terms prior credit agreement prior credit agreement sublimit 100 million letters credit agreement terminated february 2016 june 18 2010 company entered note purchase agreement certain institutional investors 2010 note purchase agreement pursuant 2010 note purchase agreement company issued senior notes 750 million principal due june 18 2020 company pay interest outstanding balance notes rate 505 per annum payable semiannually june 18th december 18th principal notes shall become due payable company may option upon notice subject terms 2010 note purchase agreement prepay time part notes amount less 10 million paying principal amount plus makewhole amount dependent upon yield respective us treasury securities 2010 note purchase agreement includes operational financial covenants company required comply including among others maintenance certain financial ratios restrictions additional indebtedness liens dispositions december 31 2016 company compliance covenants related 2010 note purchase agreement april 2015 fasb issued asu 201503 “interestimputation interest subtopic 83530 simplifying presentation debt issuance costs” asu requires debt issuance costs related recognized debt liability presented balance sheet direct deduction carrying amount debt liability consistent debt discounts opposed asset asu effective public companies beginning first interim period december 15 2015 considered change accounting principle new guidance applied retrospective basis december 31 2016 company total debt outstanding 6536 million total unamortized debt issuance costs debt outstanding 32 million longterm debt net current portion net debt issuance costs 5113 million december 31 2016 december 31 2015 company total debt outstanding 5773 million total unamortized debt issuance costs debt outstanding 20 million longterm debt net current portion 5762 million december 31 2015 order apply guidance retrospective basis company reclassified debt issuance costs december 31 2015 assets total longterm debt outstanding therefore restated longterm debt net current portion balance december 31 2015 5742 million restated longterm asset balance december 31 2015 119 million 11 common stock class common stock class b common stock equal dividend liquidation rights share company’s class common stock entitled one vote matters submitted stockholders share class b common stock entitled ten votes matters shares class b common stock convertible shares class common stock onetoone basis option holder december 31 2016 company reserved total 2773562 shares class common stock issuance stockbased compensation plans 6379290 shares conversion class b common stock class common stock july 27 2015 company’s board directors authorized repurchase 100 million company’s class common stock time open market privately negotiated transactions connection stock repurchase program company entered rule 10b51 plan permits shares repurchased company might otherwise precluded insider trading laws repurchase program may suspended discontinued time subject terms rule 10b51 plan company entered respect repurchase program december 31 2016 approximately 560 million remaining authorized share repurchases program april 30 2013 company’s board directors authorized repurchase 90 million company’s class common stock time open market privately negotiated transactions stock repurchase program completed september 2015 company expended entire 90 million authorized program following table summarizes cost number shares class common stock repurchased april 30 2013 july 27 2015 programs years ended december 31 2016 2015 12 stockbased compensation december 31 2016 company maintains one stock incentive plan second amended restated 2004 stock incentive plan “2004 stock incentive plan” december 31 2016 1402580 shares class common stock authorized future grants new equity awards plan key employees granted nonqualified stock options purchase company’s class common stock options typically become exercisable fouryear period rate 25 per year expire ten years grant date however options granted 2014 become exercisable threeyear period rate onethird per year options granted plan may exercise prices less 100 fair market value class common stock date grant company’s current practice grant options fair market value grant date beginning 2015 company stopped granting stock options part annual equity awards employees company issue stock options 2016 2015 company grants shares restricted stock deferred shares key employees stock awards nonemployee members company’s board directors 2004 stock incentive plan stock awards nonemployee members company’s board directors vest immediately employees’ restricted stock awards deferred shares typically vest threeyear period rate onethird per year except restricted stock awards deferred shares granted 2014 vest twoyear period rate 50 per year company also grants performance stock units key employees 2004 stock incentive plan performance stock units cliff vest end performance period set compensation committee board directors time grant upon vesting number shares company’s class common stock awarded performance stock unit recipient determined based company’s performance relative certain performance goals set time performance stock units granted recipient performance stock unit award may earn zero shares twice number target shares awarded recipient performance stock units amortized expense vesting period based company’s performance relative performance goals may adjusted changes estimated shares expected vest result adjustments related sharebased compensation expense recorded period change performance goals met awards earned previously recognized compensation expense reversed company granted performance stock units 2014 2015 2016 performance goals performance stock units based compound annual growth rate company’s revenue threeyear performance period company’s return invested capital “roic” third year performance period company also management stock purchase plan allows granting restricted stock units rsus key employees annual basis key employees may elect receive portion annual incentive compensation rsus instead cash rsu provides key employee right purchase share class common stock 67 fair market value date grant beginning annual incentive compensation 2016 rsus granted 2017 purchase price rsus increased 80 fair market value company’s class common stock rsus vest either annually threeyear period grant date upon third anniversary grant date receipt shares underlying rsus deferred minimum three years greater number years chosen employee aggregate 2000000 shares class common stock may issued management stock purchase plan december 31 2016 803562 shares class common stock authorized future grants company’s management stock purchase plan 2004 stock incentive plan december 31 2016 total unrecognized compensation cost related unvested stock options approximately 06 million total weighted average remaining term 06 years 2016 2015 2014 company recognized compensation cost 11 million 19 million 26 million respectively following summary stock option activity related information december 31 2016 aggregate intrinsic value exercisable options approximately 10 million representing total pretax intrinsic value based company’s closing class common stock price 6520 december 31 2016 would received option holders option holders exercised options date total intrinsic value options exercised 2016 2015 2014 approximately 35 million 12 million 82 million respectively upon exercise options company issues shares class common stock following table summarizes information options outstanding december 31 2016 fair value option granted 2004 stock incentive plan estimated date grant using blackscholesmerton model based following weighted average assumptions riskfree interest rate based upon us treasury yield curve time grant respective expected life option expected life estimated period time outstanding options volatility calculated using historical data expected dividend yield stock company’s best estimate expected future dividend yield assumptions used determine weighted average grantdate fair value stock options 2004 year ended december 31 2014 stock options granted 2015 2016 following summary unvested restricted stock deferred shares activity related information total fair value shares vested 2016 2015 2014 79 million 66 million 59 million respectively december 31 2016 total unrecognized compensation cost related unvested restricted stock deferred shares approximately 79 million total weighted average remaining term 172 years 2016 2015 2014 company recognized compensation costs 76 million 67 million 48 million respectively aggregate intrinsic value restricted stock deferred shares granted outstanding approximated 137 million representing total pretax intrinsic value based company’s closing class common stock price 6520 december 31 2016 following summary unvested performance share award activity related information december 31 2016 total unrecognized compensation cost related unvested performance shares approximately 63 million total weighted average remaining term 153 years 2016 2015 company recognized compensation costs 40 million 17 million respectively aggregate intrinsic value performance shares granted outstanding approximated 174 million representing total pretax intrinsic value based company’s closing class common stock price 6520 december 31 2016 management stock purchase plan total unrecognized compensation cost related unvested rsus approximately 15 million december 31 2016 total weighted average remaining term 18 years 2016 2015 2014 company recognized compensation cost 07 million 06 million 05 million respectively dividends declared rsus paid individuals remain unpaid december 31 2016 total approximately 01 million summary company’s rsu activity related information shown following table december 31 2016 aggregate intrinsic values outstanding vested rsus approximately 43 million 08 million respectively representing total pretax intrinsic value based company’s closing class common stock price 6520 december 31 2016 would received rsus holders rsus settled date total intrinsic value rsus settled 2016 2015 2014 approximately 15 million 08 million 17 million respectively upon settlement rsus company issues shares class common stock following table summarizes information rsus outstanding december 31 2016 fair value share issued management stock purchase plan estimated date grant using blackscholesmerton model based following weighted average assumptions riskfree interest rate based upon us treasury yield curve time grant respective expected life rsus expected life estimated period time outstanding rsus volatility calculated using historical data expected dividend yield stock company’s best estimate expected future dividend yield assumptions used determine weighted average grantdate fair value rsus granted 1815 1904 2257 2016 2015 2014 respectively company distributed dividends 071 per share 2016 066 per share 2015 058 per share 2014 respectively company’s class common stock class b common stock 13 employee benefit plans company’s domestic employees eligible participate company’s 401k savings plan since january 1 2012 company provided base contribution 2 employee’s salary regardless whether employee participates plan company matches contribution 100 first 4 employee’s contribution company’s match contributions years ended december 31 2016 2015 2014 54 million 43 million 44 million respectively charges emea pension plans approximated 45 million 49 million 55 million years ended december 31 2016 2015 2014 respectively costs relate plans administered certain european subsidiaries benefits calculated according government requirements paid employees upon retirement change employment prior january 1 2012 majority us employees company sponsored funded noncontributory defined benefit pension plan watts water technologies inc pension plan “pension plan” unfunded noncontributory defined benefit pension plan watts water technologies inc supplemental employees retirement plan “serp” april 28 2014 company’s board directors voted terminate company’s pension plan serp board directors authorized company make contributions pension plan serp may necessary make plans sufficient settle plan liabilities pension plan terminated effective july 31 2014 june 4 2015 company received internal revenue service’s favorable determination letter terminating pension plan serp terminated effective may 15 2014 september 2015 company settled pension plan serp benefit obligations company made cash contributions september 2015 432 million fully fund settlement actions cumulative actuarial losses 597 million previously recorded accumulated comprehensive income recognized selling general administrative expenses quarter ended september 27 2015 associated deferred tax asset 230 million previously recorded accumulated comprehensive income netted within longterm deferred tax liabilities reversed quarter ended september 27 2015 august 18 2015 company entered amendment 3 supplemental compensation agreement “amendment” timothy p horne company’s former chief executive officer president principal stockholder supplemental compensation agreement dated september 1 1995 amended july 25 2000 october 23 2002 “compensation agreement” company mr horne mr horne received payments consulting services equal greater onehalf average annual base salary employee company three years immediately prior retirement ii 400000 calendar year following retirement date death subject certain costofliving increases year mr horne paid 598562 consulting services 2014 compensation agreement mr horne also entitled receive lifetime benefits including use secretarial services use office retiree health insurance reimbursement tax financial planning expenses certain benefits amendment provides 6 million lumpsum buyout company’s ongoing lifetime payment obligations benefits compensation agreement except use office administrative support amendment also provides consulting services mr horne requested company rather per year hourly requirements company paid 6 million lumpsum buyout amount mr horne september 2015 resulted 5 million pretax charge year ended december 31 2015 14 contingencies environmental remediation accrual disclosure policy company defendant numerous legal matters arising ordinary course operations including involving product liability environmental matters commercial disputes company reviews lawsuits legal proceedings ongoing basis follows appropriate accounting guidance making accrual disclosure decisions company establishes accruals matters company assesses probable loss incurred amount loss reasonably estimated company establish accruals matters company believe probable loss incurred amount loss reasonably estimated company’s assessment whether loss probable based assessment ultimate outcome matter following appeals fasb issued asc 450 “contingencies” event “reasonably possible” “the chance future event events occurring remote less likely” event “remote” “the chance future event events occurring slight” thus references upper end range reasonably possible loss cases company able estimate range reasonably possible loss mean upper end range loss cases company believes risk loss slight may continue exposure loss excess amount accrued possible estimate reasonably possible loss range loss amount accrued matters disclosed estimate aggregated disclosed company records legal costs associated legal contingencies incurred except legal costs associated product liability claims included actuarial estimates used determining product liability accrual december 31 2016 company estimates aggregate amount reasonably possible loss excess amount accrued legal contingencies approximately 40 million pretax respect estimate reasonably possible loss management estimated upper end range reasonably possible loss based amount money damages claimed applicable ii allegations factual development date iii available defenses based allegations andor iv potentially liable parties estimate based upon currently available information subject significant judgment variety assumptions known unknown uncertainties matters underlying estimate change time actual results may vary significantly current estimate event unfavorable outcome one matters described ultimate liability may excess amounts currently accrued may material company’s operating results cash flows particular quarterly annual period however based information currently known management believes ultimate outcome matters resolved time likely material adverse effect financial condition company though outcome could material company’s operating results particular period depending part upon operating results period connector class actions november december 2014 watts water technologies inc watts regulator co named defendants three separate putative nationwide class action complaints meyers v watts water technologies inc united states district court southern district ohio ponzo v watts regulator co united states district court district massachusetts sharp v watts regulator co united states district court district massachusetts seeking recover damages relief based alleged failure water heater connectors june 26 2015 plaintiffs three actions filed consolidated amended complaint case captioned ponzo v watts regulator co united states district court district massachusetts hereinafter “ponzo” watts water technologies voluntarily dismissed ponzo case complaint seeks among items damages unspecified amount replacement costs injunctive relief declaratory relief attorneys’ fees costs august 7 2015 company filed motion dismiss complaint motion still pending february 2015 watts regulator co named defendant putative nationwide class action complaint klug v watts water technologies inc et al united states district court district nebraska seeking recover damages relief based alleged failure company’s floodsafe connectors hereinafter “klug” june 26 2015 company filed partial motion dismiss complaint response july 17 2015 plaintiff filed amended complaint added additional named plaintiffs sought correct deficiencies original complaint klug v watts regulator co united states district court district nebraska complaint seeks among items damages unspecified amount injunctive relief declaratory relief attorneys’ fees costs july 31 2015 company filed partial motion dismiss complaint granted part denied part december 29 2015 company answered amended complaint february 2 2016 formal discovery yet conducted company participated mediation sessions ponzo klug cases december 2015 january 2016 february 16 2016 company reached agreement principle settle claims proposed total settlement amount 14 million company expected pay approximately 41 million insurance proceeds 99 million parties executed final written settlement agreements april 2016 motions preliminary approval settlements submitted may 4 2016 district nebraska federal court december 7 2016 court issued order preliminarily approving settlements subject final court approval fairness hearing set april 12 2017 accordingly assurance proposed settlements approved current form settlements approved company intends continue vigorously contest allegations cases fourth quarter 2015 company recorded liability 14 million related ponzo klug matters 78 million included current liabilities 62 million noncurrent liabilities addition 95 million receivable recorded current assets related insurance proceeds due based costs incurred december 31 2015 subject completion separate final written settlement agreement class action settlement approved company recorded pretax charge 35 million fourth quarter 2015 related settlement adjusting existing product liability accrual product liability company subject variety potential liabilities connection product liability cases company maintains high selfinsured retention limit within product liability general liability coverage company believes generally accordance industry practices product liability cases us management establishes product liability accrual includes legal costs associated accrued claims utilizing thirdparty actuarial valuations incorporate historical trend factors company’s specific claims experience derived loss reports provided thirdparty administrators product liability accrual established considering applicable insurance coverage changes nature product liability claims actual settlement amounts could affect adequacy estimates require changes provisions liability estimate ultimate liability may less reported environmental remediation company named potentially responsible party respect limited number identified contaminated sites levels contamination vary significantly site related levels remediation efforts environmental liabilities recorded based probable cost known estimated minimum cost remediation accruals discounted present value unless amount timing expenditures fixed reliably determinable company accrues estimated environmental liabilities based assumptions subject number factors uncertainties circumstances affect reliability precision estimates include identification additional sites environmental regulations level cleanup required technologies available number financial condition contributors remediation time period remediation may occur company recognizes changes estimates new remediation requirements defined new information becomes available asbestos litigation company defending approximately 332 lawsuits different jurisdictions alleging injury death result exposure asbestos complaints cases typically name large number defendants identify particular company products source asbestos exposure date discovery failed yield evidence substantial exposure company products judgments entered company litigation lawsuits proceedings claims arising ordinary course operations also pending threatened company 15 financial instruments fair value carrying amounts cash equivalents trade receivables trade payables approximate fair value short maturity financial instruments fair value company’s 505 senior notes due 2020 based quoted market prices similar notes level 2 fair value company’s borrowings outstanding credit agreement company’s variable rate debt approximates carrying value carrying amount estimated fair market value company’s longterm debt including current portion follows financial instruments company measures certain financial assets liabilities fair value recurring basis including deferred compensation plan assets related liabilities redeemable financial instruments derivatives fair values certain financial assets liabilities determined using following inputs december 31 2016 december 31 2015 1 included company’s consolidated balance sheet assets net 2 included company’s consolidated balance sheet accrued compensation benefits 3 included company’s consolidated balance sheet noncurrent liabilities december 31 2016 december 31 2015 relates mandatorily redeemable equity instrument part apex acquisition 2015 table provides summary changes fair value financial assets liabilities measured fair value recurring basis using significant unobservable inputs level 3 period december 31 2015 december 31 2016 connection acquisition aerco korea first quarter 2016 liability 08 million recognized estimate acquisition date fair value mandatorily redeemable equity instrument liability classified level 3 fair value hierarchy based commitment purchase remaining 10 aerco korea shares december 31 2017 observable market december 30 2016 company purchased remaining 10 aerco korea shares settling redeemable financial instrument connection acquisition apex liability 55 million recognized november 30 2015 estimate acquisition date fair value mandatorily redeemable equity instrument liability classified level 3 fair value hierarchy based commitment purchase remaining 20 apex shares within next three years observable market cash equivalents consist instruments remaining maturities three months less date purchase consist primarily certificates deposit money market funds carrying amount reasonable estimate fair value company uses financial instruments time enhance ability manage risk including foreign currency commodity pricing exposures exist part ongoing business operations use derivatives exposes company counterparty credit risk nonperformance market risk related changes currency exchange rates commodity prices company manages exposure counterparty credit risk diversification counterparties company’s counterparties derivative transactions substantial commercial banks significant experience using derivative instruments impact market risk fair value cash flows company’s derivative instruments monitored company restricts use derivative financial instruments hedging activities company enter contracts trading purposes company enter contracts speculative purposes use derivative instruments approved senior management written guidelines interest rate swaps february 12 2016 company entered new credit agreement “credit agreement” pursuant received funding commitment term loan 300 million entire 300 million drawn revolving commitment “revolver” 500 million 162 million drawn december 31 2016 facilities mature february 12 2021 facility company choose either adjusted libor alternative base rate “abr” upon intended election adjusted libor interest rate term loan quarterly interest payments began may 12 2016 quarterly principal repayments commencing march 31 2017 balloon payment principal maturity date revolver quarterly interest payments began july 27 2016 accordingly company’s earnings cash flows exposed interest rate risk changes adjusted libor order manage company’s exposure changes cash flows attributable fluctuations liborindexed interest payments related company’s floating rate debt company entered two interest rate swaps interest rate swap company receives threemonth usdlibor subject 0 floor pays fixed rate 131375 notional amount 2250 million swaps mature february 12 2021 company formally documents hedge relationships hedge inception ensure interest rate swaps qualify hedge accounting quarterly basis company assesses whether interest rate swaps highly effective offsetting changes cash flow hedged item company hold issue interest rate swaps trading purposes swaps designated cash flow hedges year ended december 31 2016 gain 29 million recorded accumulated comprehensive income recognize change fair value interest rate swaps qualify cash flow hedge company enter interest rate swaps 2015 nondesignated cash flow hedge company exposure number foreign currency rates including canadian dollar euro chinese yuan british pound sterling manage risk company generally uses layering methodology whereby end quarter company generally entered forward exchange contracts hedge approximately 50 projected intercompany purchase transactions next twelve months forward exchange contracts designated cash flow fair value hedges company entered two forward exchange contracts manage foreign currency rate exposure 2016 first forward contract entered manage foreign currency rate exposure canadian dollar euro regarding intercompany loan hedge terminated november 2016 intercompany loan settled second forward contract entered manage foreign currency rate exposure hong kong dollar euro regarding intercompany loan forward contracts markedtomarket changes fair value recorded earnings company recognized gain forward contract 2016 03 million company forward contracts 2015 leases company leases certain manufacturing facilities sales offices warehouses equipment generally leases carry renewal provisions require company pay maintenance costs future minimum lease payments capital leases noncancelable operating leases december 31 2016 follows carrying amounts assets capital lease include 16 segment information company operates three geographic segments americas emea asiapacific segments sells similar products separate financial results reviewed company’s chief operating decisionmaker intercompany sales transactions eliminated sales region based upon location entity recording sale accounting policies segment described summary significant accounting policies see note 2 following summary company’s significant accounts balances segment reconciled consolidated totals corporate expenses primarily administrative compensation expense compliance costs professional fees including corporaterelated legal audit expenses shareholder services benefit administration costs included corporate’s operating loss 2015 597 million charge related company’s settlement pension plan serp benefit obligations refer note 13 defined benefit plans discussion following includes us net sales us property plant equipment company’s americas segment following includes intersegment sales americas emea asiapacific company sells products various end markets around world groups net sales third parties four product categories net sales third parties four product categories follows 17 accumulated comprehensive loss accumulated comprehensive loss consists following 18 quarterly financial information unaudited 1 four quarters may sum full year due rounding 19 subsequent events february 8 2017 company declared quarterly dividend eighteen cents 018 per share outstanding share class common stock class b common stock payable march 16 2017 stockholders record march 2 2017 watts water technologies inc subsidiaries schedule iivaluation qualifying accounts amounts millions exhibit index 1 incorporated reference registrant’s current report form 8k dated july 27 2015 file 00111499 2 incorporated reference registrant’s current report form 8k dated november 14 1991 file 00111499 3 incorporated reference registrant’s annual report form 10k year ended december 31 2002 file 001 11499 4 incorporated reference registrant’s current report form 8k dated april 27 2006 file 00111499 5 incorporated reference registrant’s form s1 336515 part second amendment form s1 dated august 21 1986 6 incorporated reference registrant’s current report form 8k dated october 26 2015 file 001 11499 7 incorporated reference registrant’s current report form 8k dated august 18 2015 file 001 11499 8 incorporated reference registrant’s current report form 8k dated may 15 2013 file 00111499 9 incorporated reference registrant’s annual report form 10k year ended june 30 1996 file 00111499 10 incorporated reference registrant’s quarterly report form 10q quarter ended june 30 2013 file 001 11499 11 incorporated reference registrant’s annual report form 10k year ended december 31 2015 file 00111499 12 incorporated reference registrant’s annual report form 10k year ended june 30 1997 file 00111499 13 incorporated reference notes consolidated financial statements note 2 report 14 incorporated reference registrant’s quarterly report form 10q quarter ended july 3 2005 file 001 11499 15 incorporated reference registrant’s annual report form 10k year ended june 30 1999 file 00111499 16 incorporated reference registrant’s quarterly report form 10q quarter ended september 30 2000 file 001 11499 17 incorporated reference registrant’s current report form 8k dated december 16 2016 file 00111499 18 incorporated reference registrant’s current report form 8k dated june 18 2010 file 00111499 19 incorporated reference registrant’s current report form 8k dated february 9 2016 file 00111499 20 incorporated reference registrant’s quarterly report form 10q quarter ended september 27 2015 file 00111499 21 incorporated reference registrant’s current report form 8k dated may 4 2014 file 00111499 22 incorporated reference registrant’s quarterly report form 10q quarter ended march 30 2014 file 001 11499 23 incorporated reference registrant’s quarterly report form 10q quarter ended june 29 2014 file 001 11499 24 incorporated reference registrant’s annual report form 10k year ended december 31 2014 file 001 11499 management contract compensatory plan arrangement †filed herewith ††furnished herewith attached exhibit 101 report following formatted xbrl extensible business reporting language consolidated statements operations years ended december 31 2016 2015 2014 ii consolidated statements comprehensive loss income years ended december 31 2016 2015 2014 iii consolidated balance sheets december 31 2016 december 31 2015 iv consolidated statements stockholders’ equity years ended december 31 2016 2015 2014 v consolidated statements cash flows years ended december 31 2016 2015 2014 vi notes consolidated financial statementsitem 15 exhibits financial statement schedules a1 financial statements following financial statements included separate section report commencing page numbers specified a2 schedules required schedules provision made applicable accounting regulations securities exchange commission included notes consolidated financial statements a3 exhibits listed exhibit index immediately preceding signature page hereto filed part annual report form 10k item 16 form 10k summary none report independent registered public accounting firm stockholders board directors watts water technologies inc opinions consolidated financial statements internal control financial reporting audited accompanying consolidated balance sheets watts water technologies inc “company” december 31 2017 2016 related consolidated statements operations comprehensive income loss stockholders’ equity cash flows years threeyear period ended december 31 2017 related notes financial statement schedule iivaluation qualifying accounts collectively “consolidated financial statements” also audited company’s internal control financial reporting december 31 2017 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission opinion consolidated financial statements referred present fairly material respects financial position company december 31 2017 2016 results operations cash flows years threeyear period ended december 31 2017 conformity us generally accepted accounting principles also opinion company maintained material respects effective internal control financial reporting december 31 2017 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission basis opinions company’s management responsible consolidated financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s annual report internal control financial reporting responsibility express opinion company’s consolidated financial statements opinion company’s internal control financial reporting based audits public accounting firm registered public company accounting oversight board united states “pcaob” required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audits obtain reasonable assurance whether consolidated financial statements free material misstatement whether due error fraud whether effective internal control financial reporting maintained material respects audits consolidated financial statements included performing procedures assess risks material misstatement consolidated financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures consolidated financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation consolidated financial statements audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions definition limitations internal control financial reporting company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate kpmg llp served company’s auditor since 1997 boston massachusetts february 23 2018 watts water technologies inc subsidiaries consolidated statements operations amounts millions except per share information accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated statements comprehensive income loss amounts millions accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated balance sheets amounts millions except share information accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated statements stockholders’ equity amounts millions except share information accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated statements cash flows amounts millions accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries notes consolidated financial statements 1 description business watts water technologies inc company leading supplier products solutions manage conserve flow fluids energy buildings residential commercial markets americas europe asiapacific middle east africa apmea 140 years company designed produced valve systems safeguard regulate water systems energy efficient heating hydronic systems drainage systems water filtration technology helps conserve water 2 accounting policies principles consolidation consolidated financial statements include accounts company majority wholly owned subsidiaries upon consolidation intercompany accounts transactions eliminated cash equivalents cash equivalents consist instruments remaining maturities three months less date purchase consist primarily money market funds carrying amount reasonable estimate fair value allowance doubtful accounts allowance doubtful accounts established represent company’s best estimate net realizable value outstanding accounts receivable development company’s allowance doubtful accounts varies region general based review past due amounts historical writeoff experience well aging trends affecting specific accounts general operational factors affecting accounts addition factors developed certain regions utilizing historical trends sales returns allowances cash discount activities derive reserve returns allowances cash discounts company uniformly considers current economic trends changes customer payment terms evaluating adequacy allowance doubtful accounts company also aggressively monitors creditworthiness company’s largest customers periodically reviews customer credit limits reduce risk circumstances relating specific customers change unanticipated changes occur general business environment company’s estimates recoverability receivables could adjusted concentration credit company sells products diversified customer base therefore significant concentrations credit risk 2017 2016 2015 customer accounted 10 company’s total sales accounts receivable inventories stated lower cost market using primarily firstin firstout method market value determined replacement cost net realizable value historical usage used basis determining reserve excess obsolete inventories goodwill intangible assets goodwill recorded consideration paid acquisitions exceeds fair value net tangible intangible assets acquired goodwill intangible assets indefinite useful lives amortized rather tested impairment least annually frequently events circumstances indicate “more likely not” might impaired change business conditions company performs annual goodwill indefinitelived intangible assets impairment assessment fourth quarter year longlived assets intangible assets estimable lives longlived assets reviewed impairment whenever events changes circumstances indicate carrying amount asset group may recoverable recoverability intangible assets estimable lives long lived assets measured comparison carrying amount asset group future net undiscounted pretax cash flows expected generated asset group comparisons indicate asset recoverable impairment loss recognized amount carrying amount asset group exceeds related estimated fair value estimated fair value based either discounted future pretax operating cash flows appraised values depending nature asset company determines discount rate analysis based weighted average cost capital using market guideline public companies related businesses allocate interest charges asset group measured judgment required estimate future operating cash flows property plant equipment property plant equipment recorded cost depreciation provided straightline basis estimated useful lives assets range 10 40 years buildings improvements 3 15 years machinery equipment leasehold improvements depreciated lesser economic useful life asset remaining lease term taxes income taxes assessed governmental authorities sale transactions recorded net basis excluded sales company’s consolidated statements operations income taxes income taxes accounted asset liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases operating loss tax credit carry forwards deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized income period includes enactment date company recognizes tax benefits item question meets morelikelythannot greater 50 likelihood sustained upon examination taxing authorities threshold 2017 unrecognized tax benefits company increased net amount 26 million unrecognized tax benefits increased approximately 31 million consisting 17 million related european tax positions 05 million related china tax positions 02 million related us tax positions 07 million related currency movements unrecognized tax benefits decreased 05 million primarily related settlement belgium audit various statute expirations december 31 2017 company gross unrecognized tax benefits approximately 77 million approximately 36 million recognized would affect effective tax rate difference amount unrecognized tax benefits amount would affect effective tax rate consists federal tax benefit state income tax items allowable correlative adjustments available certain jurisdictions reconciliation beginning ending amount unrecognized tax follows company estimates reasonably possible balance unrecognized tax benefits december 31 2017 may decrease approximately 05 million next twelve months result lapses statutes limitations settlements open audits january 2017 united states internal revenue service commenced audit company’s 2015 tax year company anticipate material adjustments arise result audit company conducts business variety locations throughout world resulting tax filings numerous domestic foreign jurisdictions company subject tax examinations regularly part normal course business company’s major jurisdictions us france germany canada netherlands statute limitations us subject tax examination 2014 later france germany canada netherlands subject tax examination 20122014 later jurisdictions exceptions longer subject tax examinations state local international jurisdictions tax years 2012 company accounts interest penalties related uncertain tax positions component income tax expense foreign currency translation functional currency foreign subsidiaries local currency nonus subsidiaries transact functional currency us dollar assets liabilities translated current rates exchange balance sheet date income expense items translated average foreign currency exchange rates period adjustments resulting translation financial statements foreign operations us dollars excluded determination net income recorded accumulated comprehensive income separate component equity subsidiaries functional currency assets liabilities differs local currency nonmonetary assets liabilities translated rate exchange effect date assets acquired monetary assets liabilities translated current rates exchange balance sheet date income expense items translated average foreign currency rates period translation adjustments subsidiaries included expense income net consolidated statements operations stockbased compensation company records compensation expense financial statements sharebased awards based grant date fair value awards restricted stock awards deferred shares stockbased compensation expense restricted stock awards deferred shares recognized requisite service periods awards straightline basis generally commensurate vesting term performance stock units offered company employees amortized expense vesting period based company’s performance relative performance goals may adjusted changes estimated shares expected vest result adjustments related sharebased compensation expense recorded period change march 2016 fasb issued asu 201609 “improvements employee sharebased payment accounting” company adopted standard first quarter 2017 immaterial change retained earnings part adoption standard company elected account forfeitures occur rather estimate expected forfeitures vesting period respective grant company also longer reclassifies benefits associated tax deductions excess recognized compensation cost operating activities financing activities consolidated statement cash flows december 31 2017 company one stockbased compensation plan total unrecognized compensation costs related unvested stockbased compensation arrangements approximately 148 million total weighted average remaining term 157 years 2017 2016 2015 company recognized compensation costs related stockbased programs approximately 139 million 134 million 109 million respectively 2017 2016 2015 stock compensation expense 08 million 09 million 04 million respectively recorded cost goods sold 131 million 125 million 105 million respectively recorded selling general administrative expenses 2017 2016 2015 company recorded approximately 01 million 08 million 03 million respectively tax benefits compensation expense relating stock options 2017 2016 2015 company recorded approximately 39 million 28 million 20 million respectively tax benefit stockbased plans 2017 2016 2015 recognition total stockbased compensation expense impacted basic diluted net income per common share 028 029 025 respectively net income loss per common share basic net income loss per common share calculated dividing net income loss weighted average number common shares outstanding calculation diluted net income loss per share assumes conversion dilutive securities see note 13 net income loss number shares used compute net income loss per share basic assuming full dilution reconciled computation diluted net income loss per share years ended december 31 2016 2015 excludes effect potential exercise options purchase approximately 01 million 03 million shares respectively exercise price option greater average market price class common stock effect would antidilutive financial instruments normal course business company manages risks associated commodity prices foreign exchange rates interest rates variety strategies including use hedging transactions executed accordance company’s policies company’s hedging transactions include limited use various derivative financial commodity instruments matter policy company use derivative instruments unless underlying exposure change value derivative instruments would substantially offset opposite change value underlying hedged items company use derivative instruments trading speculative purposes derivative instruments may designated accounted either hedge recognized asset liability fair value hedge forecasted transaction cash flow hedge fair value hedge effective ineffective portions change fair value derivative instrument along adjustment carrying amount hedged item fair value changes attributable hedged risk recognized earnings cash flow hedge changes fair value derivative instrument highly effective deferred accumulated comprehensive income loss underlying hedged item recognized earnings company two interest rate swaps designated cash flow hedges december 31 2017 2016 company one foreign currency swap nondesignated cash flow hedge december 31 2016 refer note 16 details fair value cash flow hedge cease qualify hedge accounting terminated would continue carried balance sheet fair value settled hedge accounting would discontinued prospectively forecasted transaction longer probable occurring amounts previously deferred accumulated comprehensive income would recognized immediately earnings occasion company may enter derivative instrument qualify hedge accounting entered offset changes fair value underlying transaction required recognized earnings natural hedge instruments reflected consolidated balance sheets fair value changes fair value recognized earnings portions company’s outstanding debt exposed interest rate risks company monitors interest rate exposures ongoing basis maximize overall effectiveness interest rates fair value measurements fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date entity required maximize use observable inputs available minimize use unobservable inputs measuring fair value company certain financial assets liabilities measured fair value recurring basis certain nonfinancial assets liabilities may measured fair value nonrecurring basis fair value disclosures assets liabilities based threelevel hierarchy defined follows level 1 quoted prices active markets identical assets liabilities entity ability access measurement date level 2 observable inputs level 1 prices quoted prices similar assets liabilities quoted prices markets active inputs observable corroborated observable market data substantially full term assets liabilities level 3 unobservable inputs supported little market activity significant fair value assets liabilities assets liabilities subject hierarchy classified entirety based lowest level input significant fair value measurement company’s assessment significance particular input fair value measurement entirety requires judgment considers factors specific asset liability refer note 16 details shipping handling shipping handling costs included selling general administrative expense amounted 521 million 479 million 535 million years ended december 31 2017 2016 2015 respectively research development research development costs included selling general administrative expense amounted 290 million 265 million 235 million years ended december 31 2017 2016 2015 respectively revenue recognition company recognizes revenue following criteria met company entered binding agreement product shipped title passes sales price customer fixed determinable collectability reasonably assured provisions estimated returns allowances made time sale recorded reduction sales included allowance doubtful accounts consolidated balance sheets company also records right return asset estimated returns product included within assets consolidated balance sheets company records provisions sales incentives primarily volume rebates adjustment net sales time sale based estimated purchase targets basis presentation certain amounts 2016 2015 consolidated financial statements reclassified permit comparison 2017 presentation including adoption recent accounting standards reclassifications effect reported results operations stockholders equity estimates preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates recently adopted accounting standards january 2017 financial accounting standards board fasb issued accounting standards update asu 201704 “intangiblesgoodwill topic 350 simplifying test goodwill impairment” asu 201704 eliminates need determine fair value individual assets liabilities reporting unit measure goodwill impairment goodwill impairment amount reporting unit’s carrying value exceeds fair value revised guidance applied prospectively effective calendar yearend sec filers 2020 early adoption permitted impairment tests performed january 1 2017 company’s adoption new guidance effective january 1 2017 material impact companys financial statements march 2016 fasb issued asu 201609 “improvements employee sharebased payment accounting” asu 201609 simplifies several aspects accounting sharebased payment transactions including income tax consequences classification awards equity liabilities forfeitures classification statement cash flows company adopted standard first quarter 2017 impact adoption standard resulted following the company elected account forfeitures occur rather estimate expected forfeitures vesting period respective grant adopted using modified retrospective approach cumulative effect adjustment 05 million retained earnings january 1 2017 the company longer reclassifies excess tax benefit operating activities financing activities consolidated statement cash flows change applied prospectively statement cash flows company excess tax benefit 04 million year ended december 31 2016 the company longer records windfall shortfall tax benefits additional paidin capital records tax benefits directly operations change applied prospectively required standard therefore comparative period adjusted change may create volatility company’s effective tax rate prospective basis november 2015 fasb issued asu 201517 “income taxes balance sheet classification deferred taxes” asu 201517 requires deferred tax liabilities assets classified noncurrent classified statement financial position asu 201517 effective financial statements issued annual periods beginning december 15 2016 interim periods thereafter company adopted provision asu first quarter 2017 applied retrospectively december 31 2016 company 386 million current deferred tax assets 15 million noncurrent deferred tax assets 857 million noncurrent deferred tax liabilities adoption standard resulted reclassification 386 million current deferred tax assets noncurrent deferred tax liabilities reclassification 15 million noncurrent deferred tax liabilities noncurrent deferred tax assets therefore restated noncurrent deferred tax asset balance noncurrent deferred tax liability balance december 31 2016 30 million 486 million respectively adoption standard affect results operations retained earnings cash flows current previous interim annual reporting periods july 2015 fasb issued asu 201511 “inventory simplifying measurement inventory” new standard changes inventory measurement lower cost market lower cost net realizable value standard eliminates requirement consider replacement cost net realizable value less normal profit margin measuring inventory asu 201511 effective first quarter 2017 public companies calendar year ends applied prospectively early adoption permitted adoption guidance material impact company’s financial statements accounting standards updates august 2017 fasb issued asu 201712 “derivatives hedging topic 815targeted improvements accounting hedging activities” asu 201712 amends hedge accounting guidance improve financial reporting hedging relationships better portray economic results entity’s risk management activities financial statements guidance permits hedge accounting risk components hedging relationships involve nonfinancial risk reduces complexity hedging fair value hedges interest rate risk eliminates requirement separately measure report hedging ineffectiveness simplifies certain hedge effectiveness assessment requirements standard effective fiscal years beginning december 15 2018 including interim periods within reporting period company currently evaluating impact guidance including transition elections required disclosures financial statements january 2017 fasb issued asu 201701 “business combinations topic 805clarifying definition business” clarifies definition business assist entities evaluating whether transactions accounted acquisitions disposals assets businesses standard introduces screen determining assets acquired business clarifies business must include minimum input substantive process contribute output considered business standard effective fiscal years beginning december 15 2017 including interim periods within reporting period adoption guidance expected material impact company’s financial statements february 2016 fasb issued asu 201602 “leases topic 842” asu 201602 requires lessee recognize statement financial position liability make lease payments rightofuse asset representing right use underlying asset lease term finance operating leases asu 201602 effective financial statements issued annual periods beginning december 15 2018 interim periods thereafter early adoption permitted entities company plans adopt standard effective january 1 2019 using modified retrospective approach company currently reviewing leasing arrangements order evaluate impact standard company’s financial statements may 2014 fasb issued asu 201409 revenue contracts customers asu 201409 converges revenue recognition us gaap international financial reporting standards ifrs us gaap standard generally eliminates transaction industryspecific revenue recognition guidance includes current guidance longterm constructiontype contracts software arrangements real estate sales telecommunication arrangements franchise sales new standard revenue recognized based fivestep model fasb issued asu 201514 august 2015 deferred effective date asu 201409 public companies periods beginning december 15 2017 early adoption permitted company assessed impact guidance revenues reviewing contract portfolio identify potential differences would result applying new standard current revenue arrangements including evaluation potential performance obligations variable consideration company completed analysis concluded adoption guidance material impact company’s financial results year adoption company adopted new standard effective january 1 2018 using modified retrospective approach new standard entities required disaggregate disclose revenue categories depict nature amount timing uncertainty revenue cash flows affected economic factors company expects disaggregate revenue geographic segment disaggregate revenue distribution channel product line company evaluating impact standard internal controls financial reporting enhanced disclosure requirements beyond impact disaggregating revenue 3 restructuring charges net company’s board directors approves major restructuring programs may involve discontinuance significant product lines shutdown significant facilities time company takes additional restructuring actions including involuntary terminations part major program company accounts costs period liability incurred costs included restructuring charges company’s consolidated statements operations summary pretax cost restructuring program follows company recorded pretax restructuring business segments follows 2015 actions 2015 board directors company approved transformation program relating company’s americas apmea businesses primarily involved exit lowmargin noncore product lines enhancing global sourcing capabilities “phase one” company eliminated approximately 165 million combined americas apmea net sales primarily within company’s doityourself diy distribution channel part exit noncore product lines company entered agreement sell operating subsidiary china dedicated exclusively manufacturing products discontinued sale finalized second quarter 2016 company recognized pretax gain 87 million received proceeds sale 84 million second phase program involved consolidation manufacturing facilities distribution center network optimization including reducing square footage company’s americas facilities together phase one reduced americas net operating footprint approximately 30 phase program designed improve utilization remaining facilities better leverage cost structure reduce working capital improve execution customer delivery requirements december 31 2017 second phase complete combined basis total pretax cost company’s transformation program related americas apmea businesses approximately 598 million including restructuring costs 181 million goodwill intangible asset impairments 135 million transformation deployment costs approximately 282 million transformation deployment costs included consulting project management fees inventory writeoffs associated costs program originally included estimated pretax charges totaling approximately 65 million third quarter 2017 total expected costs planned actions reduced approximately 60 million primarily related reduced expected facility exit costs reduced transformation deployment costs associated americas apmea transformation program incurred december 31 2017 following table summarizes type total incurred pretax restructuring costs company’s transformation program related americas apmea businesses phase one phase two combined following table summarizes pretax restructuring costs incurred year ended december 31 2017 total pretax restructuring costs incurred program business segment company’s americas apmea 2015 transformation program remaining costs incurred details restructuring reserve activity company’s americas apmea 2015 transformation program year ended december 31 2017 follows actions company periodically initiates actions part major program total “other actions” pretax restructuring expense 44 million year ended december 31 2017 included “other actions” european restructuring activities initiated 2017 2015 europe restructuring actions well certain minor initiatives company incurred restructuring expenses year ended december 31 2017 fourth quarter 2017 management initiated certain restructuring actions related reductions force within company’s europe segment restructuring activities primarily included severance benefits total pretax charges associated europe restructuring activities approximately 41 million costs fully incurred 2017 restructuring reserve associated actions approximately 31 million december 31 2017 relates severance benefits fourth quarter 2015 management initiated certain restructuring actions strategic initiatives respect company’s europe segment response ongoing economic challenges europe additional product rationalization restructuring actions included severance benefits limited costs relating asset write offs professional fees relocation total pretax charge europe 2015 restructuring initiatives expected approximately 100 million december 31 2017 company revised forecast approximately 93 million reduction estimated costs primarily due reduced expected severance costs december 31 2017 company incurred approximately 77 million program date remaining expected costs relate potential additional severance legal costs resulting foreign statutes limitations associated 2015 program statutes expire 2018 following table summarizes total expected incurred remaining pretax restructuring costs europe 2015 restructuring actions details company’s europe 2015 restructuring reserve activity year ended december 31 2017 follows 4 sale business gain sale china operating subsidiary september 22 2015 company signed agreement sell operating subsidiary china dedicated production noncore products sale finalized second quarter 2016 company received proceeds 84 million sale fourth quarter 2016 company recognized pretax gain 87 million includes noncash accumulated currency translation adjustment 73 million net aftertax gain approximately 83 million sale certain americas product lines september 15 2015 company completed sale certain assets related company’s fittings brass tubular vinyl tubing product lines third party allcash transaction company received net cash proceeds approximately 331 million inventory adjustments transaction fees total net assets sold 334 million resulting immaterial loss 5 business acquisitions pvi industries llc november 2 2016 company acquired 100 shares pvi riverside holdings inc parent company pvi industries llc “pvi” aggregate purchase price including final working capital adjustment approximately 791 million pvi leading manufacturer commercial stainless steel water heating equipment focused high capacity market north america based fort worth texas pvi’s water heater product offering complements aerco’s boiler products allowing company address customers’ heating hot water requirements results pvi included company’s americas segment company accounted transaction purchased business combination acquisition funded partially available cash partially borrowings company’s credit agreement second quarter 2017 company finalized purchase price allocation pvi purchase acquisition resulted recognition 411 million goodwill 310 million intangible assets intangible assets acquired consist customer relationships valued 176 million estimated lives 15 years developed technology valued 102 million estimated lives 10 years trade name valued 32 million estimated life 20 years goodwill attributable workforce pvi strategic platform adjacency allow watts extend product offerings result acquisition approximately 69 million goodwill deductible tax purposes following table summarizes value assets liabilities acquired millions watts korea february 26 2016 company acquired additional 50 outstanding shares watts korea aggregate purchase price approximately 4 million prior february 26 2016 company held 40 interest watts korea operated joint venture company acquired remaining 10 ownership fourth quarter 2016 07 million owns 100 watts korea watts korea strengthens watts’ strategic vision expand solutions sales korean market company accounted transaction step acquisition within business combination company recognized 17 million pretax gain previously held 40 ownership interest first quarter 2016 company completed valuation assets liabilities acquired resulted recognition 33 million goodwill 16 million intangible assets 08 million estimate acquisition date fair value commitment purchase remaining 10 ownership december 31 2017 intangible assets acquired consisted entirely customer relationships amortization period customer relationships 10 years goodwill deductible tax purposes balance sheet results operations watts korea included company’s apmea segment since acquisition date apex valves limited november 30 2015 company acquired 80 outstanding shares apex valves limited “apex” apex specializes design manufacturing control valves low high pressure hot water filtration systems apex also produces extensive range float reservoir valves agricultural industry aggregate purchase price approximately 204 million company recorded longterm liability 55 million estimate acquisition date fair value contractual call option purchase remaining 20 within three years closing company accounted transaction business combination company completed purchase price allocation resulted recognition 129 million goodwill 101 million intangible assets intangible assets consist primarily customer relationships estimated life 10 years trade name estimated life 15 years goodwill deductible tax purposes results operations apex included company’s apmea segment since acquisition date company acquired additional 10 ownership first quarter 2017 approximately 29 million owns 90 outstanding shares apex company maintains current liability approximately 29 million estimated fair value remaining 10 contractual call option expected exercised 2018 6 goodwill intangibles goodwill company performs annual goodwill impairment testing reporting unit fiscal october month end earlier triggering event circumstance indicates impairment loss may occurred october 29 2017 testing date company 5475 million goodwill balance sheet 2017 company eight reporting units one reporting units water quality goodwill company performed qualitative analysis six remaining seven reporting units include blücher dormont us drains europe residential commercial apmea january 1 2017 company began reporting results watts industries middle east fze “watts middle east” indirect wholly owned subsidiary part company’s former asiapacific segment referred apmea watts middle east previously reported within former emea segment referred europe change segment composition aligns structure company’s internal organization result material change previously reported segment information change determination eight reporting units purpose goodwill testing company followed guidance asc 352203539 asc 350203540 reassign assets liabilities reporting units affected including allocation immaterial amount goodwill result pvi acquisition november 2016 company combined two components aerco pvi heating hot water solutions “hhws” reporting unit company evaluated aggregation criteria asc 350 combining components aerco standalone reporting unit 2016 annual impairment assessment fourth quarter 2017 company performed quantitative impairment analysis hhws reporting unit connection annual strategic plan due underperformance budget primarily caused continuing softness condensing boiler market weakness company’s tankless water heater products competitive pricing pressure company estimated fair value reporting unit using weighted calculation income approach market approach income approach calculated present value expected future cash flows guideline public company method market approach calculated estimated fair values based valuation multiples derived stock prices enterprise values publicly traded companies comparable reporting unit estimated fair value reporting unit exceeded carrying value approximately 6 2017 therefore impairment recorded fourth quarter 2015 company performed quantitative impairment analysis europe reporting unit connection annual strategic plan due underperformance budget primarily caused continued challenging european macroeconomic environment company estimated fair value reporting unit using weighted calculation income approach market approach income approach calculated present value expected future cash flows included impact recent underperformance reporting unit due continued challenging macroeconomic environment europe company’s lowered expectations reporting unit included strategic plan guideline public company method market approach calculated estimated fair values based valuation multiples derived stock prices enterprise values publicly traded companies comparable company second step impairment test carrying value goodwill exceeded implied fair value goodwill resulting pretax impairment charge 1297 million tax benefit associated impairment 34 million resulting net impairment charge 1263 million changes carrying amount goodwill geographic segment follows 1 americas goodwill additions 2017 includes purchase accounting adjustments related pvi acquisition discussed note 5 notes consolidated financial statements november 2 2016 company acquired 100 shares pvi riverside holdings inc parent company pvi aggregate purchase price recorded including final working capital adjustment approximately 791 million company accounted transaction purchased business combination company finalized purchase price allocation resulted recognition 411 million goodwill 310 million intangible second quarter 2017 february 26 2016 company acquired additional 50 outstanding shares watts korea aggregate purchase price approximately 4 million prior february 26 2016 company held 40 interest watts korea operated joint venture december 30 2016 company acquired remaining 10 outstanding shares watts korea 08 million company completed valuation assets liabilities acquired resulted recognition 37 million goodwill 16 million intangible assets longlived assets indefinitelived intangibles tested impairment least annually frequently events circumstances change business conditions indicate “more likely not” intangible asset might impaired company performs annual indefinitelived intangibles impairment assessment fourth quarter year 2017 2016 2015 impairment assessments company performed quantitative assessments indefinitelived intangible assets methodology employed relief royalty method subset income approach based results assessment company recognize impairment indefinitelived intangibles 2017 2016 2015 company recognized noncash pretax impairment charges approximately 04 million 06 million respectively impairment charge 04 million 2016 related trade name europe segment 06 million impairment charge 2015 included tradenames americas europe segment 05 million 01 million respectively intangible assets estimable lives longlived assets reviewed impairment whenever events changes circumstances indicate carrying amount asset group may recoverable recoverability intangible assets estimable lives longlived assets measured comparison carrying amount asset group future net undiscounted pretax cash flows expected generated asset group comparisons indicate asset recoverable impairment loss recognized amount carrying amount asset group exceeds related estimated fair value estimated fair value based either discounted future pretax operating cash flows appraised values depending nature asset company determines discount rate analysis based weighted average cost capital using market guideline public companies related businesses allocate interest charges asset group measured judgment required estimate future operating cash flows fourth quarter 2017 company recognized 10 million impairment charge americas segment technology asset change market expectations indicated carrying amount asset longer recoverable intangible assets include following company acquired 310 million intangible assets part pvi acquisition 2016 consisting customer relationships valued 176 million technology 102 million trade name 32 million weightedaverage amortization period total asset category customer relationships technology trade name 161 years 15 years 10 years 20 years respectively company acquired 16 million intangible assets part watts korea acquisition 2016 consisting entirely customer relationships weightedaverage amortization period customer relationships acquired 10 years aggregate amortization expense amortized intangible assets 2017 2016 2015 225 million 208 million 209 million respectively additionally future amortization expense amortizable intangible assets expected 195 million 2018 155 million 2019 150 million 2020 133 million 2021 116 million 2022 amortization expense provided straightline basis estimated useful lives intangible assets weightedaverage remaining life total amortizable intangible assets 125 years patents customer relationships technology trade names amortizable intangibles weightedaverage remaining lives 33 years 113 years 81 years 144 years 197 years respectively indefinitelived intangible assets primarily include trade names trademarks 7 inventories net inventories consist following raw materials workinprocess finished goods net valuation reserves 282 million 284 million december 31 2017 2016 respectively finished goods 175 million 130 million december 31 2017 2016 respectively consigned 8 property plant equipment property plant equipment consist following 9 income taxes significant components company’s deferred income tax liabilities assets follows provision income taxes based following pretax income provision income taxes consists following 2017 tax cuts jobs act “2017 tax act” enacted december 22 2017 resulted significant changes us corporate income tax system changes include lowering us corporate income tax rate 35 21 elimination reduction certain domestic deductions credits 2017 tax act also transitions international taxation worldwide system modified territorial system creating new taxes certain foreignsourced earnings certain related party payments referred global intangible lowtaxed income tax annual antibase erosion tax respectively 2017 tax act also imposes onetime mandatory deemed repatriation tax “toll tax” foreign subsidiaries’ previously untaxed accumulated foreign earnings due timing enactment complexity involved applying provisions 2017 tax act company made reasonable estimates effects recorded provisional amounts financial statements december 2017 sec staff issued staff accounting bulletin 118 income tax accounting implications tax cuts jobs act sab 118 allows companies record provisional amounts measurement period extend beyond one year enactment date additional regulatory guidance issued applicable taxing authorities accounting treatment clarified company performs additional analysis application law company refines estimates calculating effect company’s final analysis recorded period completed may different company’s current provisional amounts could materially affect company’s tax obligations effective tax rate period periods adjustments made changes tax rates tax laws accounted period enactment therefore company recorded provisional tax expense 251 million related 2017 tax act december 31 2017 amount also includes immaterial benefit company’s 2017 current year tax expense final determination toll tax impacts company’s deferred assets liabilities valuation allowances completed additional information becomes available later one year enactment 2017 tax act toll tax 2017 tax act imposes onetime toll tax requiring company pay us income taxes accumulated foreign subsidiary earnings previously subject us income tax rate 155 extent foreign cash equivalents 8 remaining earnings company recorded provisional amount based estimates effects 2017 tax act 233 million paid eight years starting 2018 accrue interest deferred tax remeasurement company’s deferred tax liabilities exceeded balance company’s deferred tax assets company recorded provisional amount tax benefit 12 million reflecting decrease us corporate income tax rate tax foreign earnings result 2017 tax act company repatriate cumulative undistributed foreign earning back us minimal us income tax consequences onetime toll tax company recorded provisional amount deferred tax expense 146 million future repatriation foreign earnings actual income taxes reported different would computed applying federal statutory tax rate income taxes reasons differences follows december 31 2017 company foreign net operating loss carry forwards 261 million income tax purposes considering valuation allowances 261 million losses carried forward indefinitely net operating losses consist 261 million related austrian operations december 31 2017 company us capital loss carry forwards 03 million income tax purposes considering valuation allowances us capital loss carry forwards expire 2018 december 31 2017 company foreign tax credit carry forwards 220 million income tax purposes considering valuation allowances foreign tax credit carry forwards expire 2027 december 31 2017 december 31 2016 company valuation allowances 287 million 71 million respectively december 31 2017 03 million relates us capital losses 220 million relates foreign tax credits 64 million relates austrian net operating losses result 2017 tax act company recorded provisional amount foreign tax credits previously recorded recognized valuation allowance related credits provisional amount requires analysis company measurement period december 31 2016 15 million relates us capital losses 57 million relates austrian net operating losses management believes ability company use losses within applicable carry forward period rise level likely threshold company valuation allowance deferred tax assets management believes likely company recover net deferred tax assets management believes likely future reversals deferred tax liabilities together forecasted income sufficient fully recover deferred tax assets december 31 2017 company considered none company’s earnings permanently reinvested outside us therefore recorded provisional amount deferred tax liabilities associated repatriation earnings 10 accrued expenses liabilities accrued expenses liabilities consist following 11 financing arrangements company’s debt consists following principal payments next five years thereafter due follows millions 2018225 2019300 20201050 20213420 2022 thereafter 0 february 12 2016 company entered credit agreement “credit agreement” among company certain subsidiaries company become borrowers credit agreement jpmorgan chase bank na administrative agent swing line lender letter credit issuer lenders referred therein credit agreement provides 500 million fiveyear senior unsecured revolving credit facility “revolving credit facility” sublimit 100 million letters credit december 31 2017 company 1470 million drawn line credit agreement also provides 300 million fiveyear term loan facility “term loan facility” available company single draw entire 300 million drawn february 2016 company 2775 million borrowings outstanding term loan december 31 2017 borrowings outstanding revolving credit facility bear interest fluctuating rate per annum equal applicable percentage defined case eurocurrency rate loans ice benchmark administration libor rate plus applicable percentage ranging 0975 145 determined reference company’s consolidated leverage ratio ii case base rate loans swing line loans highest federal funds rate plus 05 b rate interest effect day announced jpmorgan chase bank na “prime rate” c ice benchmark administration libor rate plus 10 plus applicable percentage ranging 000 045 determined reference company’s consolidated leverage ratio borrowings outstanding term loan facility bear interest fluctuating rate per annum equal applicable percentage defined ice benchmark administration libor rate plus applicable percentage ranging 1125 175 determined reference company’s consolidated leverage ratio interest rates december 31 2017 revolving credit facility term loan facility 256 267 respectively loan term loan facility amortizes follows 0 per annum first year 75 second third years 10 fourth fifth years remaining unpaid balance paid full maturity date payments due made ratably year quarterly installments company paid quarterly installments 225 million 2017 addition paying interest credit agreement company also required pay certain fees connection credit facility including limited unused facility fee letter credit fees credit agreement matures february 12 2021 subject extension certain circumstances subject terms credit agreement company may repay loans outstanding credit agreement time without premium penalty customary breakage costs subject terms credit agreement repaid amounts borrowed term loan facility may borrowed company maintains letters credit guarantee performance payment third parties accordance specified terms conditions amounts outstanding 257 million december 31 2017 256 million december 31 2016 company’s letters credit primarily associated insurance coverage company’s letters credit generally expire within one year issuance drawn revolving credit facility instruments may exist expire without drawn therefore necessarily represent future cash flow obligations december 16 2016 watts international holdings limited “watts international” wholly owned subsidiary company entered facility agreement “facility agreement” among watts international original borrower original guarantor watts water technologies emea bv wholly owned subsidiary company “watts emea” original guarantor jpmorgan chase bank na sole bookrunner sole lead arranger “jp morgan chase bank” jp morgan europe limited agent financial parties lenders referred therein facility agreement provides €110 million 364 day term loan facility available company single draw december 20 2016 watts international borrowed full amount available borrowing facility agreement loan made december 20 2016 bears interest rate per annum equal euro interbank offered rate euribor provided rate less zero euribor shall deemed zero plus ii margin 1875 provided event default continuing watts international’s consolidated leverage ratio specified level margin shall decrease 150 accrued interest loan payable last day interest period first interest period set one month may changed subsequently period one two three months period agreed lenders substantially proceeds borrowings made december 20 2016 facility agreement used pay 113 million outstanding revolving credit facility third quarter 2017 company repaid full facility agreement december 31 2017 company 3273 million unused available credit agreement 257 million standby letters credit outstanding credit agreement december 31 2017 company compliance covenants related credit agreement june 18 2010 company entered note purchase agreement certain institutional investors 2010 note purchase agreement pursuant 2010 note purchase agreement company issued senior notes 750 million principal due june 18 2020 company pay interest outstanding balance notes rate 505 per annum payable semiannually june 18th december 18th principal notes shall become due payable company may option upon notice subject terms 2010 note purchase agreement prepay time part notes amount less 10 million paying principal amount plus makewhole amount dependent upon yield respective us treasury securities 2010 note purchase agreement includes operational financial covenants company required comply including among others maintenance certain financial ratios restrictions additional indebtedness liens dispositions december 31 2017 company compliance covenants related 2010 note purchase agreement 12 common stock class common stock class b common stock equal dividend liquidation rights share company’s class common stock entitled one vote matters submitted stockholders share class b common stock entitled ten votes matters shares class b common stock convertible shares class common stock onetoone basis option holder december 31 2017 company reserved total 2673034 shares class common stock issuance stockbased compensation plans 6379290 shares conversion class b common stock class common stock july 27 2015 company’s board directors authorized repurchase 100 million company’s class common stock time open market privately negotiated transactions connection stock repurchase program company entered rule 10b51 plan permits shares repurchased company might otherwise precluded insider trading laws repurchase program may suspended discontinued time subject terms rule 10b51 plan company entered respect repurchase program december 31 2017 approximately 378 million remaining authorized share repurchases program following table summarizes cost number shares class common stock repurchased july 27 2015 programs years ended december 31 2017 2016 13 stockbased compensation december 31 2017 company maintains one stock incentive plan second amended restated 2004 stock incentive plan “2004 stock incentive plan” december 31 2017 1342858 shares class common stock authorized future grants new equity awards plan company grants shares restricted stock deferred shares key employees stock awards nonemployee members company’s board directors 2004 stock incentive plan stock awards nonemployee members company’s board directors vest immediately employees’ restricted stock awards deferred shares typically vest threeyear period rate onethird per year company also grants performance stock units key employees 2004 stock incentive plan performance stock units cliff vest end performance period set compensation committee board directors time grant upon vesting number shares company’s class common stock awarded performance stock unit recipient determined based company’s performance relative certain performance goals set time performance stock units granted recipient performance stock unit award may earn zero shares twice number target shares awarded recipient performance stock units amortized expense vesting period based company’s performance relative performance goals may adjusted changes estimated shares expected vest result adjustments related sharebased compensation expense recorded period change performance goals met awards earned previously recognized compensation expense reversed company granted performance stock units 2017 2016 2015 performance goals performance stock units based compound annual growth rate company’s revenue threeyear performance period company’s return invested capital “roic” third year performance period previously 2004 stock incentive plan key employees granted nonqualified stock options purchase company’s class common stock options typically became exercisable fouryear period rate 25 per year expire ten years grant date however options granted 2014 become exercisable threeyear period rate onethird per year options granted plan may exercise prices less 100 fair market value class common stock date grant company’s practice grant options fair market value grant date upon exercise options company issues shares class common stock beginning 2015 company stopped granting stock options part annual equity awards employees company also management stock purchase plan allows granting restricted stock units rsus key employees annual basis key employees may elect receive portion annual incentive compensation rsus instead cash participating employees may use 50 annual incentive bonus purchase rsus purchase price equal 80 fair market value company’s class common stock date grant beginning annual incentive compensation 2016 purchase price rsus increased 67 80 fair market value company’s class common stock rsus vest either annually threeyear period grant date upon third anniversary grant date receipt shares underlying rsus deferred minimum three years greater number years chosen employee date grant aggregate 2000000 shares class common stock may issued management stock purchase plan december 31 2017 763233 shares class common stock authorized future grants company’s management stock purchase plan 2004 stock incentive plan following summary unvested restricted stock deferred shares activity related information total fair value shares vested 2017 2016 2015 77 million 79 million 66 million respectively december 31 2017 total unrecognized compensation cost related unvested restricted stock deferred shares approximately 83 million total weighted average remaining term 163 years 2017 2016 2015 company recognized compensation costs 69 million 76 million 67 million respectively aggregate intrinsic value restricted stock deferred shares granted outstanding approximated 165 million representing total pretax intrinsic value based company’s closing class common stock price 7595 december 31 2017 following summary unvested performance share award activity related information total fair value shares vested 2017 35 million 2016 2015 performance share awards vested december 31 2017 total unrecognized compensation cost related unvested performance shares approximately 53 million total weighted average remaining term 151 years 2017 2016 2015 company recognized compensation costs 48 million 40 million 17 million respectively aggregate intrinsic value performance shares granted outstanding approximated 207 million representing total pretax intrinsic value based company’s closing class common stock price 7595 december 31 2017 following summary stock option activity related information december 31 2017 substantially stock options granted 2004 stock incentive plan vested 2017 2016 2015 company recognized compensation cost options 05 million 11 million 19 million respectively december 31 2017 unrecognized compensation cost related unvested options december 31 2017 aggregate intrinsic value exercisable options approximately 20 million representing total pretax intrinsic value based company’s closing class common stock price 7595 december 31 2017 would received option holders option holders exercised options date total intrinsic value options exercised 2017 2016 2015 approximately 05 million 35 million 12 million respectively following table summarizes information options outstanding december 31 2017 management stock purchase plan total unrecognized compensation cost related unvested rsus approximately 12 million december 31 2017 total weighted average remaining term 14 years 2017 2016 2015 company recognized compensation cost 10 million 07 million 06 million respectively dividends declared rsus paid individuals remain unpaid december 31 2017 total approximately 01 million summary company’s rsu activity related information shown following table december 31 2017 aggregate intrinsic values outstanding vested rsus approximately 63 million 23 million respectively representing total pretax intrinsic value based company’s closing class common stock price 7595 december 31 2017 would received rsus holders rsus settled date total intrinsic value rsus settled 2017 2016 2015 approximately 04 million 15 million 08 million respectively upon settlement rsus company issues shares class common stock following table summarizes information rsus outstanding december 31 2017 fair value share issued management stock purchase plan estimated date grant using blackscholesmerton model based following weighted average assumptions riskfree interest rate based upon us treasury yield curve time grant respective expected life rsus expected life estimated period time outstanding rsus volatility calculated using historical data expected dividend yield stock company’s best estimate expected future dividend yield assumptions used determine weighted average grantdate fair value rsus granted 1684 1815 1904 2017 2016 2015 respectively company distributed dividends 075 per share 2017 071 per share 2016 066 per share 2015 respectively company’s class common stock class b common stock 14 employee benefit plans company’s domestic employees eligible participate company’s 401k savings plan since january 1 2012 company provided base contribution 2 employee’s salary regardless whether employee participates plan company matches contribution 100 first 4 employee’s contribution company’s match contributions years ended december 31 2017 2016 2015 50 million 54 million 43 million respectively charges europe pension plans approximated 41 million 45 million 49 million years ended december 31 2017 2016 2015 respectively costs relate plans administered certain european subsidiaries benefits calculated according government requirements paid employees upon retirement change employment prior january 1 2012 majority us employees company sponsored funded noncontributory defined benefit pension plan watts water technologies inc pension plan “pension plan” unfunded noncontributory defined benefit pension plan watts water technologies inc supplemental employees retirement plan “serp” april 28 2014 company’s board directors voted terminate company’s pension plan serp board directors authorized company make contributions pension plan serp may necessary make plans sufficient settle plan liabilities pension plan terminated effective july 31 2014 june 4 2015 company received internal revenue service’s favorable determination letter terminating pension plan serp terminated effective may 15 2014 september 2015 company settled pension plan serp benefit obligations company made cash contributions september 2015 432 million fully fund settlement actions cumulative actuarial losses 597 million previously recorded accumulated comprehensive income recognized selling general administrative expenses quarter ended september 27 2015 associated deferred tax asset 230 million previously recorded accumulated comprehensive income netted within longterm deferred tax liabilities reversed quarter ended september 27 2015 august 18 2015 company entered amendment 3 supplemental compensation agreement “amendment” timothy p horne company’s former chief executive officer president principal stockholder supplemental compensation agreement dated september 1 1995 amended july 25 2000 october 23 2002 “compensation agreement” company mr horne mr horne received payments consulting services equal greater onehalf average annual base salary employee company three years immediately prior retirement ii 400000 calendar year following retirement date death subject certain costofliving increases year mr horne paid 598562 consulting services 2014 compensation agreement mr horne also entitled receive lifetime benefits including use secretarial services use office retiree health insurance reimbursement tax financial planning expenses certain benefits amendment provided 6 million lumpsum buyout company’s ongoing lifetime payment obligations benefits compensation agreement except use office administrative support amendment also provides consulting services mr horne requested company rather per year hourly requirements company paid 6 million lumpsum buyout amount mr horne september 2015 resulted 5 million pretax charge year ended december 31 2015 15 contingencies environmental remediation accrual disclosure policy company defendant numerous legal matters arising ordinary course operations including involving product liability environmental matters commercial disputes company reviews lawsuits legal proceedings ongoing basis follows appropriate accounting guidance making accrual disclosure decisions company establishes accruals matters company assesses probable loss incurred amount loss reasonably estimated company establish accruals matters company believe probable loss incurred amount loss reasonably estimated company’s assessment whether loss probable based assessment ultimate outcome matter following appeals fasb issued asc 450 “contingencies” event “reasonably possible” “the chance future event events occurring remote less likely” event “remote” “the chance future event events occurring slight” thus references upper end range reasonably possible loss cases company able estimate range reasonably possible loss mean upper end range loss cases company believes risk loss slight may continue exposure loss excess amount accrued possible estimate reasonably possible loss range loss amount accrued matters disclosed estimate aggregated disclosed company records legal costs associated legal contingencies incurred except legal costs associated product liability claims included actuarial estimates used determining product liability accrual december 31 2017 company estimates aggregate amount reasonably possible loss excess amount accrued legal contingencies approximately 61 million pretax respect estimate reasonably possible loss management estimated upper end range reasonably possible loss based amount money damages claimed applicable ii allegations factual development date iii available defenses based allegations andor iv potentially liable parties estimate based upon currently available information subject significant judgment variety assumptions known unknown uncertainties matters underlying estimate change time actual results may vary significantly current estimate event unfavorable outcome one matters ultimate liability may excess amounts currently accrued may material company’s operating results cash flows particular quarterly annual period however based information currently known management believes ultimate outcome matters resolved time likely material adverse effect financial condition company though outcome could material company’s operating results particular period depending part upon operating results period connector class actions november december 2014 watts water technologies inc watts regulator co named defendants three separate putative nationwide class action complaints meyers v watts water technologies inc united states district court southern district ohio ponzo v watts regulator co united states district court district massachusetts sharp v watts regulator co united states district court district massachusetts seeking recover damages relief based alleged failure water heater connectors june 26 2015 plaintiffs three actions filed consolidated amended complaint case captioned ponzo v watts regulator co united states district court district massachusetts hereinafter “ponzo” watts water technologies voluntarily dismissed ponzo case complaint sought among items damages unspecified amount replacement costs injunctive relief declaratory relief attorneys’ fees costs august 7 2015 company filed motion dismiss complaint motion mooted class settlements february 2015 watts regulator co named defendant putative nationwide class action complaint klug v watts water technologies inc et al united states district court district nebraska seeking recover damages relief based alleged failure company’s floodsafe connectors hereinafter “klug” june 26 2015 company filed partial motion dismiss complaint response july 17 2015 plaintiff filed amended complaint added additional named plaintiffs sought correct deficiencies original complaint klug v watts regulator co united states district court district nebraska complaint seeks among items damages unspecified amount injunctive relief declaratory relief attorneys’ fees costs july 31 2015 company filed partial motion dismiss complaint granted part denied part december 29 2015 company answered amended complaint february 2 2016 formal discovery conducted company participated mediation sessions ponzo klug cases december 2015 january 2016 february 16 2016 company reached agreement principle settle claims proposed total settlement amount 14 million company expected pay approximately 41 million insurance proceeds 99 million parties executed final written settlement agreements april 2016 motions preliminary approval settlements submitted may 4 2016 district nebraska federal court december 7 2016 court issued order preliminarily approving settlements fairness hearing held april 12 2017 court entered final orders judgments approving settlements april 13 2017 appeals filed settlements became final may 15 2017 fourth quarter 2015 company recorded liability 14 million related ponzo klug matters 78 million included current liabilities 62 million noncurrent liabilities liability reduced 87 million first nine months 2017 08 million notice claims administrator payments counsel fees 43 million initial contributions class action fund 36 million remaining liability 53 million paid four years 95 million receivable recorded current assets related insurance proceeds due december 31 2015 subsequently increased first quarter 2017 99 million based costs incurred april 3 2017 company received 99 million insurance proceeds second quarter 2017 product liability company subject variety potential liabilities connection product liability cases company maintains high selfinsured retention limit within product liability general liability coverage company believes generally accordance industry practices product liability cases us management establishes product liability accrual includes legal costs associated accrued claims utilizing thirdparty actuarial valuations incorporate historical trend factors company’s specific claims experience derived loss reports provided thirdparty claims administrators product liability accrual established considering applicable insurance coverage changes nature product liability claims actual settlement amounts could affect adequacy estimates require changes provisions liability estimate ultimate liability may less reported environmental remediation company named potentially responsible party respect limited number identified contaminated sites levels contamination vary significantly site related levels remediation efforts environmental liabilities recorded based probable cost known estimated minimum cost remediation accruals discounted present value unless amount timing expenditures fixed reliably determinable company accrues estimated environmental liabilities based assumptions subject number factors uncertainties circumstances affect reliability precision estimates include identification additional sites environmental regulations level cleanup required technologies available number financial condition contributors remediation time period remediation may occur company recognizes changes estimates new remediation requirements defined new information becomes available chemetco inc superfund site hartford illinois august 2017 watts regulator co received “notice environmental liability” us environmental protection agency “usepa” chemetco inc superfund site hartford illinois site letter chemetco site group “group” alleges watts regulator co potentially responsible party arranged disposal treatment hazardous substances contained materials sent site resulted release threat release hazardous substances site august 2017 162 companies members group final number members subject change unknown time letter offered watts regulator co opportunity join group participate remedial investigation feasibility study “rifs” site watts regulator co joined group september 2017 based information currently known management believes watts regulator co’s share costs rifs likely material adverse effect financial condition company material adverse effect company’s operating results particular period company unable estimate range reasonably possible loss matter damages specified rifs completed determine remediation plan implemented costs plan ii total number potentially responsible parties may agree fund perform remediation yet determined iii share contribution potentially responsible parties remediation determined iv number years required complete rifs implement remediation plan acceptable usepa uncertain asbestos litigation company defending approximately 355 lawsuits different jurisdictions alleging injury death result exposure asbestos complaints cases typically name large number defendants identify particular company products source asbestos exposure date discovery failed yield evidence substantial exposure company products judgments entered company litigation lawsuits proceedings claims arising ordinary course operations also pending threatened company 16 financial instruments fair value carrying amounts cash equivalents trade receivables trade payables approximate fair value short maturity financial instruments fair value company’s 505 senior notes due 2020 based quoted market prices similar notes level 2 fair value company’s borrowings outstanding credit agreement facility agreement company’s variable rate debt approximates carrying value carrying amount estimated fair market value company’s longterm debt including current portion follows financial instruments company measures certain financial assets liabilities fair value recurring basis including deferred compensation plan assets related liabilities redeemable financial instruments derivatives fair values certain financial assets liabilities determined using following inputs december 31 2017 december 31 2016 1 included company’s consolidated balance sheet assets net 2 included company’s consolidated balance sheet accrued compensation benefits 3 included company’s consolidated balance sheet current liabilities december 31 2017 noncurrent liabilities december 31 2016 relates mandatorily redeemable equity instrument part apex acquisition 2015 table provides summary changes fair value financial assets liabilities measured fair value recurring basis using significant unobservable inputs level 3 period december 31 2016 december 31 2017 connection acquisition apex liability 55 million recognized november 30 2015 estimate acquisition date fair value mandatorily redeemable equity instrument company acquired additional 10 ownership first quarter 2017 approximately 29 million owns 90 apex outstanding shares remaining liability classified level 3 fair value hierarchy based commitment purchase remaining 10 apex shares within next year observable market cash equivalents consist instruments remaining maturities three months less date purchase consist primarily money market funds carrying amount reasonable estimate fair value company uses financial instruments time enhance ability manage risk including foreign currency commodity pricing exposures exist part ongoing business operations use derivatives exposes company counterparty credit risk nonperformance market risk related changes currency exchange rates commodity prices company manages exposure counterparty credit risk diversification counterparties company’s counterparties derivative transactions substantial commercial banks significant experience using derivative instruments impact market risk fair value cash flows company’s derivative instruments monitored company restricts use derivative financial instruments hedging activities company enter contracts trading purposes company enter contracts speculative purposes use derivative instruments approved senior management written guidelines interest rate swaps february 12 2016 company entered credit agreement “credit agreement” pursuant received funding commitment term loan 300 million entire 300 million drawn revolving commitment “revolver” 500 million 147 million drawn december 31 2017 facilities mature february 12 2021 facility company choose either adjusted libor alternative base rate “abr” upon intended election adjusted libor interest rate term loan quarterly interest payments began may 2016 quarterly principal repayments commencing march 31 2017 balloon payment principal maturity date revolver quarterly interest payments began july 2016 accordingly company’s earnings cash flows exposed interest rate risk changes adjusted libor order manage company’s exposure changes cash flows attributable fluctuations liborindexed interest payments related company’s floating rate debt company entered two interest rate swaps february 12 2016 interest rate swap company receives threemonth usdlibor subject 0 floor pays fixed rate 131375 notional amount 2250 million swaps mature february 12 2021 company formally documents hedge relationships hedge inception ensure interest rate swaps qualify hedge accounting quarterly basis company assesses whether interest rate swaps highly effective offsetting changes cash flow hedged item company hold issue interest rate swaps trading purposes swaps designated cash flow hedges years ended december 31 2017 2016 net tax gain 06 million 29 million respectively recorded accumulated comprehensive income recognize effective portion fair value interest rate swaps qualify cash flow hedge company enter interest rate swaps 2017 nondesignated cash flow hedge company’s foreign subsidiaries transact business including certain intercompany transactions foreign currencies transactions principally purchases sales materials denominated european currencies us canadian dollar company uses foreign currency forward exchange contracts time manage risk related intercompany loans intercompany purchases occur course year certain open foreign currency denominated commitments sell products third parties company entered one forward contract fourth quarter 2016 one forward contract first quarter 2017 manage foreign currency rate exposure 2016 2017 forward contracts entered manage foreign currency rate exposure hong kong dollar euro regarding two intercompany loans forward contracts markedtomarket changes fair value recorded earnings company recognized loss 29 million related forward exchange contracts 2017 recognized gain forward contract 2016 03 million company forward contracts 2015 forward contracts renewed september 2017 intercompany loans company hedging foreign currency rate exposure settled leases company leases certain manufacturing facilities sales offices warehouses automobiles equipment generally leases carry renewal provisions require company pay maintenance costs future minimum lease payments capital leases noncancelable operating leases december 31 2017 follows carrying amounts assets capital lease include 17 segment information company operates three geographic segments americas europe apmea segments sells similar products separate financial results reviewed company’s chief operating decisionmaker segment earns revenue income almost exclusively sale products company sells products various end markets around world sales region based upon location entity recording sale products sold four product categories 1 residential commercial flow control products 2 hvac gas products 3 drainage water reuse products 4 water quality products americas sells products across four product categories europe primarily sells residential commercial flow products hvac gas products drainage products apmea primarily sells residential commercial flow products hvac gas products intercompany sales transactions eliminated accounting policies segment described summary significant accounting policies see note 2 january 1 2017 company began reporting results watts middle east part company’s former asiapacific segment referred apmea watts middle east previously reported within former emea segment referred europe change segment composition aligns structure company’s internal organization result material change previously reported segment information 2016 2015 results segment retrospectively revised comparative purposes following summary company’s significant accounts balances segment reconciled consolidated totals corporate expenses primarily administrative compensation expense compliance costs professional fees including corporaterelated legal audit expenses shareholder services benefit administration costs included corporate’s operating loss 2015 597 million charge related company’s settlement pension plan serp benefit obligations refer note 14 “employee benefit plans” discussion included europe’s operating loss 2015 1297 million charge related goodwill impairment europe reporting unit refer note 6 “goodwill intangibles” discussion included apmea’s operating income 2016 87 million gain related sale operating subsidiary china refer note 4 “sale business” discussion following includes us net sales us property plant equipment company’s americas segment following includes intersegment sales americas europe apmea company sells products various end markets around world groups net sales third parties four product categories net sales third parties four product categories follows 18 accumulated comprehensive loss accumulated comprehensive loss consists following 19 quarterly financial information unaudited 1 four quarters may sum full year due rounding 20 subsequent events february 8 2018 company declared quarterly dividend nineteen cents 019 per share outstanding share class common stock class b common stock payable march 16 2018 stockholders record march 2 2018 watts water technologies inc subsidiaries schedule iivaluation qualifying accounts amounts millions exhibit index exhibit description 101def† xbrl taxonomy extension definition linkbase document 101lab† xbrl taxonomy extension label linkbase document 101pre† xbrl taxonomy extension presentation linkbase document management contract compensatory plan arrangement †filed herewith ††furnished herewith attached exhibit 101 report following formatted xbrl extensible business reporting language consolidated statements operations years ended december 31 2017 2016 2015 ii consolidated statements comprehensive loss income years ended december 31 2017 2016 2015 iii consolidated balance sheets december 31 2017 december 31 2016 iv consolidated statements stockholders’ equity years ended december 31 2017 2016 2015 v consolidated statements cash flows years ended december 31 2017 2016 2015 vi notes consolidated financial statements signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized dated february 23 2018 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated signature title date robert j pagano jr chief executive officer president director february 23 2018 robert j pagano jr principal executive officer todd trapp chief financial officer february 23 2018 todd trapp principal financial officer virginia halloran chief accounting officer february 23 2018 virginia halloran principal accounting officer robert l ayers director february 15 2018 robert l ayers christopher l conway director february 18 2018 christopher l conway david dunbar director february 15 2018 david dunbar jes munk hansen director february 16 2018 jes munk hansen w craig kissel chairman board february 21 2018 w craig kissel joseph noonan director february 20 2018 joseph noonan merilee raines director february 15 2018 merilee raines joseph w reitmeier director february 17 2018 joseph w reitmeieritem 15 exhibits financial statement schedules a1 financial statements following financial statements included separate section report commencing page numbers specified a2 schedules required schedules provision made applicable accounting regulations securities exchange commission included notes consolidated financial statements a3 exhibits listed exhibit index immediately preceding signature page hereto filed part annual report form 10k item 16 form 10k summary none report independent registered public accounting firm stockholders board directors watts water technologies inc opinion consolidated financial statements audited accompanying consolidated balance sheets watts water technologies inc subsidiaries company december 31 2018 2017 related consolidated statements operations comprehensive income stockholders’ equity cash flows years threeyear period ended december 31 2018 related notes financial statement schedule ii valuation qualifying accounts collectively “consolidated financial statements” opinion consolidated financial statements present fairly material respects financial position company december 31 2018 2017 results operations cash flows years threeyear period ended december 31 2018 conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states pcaob company’s internal control financial reporting december 31 2018 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission report dated february 22 2019 expressed adverse opinion effectiveness company’s internal control financial reporting basis opinion consolidated financial statements responsibility company’s management responsibility express opinion consolidated financial statements based audits public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether consolidated financial statements free material misstatement whether due error fraud audits included performing procedures assess risks material misstatement consolidated financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures consolidated financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation consolidated financial statements believe audits provide reasonable basis opinion kpmg llp served company’s auditor since 1997 boston massachusetts february 22 2019 watts water technologies inc subsidiaries consolidated statements operations amounts millions except per share information accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated statements comprehensive income amounts millions accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated balance sheets amounts millions except share information accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated statements stockholders’ equity amounts millions except share information accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated statements cash flows amounts millions accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries notes consolidated financial statements 1 description business watts water technologies inc company leading supplier products solutions conserve water manage flow fluids energy buildings commercial residential markets americas europe asiapacific middle east africa apmea 140 years company designed produced valve systems safeguard regulate water systems energy efficient heating hydronic systems drainage systems water filtration technology helps purify conserve water 2 accounting policies principles consolidation consolidated financial statements include accounts company majority wholly owned subsidiaries upon consolidation intercompany accounts transactions eliminated cash equivalents cash equivalents consist instruments remaining maturities three months less date purchase consist primarily money market funds carrying amount reasonable estimate fair value allowance doubtful accounts allowance doubtful accounts established represent company’s best estimate net realizable value outstanding accounts receivable development company’s allowance doubtful accounts varies region general based review past due amounts historical writeoff experience well aging trends affecting specific accounts general operational factors affecting accounts addition factors developed certain regions utilizing historical trends sales returns allowances cash discount activities derive reserve returns allowances cash discounts company uniformly considers current economic trends changes customer payment terms evaluating adequacy allowance doubtful accounts company also aggressively monitors creditworthiness company’s largest customers periodically reviews customer credit limits reduce risk circumstances relating specific customers change unanticipated changes occur general business environment company’s estimates recoverability receivables could adjusted concentration credit company sells products diversified customer base therefore significant concentrations credit risk 2018 2017 2016 customer accounted 10 company’s total sales accounts receivable inventories stated lower cost market using firstin firstout method market value determined replacement cost net realizable value historical usage used basis determining reserve excess obsolete inventories goodwill intangible assets goodwill recorded consideration paid acquisitions exceeds fair value net tangible intangible assets acquired goodwill intangible assets indefinite useful lives amortized rather tested impairment least annually frequently events circumstances indicate “more likely not” might impaired change business conditions company performs annual goodwill indefinitelived intangible assets impairment assessment fourth quarter year longlived assets intangible assets estimable lives longlived assets reviewed indicators impairment least quarterly frequently events changes circumstances indicate carrying amount asset group may recoverable property plant equipment property plant equipment recorded cost depreciation provided straightline basis estimated useful lives assets range 10 40 years buildings improvements 3 15 years machinery equipment leasehold improvements depreciated lesser economic useful life asset remaining lease term taxes income taxes assessed governmental authorities sale transactions recorded net basis excluded sales company’s consolidated statements operations income taxes income taxes accounted asset liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases operating loss tax credit carry forwards deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized income period includes enactment date company recognizes tax benefits item question meets morelikelythannot greater 50 likelihood sustained upon examination taxing authorities threshold december 31 2018 company gross unrecognized tax benefits approximately 102 million approximately 45 million recognized would affect effective tax rate difference amount unrecognized tax benefits amount would affect effective tax rate consists federal tax benefit state income tax items allowable correlative adjustments available certain jurisdictions reconciliation beginning ending amount unrecognized tax follows company estimates reasonably possible balance unrecognized tax benefits december 31 2018 may decrease approximately 05 million next twelve months result lapses statutes limitations settlements open audits february 2018 united states internal revenue service concluded audit company’s 2015 2016 tax years material adjustments result audit company conducts business variety locations throughout world resulting tax filings numerous domestic foreign jurisdictions company subject tax examinations regularly part normal course business company’s major jurisdictions us france germany canada netherlands statute limitations us subject tax examination 2015 later france germany canada netherlands subject tax examination 20122014 later jurisdictions exceptions longer subject tax examinations state local international jurisdictions tax years 2013 company accounts interest penalties related uncertain tax positions component income tax expense foreign currency translation functional currency company’s foreign subsidiaries local currency nonus subsidiaries transact functional currency us dollar assets liabilities translated current rates exchange balance sheet date income expense items translated average foreign currency exchange rates period adjustments resulting translation financial statements foreign operations us dollars excluded determination net income recorded accumulated comprehensive income separate component equity subsidiaries functional currency assets liabilities differs local currency nonmonetary assets liabilities translated rate exchange effect date assets acquired monetary assets liabilities translated current rates exchange balance sheet date income expense items translated average foreign currency rates period translation adjustments subsidiaries included income expense net consolidated statements operations stockbased compensation company records compensation expense financial statements sharebased awards based grant date fair value awards restricted stock awards deferred stock awards stockbased compensation expense restricted stock awards deferred stock awards recognized requisite service periods awards straightline basis generally commensurate vesting term performance stock units offered company employees amortized expense vesting period based company’s performance relative performance goals may adjusted changes estimated shares expected vest result adjustments related sharebased compensation expense recorded period change march 2016 fasb issued asu 201609 “improvements employee sharebased payment accounting” company adopted standard first quarter 2017 immaterial change retained earnings part adoption standard company elected account forfeitures occur rather estimate expected forfeitures vesting period respective grant company also longer reclassifies benefits associated tax deductions excess recognized compensation cost operating activities financing activities consolidated statement cash flows december 31 2018 company one stockbased compensation plan total unrecognized compensation costs related unvested stockbased compensation arrangements approximately 174 million total weighted average remaining term 161 years 2018 2017 2016 company recognized compensation costs related stockbased programs approximately 138 million 139 million 134 million respectively 2018 2017 2016 stock compensation expense 09 million 08 million 09 million respectively recorded cost goods sold 129 million 131 million 125 million respectively recorded selling general administrative expenses 2017 2016 company recorded approximately 01 million 08 million respectively tax benefits compensation expense relating stock options 2018 2017 2016 company recorded approximately 28 million 39 million 28 million respectively tax benefit stockbased plans 2018 2017 2016 recognition total stockbased compensation expense impacted basic diluted net income per common share 032 028 029 respectively net income per common share basic net income per common share calculated dividing net income weighted average number common shares outstanding calculation diluted net income per share assumes conversion dilutive securities net income number shares used compute net income per share basic assuming full dilution reconciled computation diluted net income per share year ended december 31 2016 excludes effect potential exercise options purchase approximately 01 million shares exercise price option greater average market price class common stock effect would antidilutive financial instruments normal course business company manages risks associated commodity prices foreign exchange rates interest rates variety strategies including use hedging transactions executed accordance company’s policies company’s hedging transactions include limited use various derivative financial commodity instruments matter policy company use derivative instruments unless underlying exposure change value derivative instruments would substantially offset opposite change value underlying hedged items company use derivative instruments trading speculative purposes derivative instruments may designated accounted either hedge recognized asset liability fair value hedge forecasted transaction cash flow hedge fair value hedge effective ineffective portions change fair value derivative instrument along adjustment carrying amount hedged item fair value changes attributable hedged risk recognized earnings cash flow hedge changes fair value derivative instrument highly effective deferred accumulated comprehensive income loss underlying hedged item recognized earnings company two interest rate swaps designated cash flow hedges december 31 2018 2017 company also foreign exchange hedges designated cash flow hedges december 31 2018 refer note 17 details fair value cash flow hedge cease qualify hedge accounting terminated would continue carried balance sheet fair value settled hedge accounting would discontinued prospectively forecasted transaction longer probable occurring amounts previously deferred accumulated comprehensive income would recognized immediately earnings occasion company may enter derivative instrument qualify hedge accounting entered offset changes fair value underlying transaction required recognized earnings natural hedge instruments reflected consolidated balance sheets fair value changes fair value recognized earnings portions company’s outstanding debt exposed interest rate risks company monitors interest rate exposures ongoing basis maximize overall effectiveness interest rates fair value measurements fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date entity required maximize use observable inputs available minimize use unobservable inputs measuring fair value company certain financial assets liabilities measured fair value recurring basis certain nonfinancial assets liabilities may measured fair value nonrecurring basis fair value disclosures assets liabilities based threelevel hierarchy defined follows level 1 quoted prices active markets identical assets liabilities entity ability access measurement date level 2 observable inputs level 1 prices quoted prices similar assets liabilities quoted prices markets active inputs observable corroborated observable market data substantially full term assets liabilities level 3 unobservable inputs supported little market activity significant fair value assets liabilities assets liabilities subject hierarchy classified entirety based lowest level input significant fair value measurement company’s assessment significance particular input fair value measurement entirety requires judgment considers factors specific asset liability refer note 17 details shipping handling shipping handling costs included selling general administrative expense amounted 563 million 521 million 479 million years ended december 31 2018 2017 2016 respectively research development research development costs included selling general administrative expense amounted 345 million 290 million 265 million years ended december 31 2018 2017 2016 respectively revenue recognition company recognizes revenue core principle depict transfer control company’s customers amount reflecting consideration company expects entitled order achieve core principle company applies following fivestep approach 1 identify contract customer 2 identify performance obligations contract 3 determine transaction price 4 allocate transaction price performance obligations contract 5 recognize revenue performance obligation satisfied company’s revenue product sales recognized point time model point control transfers customer generally products shipped company’s manufacturing distribution facilities delivered customer’s named location sales tax valueadded tax taxes collected concurrent revenue producing activities excluded revenue freight costs billed customers shipping handling activities included revenue related cost included selling general administrative expenses see note 4 disclosures detail regarding revenue recognition basis presentation certain amounts 2017 2016 consolidated financial statements reclassified permit comparison 2018 presentation including adoption recent accounting standards reclassifications effect reported results operations stockholders equity estimates preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates recently adopted accounting standards february 2018 fasb issued asu 201802 “income statementreporting comprehensive income” asu 201802 provides guidance reclassification certain tax effects 2017 tax cuts jobs act “2017 tax act” accumulated comprehensive income current generally accepted accounting principles requires deferred tax liabilities deferred tax assets adjusted effect change tax laws tax rates effect included income operations period enactment included income tax effects items accumulated comprehensive income guidance allows reclassification accumulated comprehensive income retained earnings tax effects items accumulated comprehensive income related change tax rates 2017 tax act standard effective entities fiscal years beginning december 15 2018 including interim periods within reporting period early adoption standard permitted company adopted standard first quarter 2018 material impact company’s financial statements january 1 2018 company adopted accounting standard asc 606 revenue contracts customers related amendments “new revenue standard” “asu 201409” contracts using modified retrospective method adoption asu 201409 material company cumulative effect upon january 1 2018 adoption date impact new revenue standard material company proforma disclosure presented year ended december 31 2018 company expects impact adoption new standard immaterial company’s financial statements ongoing basis see “revenue recognition” within note 2 note 4 notes consolidated financial statements annual report form 10k details october 2016 fasb issued asu 201616 “intraentity transfers assets inventory” asu 201616 provides guidance timing recognition tax consequences intraentity transfer asset inventory company adopted provision asu first quarter 2018 using modified retrospective approach cumulativeeffect adjustment retained earnings beginning quarter adoption guidance material impact company’s financial statements accounting standards updates august 2018 fasb issued asu 201815 “intangiblesgoodwill otherinternaluse software subtopic 35040customer’s accounting implementation costs incurred cloud computing arrangement service contract” asu 201815 aligns requirements capitalizing implementation costs incurred hosting arrangement service contract requirements capitalizing implementation costs incurred develop obtain internaluse software guidance requires entity hosting arrangement service contract follow guidance subtopic 35040 determine implementation costs capitalize asset related service contract costs expense standard effective fiscal years beginning december 15 2019 including interim periods within reporting period company currently evaluating impact guidance company’s financial statements expect adoption guidance material impact company’s financial statements august 2018 fasb issued asu 201813 “fair value measurement topic 820disclosure framework changes disclosure requirements fair value measurement” asu 201813 modifies disclosure requirements fair value measurements topic 820 standard effective fiscal years beginning december 15 2019 including interim periods within reporting period company currently evaluating impact guidance company’s disclosures however guidance impact company’s financial statements august 2017 fasb issued asu 201712 “derivatives hedging topic 815targeted improvements accounting hedging activities” asu 201712 amends hedge accounting guidance improve financial reporting hedging relationships better portray economic results entity’s risk management activities financial statements guidance permits hedge accounting risk components hedging relationships involve nonfinancial risk reduces complexity hedging fair value hedges interest rate risk eliminates requirement separately measure report hedging ineffectiveness simplifies certain hedge effectiveness assessment requirements standard effective fiscal years beginning december 15 2018 including interim periods within reporting period company currently evaluating impact guidance including transition elections required disclosures financial statements expect adoption guidance material impact company’s financial statements february 2016 fasb issued asu 201602 “leases topic 842” asu 201602 requires lessee recognize statement financial position liability make lease payments rightofuse asset representing right use underlying asset lease term finance operating leases term longer twelve months topic 842 subsequently amended asu 201801 “land easement practical expedient transition topic 842” asu 201810 “codification improvements topic 842 leases” asu 201811 “targeted improvements” asu 201602 effective financial statements issued annual periods beginning december 15 2018 interim periods thereafter early adoption permitted entities modified retrospective transition approach required applying new standard leases existing date initial application company may choose use either 1 effective date standard 2 beginning earliest comparable period presented financial statements date initial application company adopted new standard january 1 2019 used effective date standard date company’s initial application electing approach financial information disclosures required new standard provided dates periods january 1 2019 new standard provides number optional practical expedients throughout transition company elected “package practical expedients” permits company reassess new standard company’s prior conclusions lease identification lease classification initial direct costs company elect useofhindsight practical expedient pertaining land easements latter applicable company new standard also provides practical expedients entity’s ongoing accounting company elected shortterm lease recognition exemption leases qualify means leases qualify company recognize rightofuse assets lease liabilities includes recognizing rightofuse assets lease liabilities existing shortterm leases assets transition company also elected practical expedient separate lease nonlease components company’s leases company completed analysis impacts new lease standard designed necessary changes existing processes configured system requirements required implement new standard company variety categories lease arrangements including real estate automobiles manufacturing equipment facility equipment office equipment certain service arrangements company reviewed leasing arrangements order evaluate impact standard company’s financial statements expects record rightofuse asset range 2540 million lease liability range 2540 million related recognition discounted basis company’s minimum commitments noncancelable operating leases consolidated balance sheets first quarter 2019 company currently expect asc 842 material effect either consolidated statement operations consolidated statement cash flow 3 restructuring charges net company’s board directors approves major restructuring programs may involve discontinuance significant product lines shutdown significant facilities time company takes additional restructuring actions including involuntary terminations part major program company accounts costs period liability incurred costs included restructuring charges company’s consolidated statements operations summary pretax cost restructuring program follows company recorded pretax restructuring business segments follows actions company periodically initiates actions part major program total “other actions” pretax restructuring expense 34 million year ended december 31 2018 included “other actions” european restructuring activities initiated 2018 2017 well certain minor initiatives company incurred restructuring expenses adjusted prior restructuring reserves year ended december 31 2018 third quarter 2018 management initiated restructuring actions primarily associated european headquarters well cost savings initiatives certain european manufacturing facilities actions included reductions force related costs within company’s europe segment pretax charges year ended december 31 2018 approximately 40 million primarily included severance benefits total restructuring charges associated program estimated approximately 50 million costs expected fully incurred within year ending december 31 2019 restructuring reserve associated actions approximately 22 million december 31 2018 primarily relates severance benefits fourth quarter 2017 management initiated certain restructuring actions related reductions force within company’s europe segment restructuring activities primarily included severance benefits total pretax charges associated europe restructuring activities initially expected approximately 41 million costs fully incurred 2017 company reduced total pretax charges program approximately 34 million september 30 2018 primarily related reduced severance costs restructuring reserve associated actions approximately 02 million december 31 2018 relates severance benefits fourth quarter 2015 management initiated certain restructuring actions strategic initiatives respect company’s europe segment response ongoing economic challenges europe additional product rationalization restructuring actions included severance benefits limited costs relating asset writeoffs professional fees relocation total pretax charge europe 2015 restructuring initiatives 77 million following table summarizes total expected incurred remaining pretax restructuring costs europe 2015 restructuring actions details company’s europe 2015 restructuring reserve activity year ended december 31 2018 follows 2015 actions americas apmea 2015 board directors company approved transformation program relating company’s americas apmea businesses primarily involved exit lowmargin noncore product lines enhancing global sourcing capabilities “phase one” company eliminated approximately 165 million combined americas apmea net sales primarily within company’s doityourself diy distribution channel part exit noncore product lines company entered agreement sell operating subsidiary china dedicated exclusively manufacturing products discontinued sale finalized second quarter 2016 company recognized pretax gain 87 million received proceeds sale 84 million second phase program involved consolidation manufacturing facilities distribution center network optimization including reducing square footage company’s americas facilities together phase one reduced americas net operating footprint approximately 30 phase program designed improve utilization company’s remaining facilities better leverage cost structure reduce working capital improve execution customer delivery requirements december 31 2017 second phase complete combined basis total pretax cost company’s transformation program related americas apmea businesses 598 million including restructuring costs 181 million goodwill intangible asset impairments 135 million transformation deployment costs approximately 282 million transformation deployment costs included consulting project management fees inventory writeoffs associated costs associated americas apmea transformation program incurred december 31 2017 following table summarizes type total incurred pretax restructuring costs company’s transformation program related americas apmea businesses phase one phase two combined details restructuring reserve activity company’s americas apmea 2015 transformation program year ended december 31 2018 follows 4 revenue recognition company leading supplier products manage conserve flow fluids energy buildings commercial residential markets company designed produced valve systems safeguard regulate water systems energy efficient heating hydronic systems drainage systems water filtration technology helps purify conserve water company distributes products four primary distribution channels wholesale original equipment manufacturers oems specialty doityourself diy company operates three geographic segments americas europe apmea segments sells similar products comprised following principal product lines · residential commercial flow control productsincludes products typically sold plumbing hot water applications backflow preventers water pressure regulators temperature pressure relief valves thermostatic mixing valves · hvac gas productsincludes commercial highefficiency boilers water heaters heating solutions hydronic electric heating systems underfloor radiant applications custom heat hot water solutions hydronic pump groups boiler manufacturers alternative energy control packages flexible stainless steel connectors natural liquid propane gas commercial food service residential applications hvac acronym heating ventilation air conditioning · drainage water reuse productsincludes drainage products engineered rain water harvesting solutions commercial industrial marine residential applications · water quality productsincludes pointofuse pointofentry water filtration conditioning scale prevention systems commercial residential applications following table disaggregates revenue presented net sales financial statements reportable segment distribution channel principal product line company generally considers customer purchase orders cases governed master sales agreements represent contract customer company’s contracts customers generally products typically include performance obligations professional services extended warranties material rights situations sales distributor company concluded contracts distributor company holds contract bearing enforceable rights obligations distributor part consideration contract company evaluates certain factors including customer’s ability pay credit risk contract company considers promise transfer products distinct identified performance obligation determining transaction price company evaluates whether price subject refund adjustment determine net consideration company expects entitled company’s standard payment terms less one year company elected practical expedient asc 606103218 assess whether contract significant financing component company allocates transaction price distinct product based relative standalone selling price product price specified purchase order considered standalone selling price observable input depicts price sold similar customer similar circumstances revenue recognized control product transferred customer ie company’s performance obligation satisfied typically occurs shipment company’s manufacturing site distribution center delivery customer’s named location certain circumstances revenue shipments retail customers recognized product consumed customer based terms arrangement transfer control satisfied point time determining whether control transferred company considers present right payment physical possession legal title along risks rewards ownership transferred customer certain circumstances company manufactures customized product without alternative use customers however arrangements entitle company right payment cost plus profit work completed company concluded control transfers point time occasionally company receives orders products delivered multiple dates may extend across reporting periods company invoices delivery upon shipment recognizes revenues distinct product delivered assuming transfer control occurred scheduled delivery dates within one year optional exemption provided asc 606105014 revenues allocated future shipments partially completed contracts disclosed company generally provides assurance warranty products substantially conform published specification company’s liability limited either credit equal purchase price replacement defective part returns warranty historically immaterial company consider activities related warranty separate performance obligation certain products company separately sell extended warranty service policies customers company considers sale extended warranty separate performance obligation policies typically periods ranging one three years payments received deferred recognized policy period periods presented revenue recognized revenue deferred policies material consolidated financial statements timing revenue recognition billings cash collections company’s contracts customers vary based payment terms conditions customer contracts cases customers partially prepay goods cases appropriate credit evaluations payment due arrears addition constraints cause variability ultimate consideration recognized constraints typically include early payment discounts volume rebates rights return cooperative advertising market development funds company includes constraints estimated transaction price basis reasonably estimate amount variable consideration estimates based historical experience anticipated future performance company’s best judgment time timing company’s recognition revenue different timing payments made customer company recognizes either contract asset performance precedes contractual due date contract liability customer payment precedes performance contracts payment arrears recognized receivables opening closing balances company’s contract assets contract liabilities follows amount revenue recognized year ended december 31 2018 included opening contract liability balance 113 million revenue consists primarily revenue recognized shipments product prepaid well amortization extended warranty service policy revenue company recognize material revenue obligations satisfied prior periods change contract liabilities material year ended december 31 2018 impairment losses related contract assets year ended december 31 2018 company incurs costs obtain fulfill contract however company elected practical expedient asc 34040244 recognize incremental costs obtain contract expense incurred amortization period one year less company elected treat shipping handling activities performed customer obtained control related goods fulfillment cost related cost accrued conjunction recording revenue goods 5 sale business gain sale china operating subsidiary september 22 2015 company signed agreement sell operating subsidiary china dedicated production noncore products sale finalized second quarter 2016 company received proceeds 84 million sale fourth quarter 2016 company recognized pretax gain 87 million includes noncash accumulated currency translation adjustment 73 million net aftertax gain approximately 83 million 6 business acquisitions pvi industries llc november 2 2016 company acquired 100 shares pvi riverside holdings inc parent company pvi industries llc “pvi” aggregate purchase price including final working capital adjustment approximately 791 million pvi leading manufacturer commercial stainless steel water heating equipment focused high capacity market north america based fort worth texas pvi’s water heater product offering complements aerco’s boiler products allowing company address customers’ heating hot water requirements results pvi included company’s americas segment company accounted transaction purchased business combination acquisition funded partially available cash partially borrowings company’s credit agreement second quarter 2017 company finalized purchase price allocation pvi purchase acquisition resulted recognition 411 million goodwill 310 million intangible assets intangible assets acquired consist customer relationships valued 176 million estimated lives 15 years developed technology valued 102 million estimated lives 10 years trade name valued 32 million estimated life 20 years goodwill attributable workforce pvi strategic platform adjacency allow watts extend product offerings result acquisition approximately 69 million goodwill deductible tax purposes 7 goodwill intangibles goodwill company performs annual goodwill impairment testing reporting unit fiscal october month end earlier triggering event circumstance indicates impairment loss may occurred october 28 2018 testing date company 5443 million goodwill balance sheet 2018 company eight reporting units one reporting units water quality goodwill company performed qualitative analysis seven remaining reporting units include blücher dormont us drains europe residential commercial heating hot water solutions “hhws” apmea result qualitative analyses company determined fair values reporting units likely greater carrying amounts 2018 company need proceed beyond qualitative analysis goodwill impairments recorded fourth quarter 2017 company performed quantitative impairment analysis hhws reporting unit connection annual strategic plan due underperformance budget primarily caused continuing softness condensing boiler market weakness company’s tankless water heater products competitive pricing pressure company estimated fair value reporting unit using weighted calculation income approach market approach income approach calculated present value expected future cash flows guideline public company method market approach calculated estimated fair values based valuation multiples derived stock prices enterprise values publicly traded companies comparable reporting unit estimated fair value reporting unit exceeded carrying value 2017 therefore impairment recorded changes carrying amount goodwill geographic segment follows 1 americas goodwill additions 2018 relate immaterial acquisitions longlived assets indefinitelived intangibles tested impairment least annually frequently events circumstances change business conditions indicate “more likely not” intangible asset might impaired company performs annual indefinitelived intangibles impairment assessment fourth quarter year 2018 2017 2016 impairment assessments company performed quantitative assessments indefinitelived intangible assets methodology employed relief royalty method subset income approach based results assessment company recognize impairment indefinitelived intangibles 2018 2017 2016 company recognized noncash pretax impairment charges approximately 04 million related trade name europe segment intangible assets estimable lives longlived assets reviewed impairment whenever events changes circumstances indicate carrying amount asset group may recoverable recoverability intangible assets estimable lives longlived assets measured comparison carrying amount asset group future net undiscounted pretax cash flows expected generated asset group comparisons indicate asset recoverable impairment loss recognized amount carrying amount asset group exceeds related estimated fair value estimated fair value based either discounted future pretax operating cash flows appraised values depending nature asset company determines discount rate analysis based weighted average cost capital using market guideline public companies related businesses allocate interest charges asset group measured judgment required estimate future operating cash flows fourth quarter 2017 company recognized 10 million impairment charge americas segment technology asset change market expectations indicated carrying amount asset longer recoverable 2016 company recognized 01 million impairment charge longlived assets intangible assets include following aggregate amortization expense amortized intangible assets 2018 2017 2016 196 million 225 million 208 million respectively additionally future amortization expense amortizable intangible assets expected 172 million 2019 162 million 2020 146 million 2021 135 million 2022 116 million 2023 amortization expense provided straightline basis estimated useful lives intangible assets weightedaverage remaining life total amortizable intangible assets 121 years patents customer relationships technology trade names amortizable intangibles weightedaverage remaining lives 33 years 110 years 72 years 137 years 191 years respectively indefinitelived intangible assets primarily include trade names trademarks 8 inventories net inventories consist following raw materials workinprocess finished goods net valuation reserves 274 million 282 million december 31 2018 2017 respectively finished goods 174 million 175 million december 31 2018 2017 respectively consigned 9 property plant equipment property plant equipment consist following 10 income taxes significant components company’s deferred income tax liabilities assets follows provision income taxes based following pretax income provision income taxes consists following 2017 tax cuts jobs act “2017 tax act” enacted december 22 2017 resulted significant changes us corporate income tax system changes included lowering us corporate income tax rate 35 21 elimination reduction certain domestic deductions credits 2017 tax act also transitioned international taxation worldwide system modified territorial system creating new taxes certain foreignsourced earnings certain related party payments referred global intangible lowtaxed income tax annual antibase erosion tax respectively 2017 tax act also imposed onetime mandatory deemed repatriation tax “toll tax” foreign subsidiaries’ previously untaxed accumulated foreign earnings due timing enactment complexity involved applying provisions 2017 tax act company made reasonable estimates effects recorded provisional amounts december 31 2017 financial statements december 2017 sec staff issued staff accounting bulletin 118 income tax accounting implications tax cuts jobs act sab 118 allows companies record provisional amounts measurement period extend beyond one year enactment date adjustments made provisional amounts allowed sab 118 identified recorded discrete adjustments described following paragraphs changes tax rates tax laws accounted period enactment therefore company recorded provisional tax expense 251 million related 2017 tax act december 31 2017 amount also included immaterial benefit company’s 2017 current year tax expense year ended december 31 2018 company finalized impact 2017 tax act recorded benefit 37 million reducing net impact 214 million included 2018 adjustment 106 million benefit related determination foreign tax credits partial release related valuation allowance partially offset additional toll tax 102 million toll tax 2017 tax act imposed onetime toll tax requiring company pay us income taxes accumulated foreign subsidiary earnings previously subject us income tax rate 155 extent foreign cash equivalents 8 remaining earnings year ended december 31 2017 company recorded provisional amount 233 million related toll tax december 31 2018 company recorded tax expense based final guidance 2017 tax act 102 million resulting total toll tax charge 335 million paid eight years starting 2018 accrue interest deferred tax remeasurement company’s deferred tax liabilities exceeded balance company’s deferred tax assets year ended december 31 2017 company recorded provisional amount tax benefit 12 million december 31 2018 company recorded final tax benefit 2 million net 14 million benefit reflecting decrease us corporate income tax rate tax foreign earnings result 2017 tax act company repatriate cumulative undistributed foreign earning back us minimal us income tax consequences onetime toll tax company recorded provisional amount deferred tax expense 146 million december 31 2018 company recorded final tax benefit 2 million net deferred tax expense 126 million future repatriation foreign earnings actual income taxes reported different would computed applying federal statutory tax rate income taxes reasons differences follows december 31 2018 company foreign net operating loss carry forwards 246 million income tax purposes considering valuation allowances 246 million losses carried forward indefinitely net operating losses consist 246 million related austrian operations december 31 2018 us capital loss carry forwards utilized expired december 31 2018 december 31 2017 company foreign tax credit carry forwards 335 million 220 million respectively income tax purposes considering valuation allowances foreign tax credit carryforwards expire 2027 2028 december 31 2018 december 31 2017 company valuation allowances 299 million 287 million respectively december 31 2018 238 million related foreign tax credits 61 million related austrian net operating losses december 31 2017 03 million related us capital losses 220 million related foreign tax credits 64 million related austrian net operating losses management believes ability company use foreign tax credits losses within applicable carry forward period rise level likely threshold company valuation allowance deferred tax assets management believes likely company recover net deferred tax assets management believes likely future reversals deferred tax liabilities together forecasted income sufficient fully recover deferred tax assets december 31 2017 company considered foreign earnings permanently reinvested outside us plans repatriate foreign earnings us 11 accrued expenses liabilities accrued expenses liabilities consist following 12 financing arrangements company’s debt consists following principal payments next five years thereafter due follows millions 2019300 20201050 20212200 2022 thereafter 0 february 12 2016 company entered credit agreement “credit agreement” among company certain subsidiaries company become borrowers credit agreement jpmorgan chase bank na administrative agent swing line lender letter credit issuer lenders referred therein credit agreement provides 500 million fiveyear senior unsecured revolving credit facility “revolving credit facility” sublimit 100 million letters credit december 31 2018 company 250 million drawn line credit agreement also provides 300 million fiveyear term loan facility “term loan facility” available company single draw entire 300 million drawn february 2016 company 2550 million borrowings outstanding term loan december 31 2018 borrowings outstanding revolving credit facility bear interest fluctuating rate per annum equal applicable percentage defined case eurocurrency rate loans ice benchmark administration libor rate plus applicable percentage ranging 0975 145 determined reference company’s consolidated leverage ratio ii case base rate loans swing line loans highest federal funds rate plus 05 b rate interest effect day announced jpmorgan chase bank na “prime rate” c ice benchmark administration libor rate plus 10 plus applicable percentage ranging 000 045 determined reference company’s consolidated leverage ratio borrowings outstanding term loan facility bear interest fluctuating rate per annum equal applicable percentage defined ice benchmark administration libor rate plus applicable percentage ranging 1125 175 determined reference company’s consolidated leverage ratio interest rates december 31 2018 revolving credit facility term loan facility 350 386 respectively loan term loan facility amortizes follows 0 per annum first year 75 second third years 10 fourth fifth years remaining unpaid balance paid full maturity date payments due made ratably year quarterly installments company paid quarterly installments 225 million 2018 addition paying interest credit agreement company also required pay certain fees connection credit facility including limited unused facility fee letter credit fees credit agreement matures february 12 2021 subject extension certain circumstances subject terms credit agreement company may repay loans outstanding credit agreement time without premium penalty customary breakage costs subject terms credit agreement repaid amounts borrowed term loan facility may borrowed company maintains letters credit guarantee performance payment third parties accordance specified terms conditions amounts outstanding 258 million december 31 2018 257 million december 31 2017 company’s letters credit primarily associated insurance coverage company’s letters credit generally expire within one year issuance drawn revolving credit facility instruments may exist expire without drawn therefore necessarily represent future cash flow obligations december 31 2018 company 4492 million unused available credit agreement 258 million standby letters credit outstanding credit agreement december 31 2018 company compliance covenants related credit agreement june 18 2010 company entered note purchase agreement certain institutional investors 2010 note purchase agreement pursuant 2010 note purchase agreement company issued senior notes 750 million principal due june 18 2020 company pays interest outstanding balance notes rate 505 per annum payable semiannually june 18th december 18th principal notes shall become due payable company may option upon notice subject terms 2010 note purchase agreement prepay time part notes amount less 10 million paying principal amount plus makewhole amount dependent upon yield respective us treasury securities 2010 note purchase agreement includes operational financial covenants company required comply including among others maintenance certain financial ratios restrictions additional indebtedness liens dispositions december 31 2018 company compliance covenants related 2010 note purchase agreement 13 common stock class common stock class b common stock equal dividend liquidation rights share company’s class common stock entitled one vote matters submitted stockholders share class b common stock entitled ten votes matters shares class b common stock convertible shares class common stock onetoone basis option holder december 31 2018 company reserved total 2581389 shares class common stock issuance stockbased compensation plans 6329290 shares conversion class b common stock class common stock july 27 2015 company’s board directors authorized repurchase 100 million company’s class common stock time open market privately negotiated transactions connection stock repurchase program company entered rule 10b51 plan permits shares repurchased company might otherwise precluded insider trading laws repurchase program may suspended discontinued time subject terms rule 10b51 plan company entered respect repurchase program december 31 2018 approximately 118 million remaining authorized share repurchases program following table summarizes cost number shares class common stock repurchased july 27 2015 programs years ended december 31 2018 2017 14 stockbased compensation december 31 2018 company maintains one stock incentive plan second amended restated 2004 stock incentive plan “2004 stock incentive plan” december 31 2018 1232137 shares class common stock authorized future grants new equity awards plan company grants shares restricted stock deferred stock awards key employees stock awards nonemployee members company’s board directors 2004 stock incentive plan stock awards nonemployee members company’s board directors vest immediately employees’ restricted stock awards deferred stock awards typically vest threeyear period rate onethird per year restricted stock awards deferred stock awards amortized expense straightline basis vesting period company also grants performance stock units key employees 2004 stock incentive plan performance stock units cliff vest end performance period set compensation committee board directors time grant upon vesting number shares company’s class common stock awarded performance stock unit recipient determined based company’s performance relative certain performance goals set time performance stock units granted recipient performance stock unit award may earn zero shares twice number target shares awarded recipient performance stock units amortized expense vesting period based company’s performance relative performance goals may adjusted changes estimated shares expected vest result adjustments related sharebased compensation expense recorded period change performance goals met awards earned previously recognized compensation expense reversed company granted performance stock units 2018 2017 2016 performance goals performance stock units based compound annual growth rate company’s revenue threeyear performance period company’s return invested capital “roic” third year performance period beginning 2015 company stopped granting stock options part annual equity awards employees previously 2004 stock incentive plan key employees granted nonqualified stock options purchase company’s class common stock options typically became exercisable fouryear period rate 25 per year expire ten years grant date however options granted 2014 become exercisable threeyear period rate onethird per year options granted plan may exercise prices less 100 fair market value class common stock date grant company’s practice grant options fair market value grant date upon exercise options company issues shares class common stock company also management stock purchase plan allows granting restricted stock units rsus key employees annual basis key employees may elect receive portion annual incentive compensation rsus instead cash participating employees may use 50 annual incentive bonus purchase rsus purchase price equal 80 fair market value company’s class common stock date grant rsus vest either annually threeyear period grant date upon third anniversary grant date receipt shares underlying rsus deferred minimum three years greater number years chosen employee date grant aggregate 2000000 shares class common stock may issued management stock purchase plan december 31 2018 750421 shares class common stock authorized future grants company’s management stock purchase plan 2004 stock incentive plan following summary unvested restricted stock deferred stock awards activity related information total fair value shares vested 2018 2017 2016 102 million 77 million 79 million respectively december 31 2018 total unrecognized compensation cost related unvested restricted stock deferred stock awards approximately 100 million total weighted average remaining term 170 years 2018 2017 2016 company recognized compensation costs 76 million 69 million 76 million respectively aggregate intrinsic value restricted stock deferred shares granted outstanding approximated 139 million representing total pretax intrinsic value based company’s closing class common stock price 6453 december 31 2018 following summary unvested performance stock award activity related information total fair value shares vested 2018 2017 58 million 35 million respectively 2016 performance stock awards vested december 31 2018 total unrecognized compensation cost related unvested performance stock awards approximately 66 million total weighted average remaining term 151 years 2018 2017 2016 company recognized compensation costs 52 million 48 million 40 million respectively aggregate intrinsic value performance shares granted outstanding approximated 161 million representing total pretax intrinsic value based company’s closing class common stock price 6453 december 31 2018 following summary stock option activity related information december 31 2018 stock options granted 2004 stock incentive plan vested 2018 company recognize compensation costs options 2017 2016 company recognized compensation cost options 05 million 11 million respectively december 31 2018 unrecognized compensation cost related unvested options december 31 2018 aggregate intrinsic value exercisable options approximately 05 million representing total pretax intrinsic value based company’s closing class common stock price 6453 december 31 2018 would received option holders option holders exercised options date total intrinsic value options exercised 2018 2017 2016 approximately 12 million 05 million 35 million respectively following table summarizes information options outstanding december 31 2018 management stock purchase plan total unrecognized compensation cost related unvested rsus approximately 08 million december 31 2018 total weighted average remaining term 121 years 2018 2017 2016 company recognized compensation cost 10 million 10 million 07 million respectively dividends declared rsus paid individuals remain unpaid december 31 2018 total approximately 01 million summary company’s rsu activity related information shown following table december 31 2018 aggregate intrinsic values outstanding vested rsus approximately 30 million 17 million respectively representing total pretax intrinsic value based company’s closing class common stock price 6453 december 31 2018 would received rsus holders rsus settled date total intrinsic value rsus settled 2018 2017 2016 approximately 18 million 04 million 15 million respectively upon settlement rsus company issues shares class common stock following table summarizes information rsus outstanding december 31 2018 fair value share issued management stock purchase plan estimated date grant using blackscholesmerton model based following weighted average assumptions riskfree interest rate based upon us treasury yield curve time grant respective expected life rsus expected life estimated period time outstanding rsus volatility calculated using historical data expected dividend yield stock company’s best estimate expected future dividend yield assumptions used determine weighted average grantdate fair value rsus granted 2180 1684 1815 2018 2017 2016 respectively company distributed dividends 082 per share 2018 075 per share 2017 071 per share 2016 company’s class common stock class b common stock 15 employee benefit plans company’s domestic employees eligible participate company’s 401k savings plan since january 1 2012 company provided base contribution 2 employee’s salary regardless whether employee participates plan company matches contribution 100 first 4 employee’s contribution company’s match contributions years ended december 31 2018 2017 2016 61 million 50 million 54 million respectively charges europe pension plans approximated 39 million 41 million 45 million years ended december 31 2018 2017 2016 respectively costs relate plans administered certain european subsidiaries benefits calculated according government requirements paid employees upon retirement change employment 16 contingencies environmental remediation accrual disclosure policy company defendant numerous legal matters arising ordinary course operations including involving product liability environmental matters commercial disputes company reviews lawsuits legal proceedings ongoing basis follows appropriate accounting guidance making accrual disclosure decisions company establishes accruals matters company assesses probable loss incurred amount loss reasonably estimated company establish accruals matters company believe probable loss incurred amount loss reasonably estimated company’s assessment whether loss probable based assessment ultimate outcome matter following appeals fasb issued asc 450 “contingencies” event “reasonably possible” “the chance future event events occurring remote less likely” event “remote” “the chance future event events occurring slight” thus references upper end range reasonably possible loss cases company able estimate range reasonably possible loss mean upper end range loss cases company believes risk loss slight may continue exposure loss excess amount accrued possible estimate reasonably possible loss range loss amount accrued matters disclosed estimate aggregated disclosed company records legal costs associated legal contingencies incurred except legal costs associated product liability claims included actuarial estimates used determining product liability accrual december 31 2018 company estimates aggregate amount reasonably possible loss excess amount accrued legal contingencies approximately 53 million pretax respect estimate reasonably possible loss management estimated reasonably possible loss based amount money damages claimed applicable ii allegations factual development date iii available defenses based allegations andor iv potentially liable parties estimate based upon currently available information subject significant judgment variety assumptions known unknown uncertainties matters underlying estimate change time actual results may vary significantly current estimate event unfavorable outcome one matters ultimate liability may excess amounts currently accrued may material company’s operating results cash flows particular quarterly annual period however based information currently known management believes ultimate outcome matters resolved time likely material adverse effect financial condition company though outcome could material company’s operating results particular period depending part upon operating results period product liability company subject variety potential liabilities connection product liability cases company maintains high selfinsured retention limit within product liability general liability coverage company believes generally accordance industry practices product liability cases us management establishes product liability accrual includes legal costs associated accrued claims significant volume liability matters company utilizes thirdparty actuarial valuations incorporate historical trend factors company’s specific claims experience derived loss reports provided thirdparty claims administrators product liability accrual established considering applicable insurance coverage changes nature product liability claims actual settlement amounts could affect adequacy estimates require changes provisions liability estimate ultimate liability may less reported environmental remediation company named potentially responsible party respect limited number identified contaminated sites levels contamination vary significantly site related levels remediation efforts environmental liabilities recorded based probable cost known estimated minimum cost remediation accruals discounted present value unless amount timing expenditures fixed reliably determinable company accrues estimated environmental liabilities based assumptions subject number factors uncertainties circumstances affect reliability precision estimates include identification additional sites environmental regulations level cleanup required technologies available number financial condition contributors remediation time period remediation may occur company recognizes changes estimates new remediation requirements defined new information becomes available chemetco inc superfund site hartford illinois august 2017 watts regulator co whollyowned subsidiary company received “notice environmental liability” chemetco site group “group” alleging potentially responsible party chemetco inc superfund site hartford illinois site arranged disposal treatment hazardous substances contained materials sent site resulted release threat release hazardous substances site august 2017 162 companies members group letter offered watts regulator co opportunity join group participate remedial investigation feasibility study “rifs” site watts regulator co joined group september 2017 added march 2018 signatory together 43 new group members administrative settlement agreement order consent united states environmental protection agency “usepa” governing completion rifs based information currently known management believes watts regulator co’s share costs rifs likely material adverse effect financial condition company material adverse effect company’s operating results particular period february 2018 group commenced suit united states district court southern district illinois seeking response costs potentially responsible parties site group identified 2000 additional potentially responsible parties date company unable estimate range reasonably possible loss matter damages specified rifs completed determine remediation plan implemented costs plan ii total number potentially responsible parties may agree fund perform remediation yet determined iii share contribution potentially responsible parties remediation determined iv number years required complete rifs implement remediation plan acceptable usepa uncertain asbestos litigation company defending approximately 300 lawsuits different jurisdictions alleging injury death result exposure asbestos complaints cases typically name large number defendants identify particular company products source asbestos exposure date discovery failed yield evidence substantial exposure company products judgments entered company litigation lawsuits proceedings claims arising ordinary course operations also pending threatened company 17 financial instruments fair value carrying amounts cash equivalents trade receivables trade payables approximate fair value short maturity financial instruments fair value company’s 505 senior notes due 2020 based quoted market prices similar notes level 2 fair value company’s borrowings outstanding credit agreement company’s variable rate debt approximates carrying value carrying amount estimated fair market value company’s longterm debt including current portion follows financial instruments company measures certain financial assets liabilities fair value recurring basis including deferred compensation plan assets related liabilities redeemable financial instruments derivatives fair values certain financial assets liabilities determined using following inputs december 31 2018 december 31 2017 1 included company’s consolidated balance sheet assets net 2 included company’s consolidated balance sheet accrued compensation benefits 3 included company’s consolidated balance sheet current liabilities relates mandatorily redeemable equity instrument part apex acquisition 2015 table provides summary changes fair value financial assets liabilities measured fair value recurring basis using significant unobservable inputs level 3 period december 31 2017 december 31 2018 november 30 2015 company acquired 80 outstanding shares apex valves limited “apex” aggregate purchase price approximately 204 million company recorded longterm liability 55 million estimate acquisition date fair value contractual call option purchase remaining 20 within three years closing company acquired additional 10 ownership first quarter 2017 approximately 29 million owns 90 apex outstanding shares remaining liability classified level 3 fair value hierarchy based commitment purchase remaining 10 apex shares within next year observable market november 30 2018 company executed agreement extend exercise contractual call option first quarter 2019 cash equivalents consist instruments remaining maturities three months less date purchase consist primarily money market funds carrying amount reasonable estimate fair value company uses financial instruments time enhance ability manage risk including foreign currency commodity pricing exposures exist part ongoing business operations use derivatives exposes company counterparty credit risk nonperformance market risk related changes currency exchange rates commodity prices company manages exposure counterparty credit risk diversification counterparties company’s counterparties derivative transactions substantial commercial banks significant experience using derivative instruments impact market risk fair value cash flows company’s derivative instruments monitored company restricts use derivative financial instruments hedging activities company enter contracts trading purposes company enter contracts speculative purposes use derivative instruments approved senior management written guidelines interest rate swaps facility credit agreement company choose either adjusted libor alternative base rate “abr” upon intended election adjusted libor interest rate term loan quarterly interest payments began may 2016 quarterly principal repayments commenced march 31 2017 balloon payment principal maturity date revolving credit facility quarterly interest payments accordingly company’s earnings cash flows exposed interest rate risk changes adjusted libor order manage company’s exposure changes cash flows attributable fluctuations liborindexed interest payments related company’s floating rate debt company entered two interest rate swaps interest rate swap company receives threemonth usdlibor subject 0 floor pays fixed rate 131375 notional amount 2250 million swaps mature february 12 2021 company formally documents hedge relationships hedge inception ensure interest rate swaps qualify hedge accounting quarterly basis company assesses whether interest rate swaps highly effective offsetting changes cash flow hedged item company hold issue interest rate swaps trading purposes swaps designated cash flow hedges years ended december 31 2018 2017 net tax gain 07 million 06 million respectively recorded accumulated comprehensive income recognize effective portion fair value interest rate swaps qualify cash flow hedge designated foreign currency hedges company’s foreign subsidiaries transact business including certain intercompany transactions foreign currencies transactions principally purchases sales materials company exposure number foreign currencies including canadian dollar euro chinese yuan beginning first quarter 2018 company used layering methodology whereby end quarter company enters forward exchange contracts hedge approximately 70 forecasted intercompany purchase transactions one company’s canadian us operating subsidiaries next twelve months december 31 2018 designated foreign exchange hedge contracts cash flow hedges asc 815 derivatives hedging asc 815 company records effective portion designated foreign currency hedge contracts comprehensive income inventory turns sold thirdparty transaction associated hedged forecasted transaction occurs effective portion related gain loss designated foreign currency hedge reclassified earnings event notional amount derivatives exceeds forecasted intercompany purchases given month excess hedge position attributed following month’s forecasted purchases however following month’s forecasted purchases cannot absorb excess hedge position current month effective portion hedge recorded comprehensive income reclassified earnings fair value company’s designated foreign hedge contracts outstanding december 31 2018 03 million year ended december 31 2018 amount expected reclassified earnings comprehensive income next twelve months material financial statements nondesignated cash flow hedge company’s foreign subsidiaries transact business including certain intercompany transactions foreign currencies transactions principally purchases sales materials denominated european currencies us canadian dollar company uses foreign currency forward exchange contracts time manage risk related intercompany loans intercompany purchases occur course year certain open foreign currency denominated commitments sell products third parties company entered one forward contract fourth quarter 2016 one forward contract first quarter 2017 manage foreign currency rate exposure 2016 2017 forward contracts entered manage foreign currency rate exposure hong kong dollar euro regarding two intercompany loans forward contracts markedtomarket changes fair value recorded earnings company recognized loss 29 million related forward exchange contracts 2017 forward contracts renewed september 2017 intercompany loans company hedging foreign currency rate exposure settled leases company leases certain manufacturing facilities sales offices warehouses automobiles equipment generally leases carry renewal provisions require company pay maintenance costs future minimum lease payments capital leases noncancelable operating leases december 31 2018 follows carrying amounts assets capital lease include 18 segment information company operates three geographic segments americas europe apmea segments sells similar products separate financial results reviewed company’s chief operating decisionmaker segment earns revenue income almost exclusively sale company’s products company sells products various end markets around world sales region based upon location entity recording sale see note 4 detail product lines sold region intercompany sales transactions eliminated accounting policies segment described note 2 notes consolidated financial statements company’s annual report form 10k year ended december 31 2018 following summary company’s significant accounts balances segment reconciled consolidated totals corporate expenses primarily administrative compensation expense compliance costs professional fees including corporaterelated legal audit expenses shareholder services benefit administration costs included apmea’s operating income 2016 87 million gain related sale operating subsidiary china refer note 5 “sale business” discussion following includes us net sales us property plant equipment company’s americas segment following includes intersegment sales americas europe apmea 19 accumulated comprehensive loss accumulated comprehensive loss consists following 1 cash flow hedges include interest rate swaps designated foreign currency hedges see note 17 details 20 quarterly financial information unaudited note four quarters may sum full year due rounding 21 subsequent events february 6 2019 company declared quarterly dividend twentyone cents 021 per share outstanding share class common stock class b common stock payable march 15 2019 stockholders record march 1 2019 february 6 2019 board directors authorized stock repurchase program 150 million company’s class common stock purchased time open market privately negotiated transactions timing number shares repurchased determined company’s management based evaluation market conditions factors watts water technologies inc subsidiaries schedule iivaluation qualifying accounts amounts millions exhibit index exhibit description 101sch† xbrl taxonomy extension schema document 101cal† xbrl taxonomy extension calculation linkbase document 101def† xbrl taxonomy extension definition linkbase document 101lab† xbrl taxonomy extension label linkbase document 101pre† xbrl taxonomy extension presentation linkbase document management contract compensatory plan arrangement †filed herewith ††furnished herewith attached exhibit 101 report following formatted xbrl extensible business reporting language consolidated statements operations years ended december 31 2018 2017 2016 ii consolidated statements comprehensive loss income years ended december 31 2018 2017 2016 iii consolidated balance sheets december 31 2018 december 31 2017 iv consolidated statements stockholders’ equity years ended december 31 2018 2017 2016 v consolidated statements cash flows years ended december 31 2018 2017 2016 vi notes consolidated financial statements signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized dated february 22 2019 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated signature title date robert j pagano jr chief executive officer president director february 22 2019 robert j pagano jr principal executive officer shashank patel chief financial officer february 22 2019 shashank patel principal financial officer virginia halloran chief accounting officer february 22 2019 virginia halloran principal accounting officer christopher l conway director february 21 2019 christopher l conway david dunbar director february 18 2019 david dunbar louise k goeser director february 15 2019 louise k goeser jes munk hansen director february 19 2019 jes munk hansen w craig kissel chairman board february 16 2019 w craig kissel joseph noonan director february 15 2019 joseph noonan merilee raines director february 20 2019 merilee raines joseph w reitmeier director february 15 2019 joseph w reitmeieritem 15 exhibits financial statement schedules a1 financial statements following financial statements included separate section report commencing page numbers specified report independent registered public accounting firm consolidated statements operations years ended december 31 2019 2018 2017 consolidated statements comprehensive income years ended december 31 2019 2018 2017 consolidated balance sheets december 31 2019 2018 consolidated statements stockholders’ equity years ended december 31 2019 2018 2017 consolidated statements cash flows years ended december 31 2019 2018 2017 notes consolidated financial statements a2 schedules schedule iivaluation qualifying accounts years ended december 31 2019 2018 2017 required schedules provision made applicable accounting regulations securities exchange commission included notes consolidated financial statements a3 exhibits listed exhibit index immediately preceding signature page hereto filed part annual report form 10k item 16 form 10k summary none report independent registered public accounting firm stockholders board directors watts water technologies inc opinion consolidated financial statements audited accompanying consolidated balance sheets watts water technologies inc subsidiaries company december 31 2019 2018 related consolidated statements operations comprehensive income stockholders’ equity cash flows years threeyear period ended december 31 2019 related notes financial statement schedule ii valuation qualifying accounts collectively consolidated financial statements opinion consolidated financial statements present fairly material respects financial position company december 31 2019 2018 results operations cash flows years threeyear period ended december 31 2019 conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states pcaob company’s internal control financial reporting december 31 2019 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission” report dated february 20 2020 expressed unqualified opinion effectiveness company’s internal control financial reporting change accounting principle discussed note 2 consolidated financial statements company changed method accounting leases january 1 2019 due adoption accounting standards update asu 201602 leases asu 201801 land easement practical expedient transition topic 842 asu 201810 codification improvements topic 842 asu 201811 targeted improvements basis opinion consolidated financial statements responsibility company’s management responsibility express opinion consolidated financial statements based audits public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether consolidated financial statements free material misstatement whether due error fraud audits included performing procedures assess risks material misstatement consolidated financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures consolidated financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation consolidated financial statements believe audits provide reasonable basis opinion critical audit matter critical audit matter communicated matter arising current period audit consolidated financial statements communicated required communicated audit committee 1 relates accounts disclosures material consolidated financial statements 2 involved especially challenging subjective complex judgments communication critical audit matter alter way opinion consolidated financial statements taken whole communicating critical audit matter providing separate opinions critical audit matter accounts disclosures relates evaluation assumptions underlying product liability accrual discussed notes 10 15 consolidated financial statements company’s product liability accrual december 31 2019 222 million product liability accrual represents actuarially determined estimated future costs product liability claims products disaggregated basis based historical loss trend factors company’s specific claims experience company’s estimated future costs include assumptions regarding frequency severity reported incurred reported claims identified evaluation key assumptions used actuarial methods estimate product liability accrual critical audit matter specialized skills needed evaluate company’s assumptions regarding frequency severity reported incurred reported claims impact assumptions actuarial methods addition high degree auditor judgment required evaluate company’s estimate frequency severity claims primary procedures performed address critical audit matter included following tested certain internal controls company’s product liability estimation process including controls development assumptions used estimate cost reported incurred reported claims compared sample claims received company formed basis estimate underlying documentation involved actuarial professional specialized skills knowledge assisted •assessing actuarial methods used company estimate product liability accrual consistency generally accepted actuarial standards •developing estimate product liability accrual utilizing company’s claims experience compared output actuarial calculations amounts recorded company kpmg llp served company’s auditor since 1997 boston massachusetts february 20 2020 watts water technologies inc subsidiaries consolidated statements operations amounts millions except per share information accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated statements comprehensive income amounts millions accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated balance sheets amounts millions except share information accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated statements stockholders’ equity amounts millions except share information accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated statements cash flows amounts millions accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries notes consolidated financial statements 1 description business watts water technologies inc company leading supplier products solutions systems manage conserve flow fluids energy buildings commercial residential markets americas europe asiapacific middle east africa apmea 140 years company designed produced valve systems safeguard regulate water systems energy efficient heating hydronic systems drainage systems water filtration technology helps purify conserve water 2 accounting policies principles consolidation consolidated financial statements include accounts company majority wholly owned subsidiaries upon consolidation intercompany accounts transactions eliminated cash equivalents cash equivalents consist instruments remaining maturities three months less date purchase consist primarily money market funds carrying amount reasonable estimate fair value allowance doubtful accounts allowance doubtful accounts established represent company’s best estimate net realizable value outstanding accounts receivable development company’s allowance doubtful accounts varies region general based review past due amounts historical writeoff experience well aging trends affecting specific accounts general operational factors affecting accounts addition factors developed certain regions utilizing historical trends sales returns allowances cash discount activities derive reserve returns allowances cash discounts company considers current economic trends changes customer payment terms evaluating adequacy allowance doubtful accounts company also monitors creditworthiness company’s largest customers periodically reviews customer credit limits reduce risk circumstances relating specific customers change unanticipated changes occur general business environment company’s estimates recoverability receivables could adjusted concentration credit company sells products diversified customer base therefore significant concentrations credit risk 2019 2018 2017 customer accounted 10 company’s total sales accounts receivable inventories stated lower cost market using firstin firstout method market value determined replacement cost net realizable value company utilizes specific product identification historical product demand basis determining excess obsolete inventory reserve company identifies inventories exceed range one three years sales determined comparing current inventory balance unit sales trailing twelve months new products added inventory within past twelve months excluded analysis portion company’s products contain recoverable materials therefore excess obsolete reserve established net recoverable amounts changes market conditions lowerthan expected customer demand changes technology features could result additional obsolete inventory saleable could require additional inventory reserve provisions goodwill intangible assets goodwill recorded consideration paid acquisitions exceeds fair value net tangible intangible assets acquired goodwill intangible assets indefinite useful lives amortized rather tested impairment least annually frequently events circumstances indicate “more likely not” might impaired change business conditions company performs annual goodwill indefinitelived intangible assets impairment assessment fourth quarter year longlived assets intangible assets estimable lives longlived assets reviewed indicators impairment least quarterly frequently events changes circumstances indicate carrying amount asset group may recoverable property plant equipment property plant equipment recorded cost depreciation provided straightline basis estimated useful lives assets range 10 40 years buildings improvements 3 15 years machinery equipment leasehold improvements depreciated lesser economic useful life asset remaining lease term leases company leases following classes underlying assets real estate automobiles manufacturing equipment facility equipment office equipment certain service arrangements dependent identified asset company determines arrangement qualifies lease inception company lessee recognizes statement financial position liability make lease payments rightofuse asset “rou” representing right use underlying asset finance operating leases lease term longer twelve months company elected shortterm lease recognition exemption leases qualify recognize rou assets lease liabilities shortterm leases company recognizes shortterm lease payments straightline basis lease term consolidated statement operations company determines initial classification measurement rou assets lease liabilities lease commencement date thereafter modified operating leases lease liability initially subsequently measured present value unpaid lease payments lease commencement date finance leases lease liability initially measured manner date operating leases subsequently measured amortized cost using effective interest method measuring lease liability requires certain estimates judgments estimates judgments include company determines 1 discount rate uses discount unpaid lease payments present value 2 lease term 3 lease payments ●the present value lease payments determined using interest rate implicit lease rate readily determinable otherwise company uses incremental borrowing rate generally company cannot determine interest rate implicit lease access lessor’s estimated residual value amount lessor’s deferred initial direct costs therefore company uses incremental borrowing rate discount rate lease company’s incremental borrowing rate lease rate interest would pay collateralized basis borrow amount equal lease payments similar term company’s incremental borrowing rate determined using portfolio approach geographic region considering many factors company’s specific credit risk amount lease payments collateralized nature lease borrowing term lease term geographical economic considerations ●the lease term company’s leases includes fixed noncancelable term lease plus periods covered options extend lease company reasonably certain exercise option b periods covered option terminate lease company reasonably certain exercise option c periods covered option extend terminate lease exercise option controlled lessor determining renewal option reasonably certain exercised company considers several economic factors including limited significance leasehold improvements incurred property whether asset difficult replace underlying contractual obligations specific characteristics unique particular lease would make reasonably certain exercise option ●lease payments included measurement lease liability include following ofixed payments including insubstance fixed payments owed lease term includes termination penalties company would owe lease term assumes company exercise termination option less lease incentives paid payable company ovariable lease payments depend index rate initially measured using index rate commencement date oamounts expected payable companyprovided residual value guarantee othe exercise price company option purchase underlying asset company reasonably certain exercise option rou asset initially measured cost comprises initial amount lease liability adjusted lease payments made lease commencement date plus initial direct costs incurred less lease incentives received operating leases rou asset subsequently measured throughout lease term carrying amount lease liability plus initial direct costs plus minus prepaid accrued lease payments less unamortized balance lease incentives received lease expense operating leases recognized straightline basis reasonably assured lease term based total lease payments included cost goods sold within selling general administrative expenses consolidated statements operations based primary use rou asset finance leases company recognizes amortization rou asset straightline basis lease commencement date earlier end useful life end lease term unless lease transfers ownership underlying asset company reasonably certain exercise option purchase underlying asset cases rou asset amortized useful life underlying asset amortization rou asset recognized depreciation consolidated statements operations interest expense related finance leases recognized using effective interest method included within interest expense variable lease payments associated company’s leases recognized period event activity circumstance lease agreement payments assessed occurs included cost goods sold within selling general administrative expenses consolidated statements operations based primary use rou asset rou assets operating finance leases periodically assessed impairment company uses longlived assets impairment guidance asc subtopic 36010 property plant equipment overall determine whether rou asset impaired amount impairment loss recognize company monitors events changes circumstances require reassessment one leases reassessment results remeasurement lease liability corresponding adjustment made carrying amount corresponding rou asset unless would reduce carrying amount rou asset amount less zero case amount adjustment would result negative rou asset balance recorded statement operations taxes income taxes assessed governmental authorities sale transactions recorded net basis excluded sales company’s consolidated statements operations income taxes income taxes accounted asset liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases operating loss tax credit carry forwards deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized income period includes enactment date company recognizes tax benefits item question meets morelikelythannot greater 50 likelihood sustained upon examination taxing authorities threshold foreign currency translation functional currency company’s foreign subsidiaries local currency nonus subsidiaries transact functional currency us dollar assets liabilities translated current rates exchange balance sheet date income expense items translated average foreign currency exchange rates period adjustments resulting translation financial statements foreign operations us dollars excluded determination net income recorded accumulated comprehensive income separate component equity transaction gains losses included income expense net consolidated statements operations subsidiaries functional currency assets liabilities differs local currency nonmonetary assets liabilities translated rate exchange effect date assets acquired monetary assets liabilities translated current rates exchange balance sheet date income expense items translated average foreign currency rates period translation adjustments subsidiaries included income expense net consolidated statements operations stockbased compensation company records compensation expense financial statements sharebased awards based grant date fair value awards restricted stock awards deferred stock awards stockbased compensation expense restricted stock awards deferred stock awards recognized requisite service periods awards straightline basis generally commensurate vesting term performance stock units offered company employees amortized expense vesting period based company’s performance relative performance goals may adjusted changes estimated shares expected vest result adjustments related sharebased compensation expense recorded period change company accounts forfeitures occur rather estimate expected forfeitures vesting period respective grant company reclassify benefits associated tax deductions excess recognized compensation cost operating activities financing activities consolidated statement cash flows net income per common share basic net income per common share calculated dividing net income weighted average number common shares outstanding calculation diluted net income per share assumes conversion dilutive securities net income number shares used compute net income per share basic assuming full dilution reconciled financial instruments normal course business company manages risks associated commodity prices foreign exchange rates interest rates variety strategies including use hedging transactions executed accordance company’s policies company’s hedging transactions include limited use various derivative financial commodity instruments matter policy company use derivative instruments unless underlying exposure change value derivative instruments would substantially offset opposite change value underlying hedged items company use derivative instruments trading speculative purposes derivative instruments may designated accounted either hedge recognized asset liability fair value hedge forecasted transaction cash flow hedge fair value hedge effective ineffective portions change fair value derivative instrument along adjustment carrying amount hedged item fair value changes attributable hedged risk recognized earnings cash flow hedge changes fair value derivative instrument highly effective deferred accumulated comprehensive income loss underlying hedged item recognized earnings company two interest rate swaps designated cash flow hedges december 31 2019 2018 company also foreign exchange hedges designated cash flow hedges december 31 2019 2018 refer note 16 details fair value cash flow hedge cease qualify hedge accounting terminated would continue carried balance sheet fair value settled hedge accounting would discontinued prospectively forecasted transaction longer probable occurring amounts previously deferred accumulated comprehensive income would recognized immediately earnings occasion company may enter derivative instrument qualify hedge accounting entered offset changes fair value underlying transaction required recognized earnings natural hedge instruments reflected consolidated balance sheets fair value changes fair value recognized earnings portions company’s outstanding debt exposed interest rate risks company monitors interest rate exposures ongoing basis maximize overall effectiveness interest rates fair value measurements fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date entity required maximize use observable inputs available minimize use unobservable inputs measuring fair value company certain financial assets liabilities measured fair value recurring basis certain nonfinancial assets liabilities may measured fair value nonrecurring basis fair value disclosures assets liabilities based threelevel hierarchy defined follows level 1 quoted prices active markets identical assets liabilities entity ability access measurement date level 2 observable inputs level 1 prices quoted prices similar assets liabilities quoted prices markets active inputs observable corroborated observable market data substantially full term assets liabilities level 3 unobservable inputs supported little market activity significant fair value assets liabilities assets liabilities subject hierarchy classified entirety based lowest level input significant fair value measurement company’s assessment significance particular input fair value measurement entirety requires judgment considers factors specific asset liability refer note 16 details shipping handling shipping handling costs included selling general administrative expense amounted 576 million 563 million 521 million years ended december 31 2019 2018 2017 respectively research development research development costs included selling general administrative expense amounted 396 million 345 million 290 million years ended december 31 2019 2018 2017 respectively revenue recognition company recognizes revenue core principle depict transfer control company’s customers amount reflecting consideration company expects entitled order achieve core principle company applies following fivestep approach 1 identify contract customer 2 identify performance obligations contract 3 determine transaction price 4 allocate transaction price performance obligations contract 5 recognize revenue performance obligation satisfied company’s revenue product sales recognized point time model point control transfers customer generally products shipped company’s manufacturing distribution facilities delivered customer’s named location sales tax valueadded tax taxes collected concurrent revenue producing activities excluded revenue freight costs billed customers shipping handling activities included revenue related cost included selling general administrative expenses see note 4 disclosures detail regarding revenue recognition estimates preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates recently adopted accounting standards august 2017 financial accounting standards board “fasb” issued asu 201712 “derivatives hedging topic 815targeted improvements accounting hedging activities” asu 201712 amends hedge accounting guidance improve financial reporting hedging relationships better portray economic results entity’s risk management activities financial statements guidance permits hedge accounting risk components hedging relationships involve nonfinancial risk reduces complexity hedging fair value hedges interest rate risk eliminates requirement separately measure report hedging ineffectiveness simplifies certain hedge effectiveness assessment requirements standard effective fiscal years beginning december 15 2018 including interim periods within reporting period company adopted standard first quarter 2019 material impact company’s financial statements february 2016 fasb issued asu 201602 “leases topic 842” asu 201602 requires lessee recognize statement financial position liability make lease payments rou asset representing right use underlying asset lease term finance operating leases term longer twelve months topic 842 subsequently amended asu 201801 “land easement practical expedient transition topic 842” asu 201810 “codification improvements topic 842 leases” asu 201811 “targeted improvements” asu 201602 effective financial statements issued fiscal years beginning december 15 2018 including interim periods within fiscal years asc 842 leases classified finance operating classification determining pattern classification expense recognition income statement modified retrospective transition approach required applying new standard leases existing date initial application company could choose use either 1 effective date standard 2 beginning earliest comparable period presented financial statements date initial application company adopted new standard january 1 2019 used effective date standard date company’s initial application electing approach financial information disclosures required new standard provided dates periods january 1 2019 company designed necessary changes existing processes configured system requirements necessary implement new standard new standard provides number optional practical expedients throughout transition company elected “package practical expedients” permitted company reassess new standard company’s prior conclusions lease identification lease classification initial direct costs company elect useofhindsight practical expedient pertaining land easements latter applicable company also elected practical expedient separate lease nonlease components company’s leases result adopting asc 842 company recorded operating rou assets 336 million operating lease liabilities 339 million january 1 2019 consolidated balance sheet difference rou assets lease liabilities related impact eliminating deferred prepaid lease payments recognized previous lease accounting standard company’s adoption asc 842 result change company’s recognition existing finance leases january 1 2019 adoption new lease accounting standard material impact either consolidated statement operations consolidated statement cash flows however asu 201602 significantly affected company’s disclosures noncash activities related leases additionally company’s leaserelated disclosures significantly increased year ended december 31 2019 compared prior years see note 5 consolidated financial statements accounting standards updates december 2019 fasb issued asu 201912 income taxes topic 740 simplifying accounting income taxes” asu simplifies accounting income taxes clarifying amending existing guidance related recognition franchise tax evaluation step tax basis goodwill effects enacted changes tax laws rates effective tax rate computation among clarifications effective date adoption asu calendar year beginning january 1 2021 early adoption permitted company currently evaluating impact guidance company’s financial statements expect adoption guidance material impact company’s financial statements august 2018 fasb issued asu 201815 “intangiblesgoodwill otherinternaluse software subtopic 35040customer’s accounting implementation costs incurred cloud computing arrangement service contract” asu 201815 aligns requirements capitalizing implementation costs incurred hosting arrangement service contract requirements capitalizing implementation costs incurred develop obtain internaluse software guidance requires entity hosting arrangement service contract follow guidance subtopic 35040 determine implementation costs capitalize asset related service contract costs expense standard effective fiscal years beginning december 15 2019 including interim periods within reporting period company currently evaluating impact guidance company’s financial statements expect adoption guidance material impact company’s financial statements august 2018 fasb issued asu 201813 “fair value measurement topic 820disclosure framework changes disclosure requirements fair value measurement” asu 201813 modifies disclosure requirements fair value measurements topic 820 standard effective fiscal years beginning december 15 2019 including interim periods within reporting period company currently evaluating impact guidance company’s disclosures however guidance impact company’s financial statements june 2016 financial accounting standards board issued asu 201613 “financial instruments credit losses topic 326” asu 201613 replaces incurred loss impairment methodology current gaap methodology reflects expected credit losses requires use forwardlooking expected credit loss model accounts receivable loans financial instruments standard effective reporting periods beginning december 15 2019 standard requires modified retrospective approach cumulativeeffect adjustment retained earnings beginning first reporting period guidance effective company plans adopt new credit loss standard effective january 1 2020 company expect new credit loss standard material effect company’s financial statements 3 restructuring charges net company’s board directors approves major restructuring programs may involve discontinuance significant product lines shutdown significant facilities time company takes additional restructuring actions including involuntary terminations part major program company accounts costs period liability incurred costs included restructuring charges company’s consolidated statements operations summary pretax cost restructuring program follows company recorded pretax restructuring business segments follows actions company periodically initiates actions part major program total “other actions” pretax restructuring expense 43 million 34 million 44 million years ended december 31 2019 2018 2017 respectively included “other actions” years ended 2019 2018 european restructuring activities initiated 2018 extended 2019 discussed “other actions” also include certain minor initiatives company incurred restructuring expenses adjusted prior restructuring reserves years ended december 31 2019 2018 2017 third quarter 2018 management initiated restructuring actions primarily associated european headquarters well cost savings initiatives certain european manufacturing facilities actions included reductions force related costs within company’s europe segment pretax charges year ended december 31 2018 approximately 40 million primarily included severance benefits total restructuring charges associated program initially estimated approximately 50 million total pretax charges program increased 2019 resulting total program restructuring charges approximately 83 million additional restructuring costs primarily related increased severance related costs restructuring charges incurred 2019 related action 43 million 16 million incurred fourth quarter 2019 restructuring reserve associated actions december 31 2019 approximately 32 million primarily relates severance benefits fourth quarter 2017 management initiated certain restructuring actions related reductions force within company’s europe segment restructuring activities primarily included severance benefits total pretax charges associated europe restructuring activities initially expected approximately 41 million costs fully incurred 2017 company reduced total pretax charges program approximately 34 million september 30 2018 primarily related reduced severance costs december 31 2019 amounts reserved associated actions complete 2015 actions americas apmea 2015 board directors company approved transformation program relating company’s americas apmea businesses primarily involved exit lowmargin noncore product lines enhancing global sourcing capabilities company eliminated approximately 165 million combined americas apmea net sales primarily within company’s doityourself diy distribution channel part program company also sold operating subsidiary china previously dedicated manufacturing products discontinued program also involved consolidation manufacturing facilities distribution center network optimization including reducing square footage net operating footprint company’s americas facilities combined basis total pretax cost transformation program 598 million including restructuring costs 181 million goodwill intangible asset impairments 135 million transformation deployment costs approximately 282 million transformation deployment costs included consulting project management fees inventory writeoffs associated costs associated americas apmea transformation program incurred december 31 2017 amounts remaining reserved december 31 2018 company incurred pretax charges year ended december 31 2017 approximately 24 million primarily related asset writedowns facility exit costs 4 revenue recognition company leading supplier products manage conserve flow fluids energy buildings commercial residential markets company designed produced valve systems safeguard regulate water systems energy efficient heating hydronic systems drainage systems water filtration technology helps purify conserve water company distributes products four primary distribution channels wholesale original equipment manufacturers oems specialty doityourself diy company operates three geographic segments americas europe apmea segments sells similar products comprised following principal product lines ●residential commercial flow control productsincludes products typically sold plumbing hot water applications backflow preventers water pressure regulators temperature pressure relief valves thermostatic mixing valves ●hvac gas productsincludes commercial highefficiency boilers water heaters heating solutions hydronic electric heating systems underfloor radiant applications custom heat hot water solutions hydronic pump groups boiler manufacturers alternative energy control packages flexible stainless steel connectors natural liquid propane gas commercial food service residential applications hvac acronym heating ventilation air conditioning ●drainage water reuse productsincludes drainage products engineered rain water harvesting solutions commercial industrial marine residential applications ●water quality productsincludes pointofuse pointofentry water filtration conditioning scale prevention systems commercial marine residential applications following table disaggregates revenue presented net sales financial statements reportable segment distribution channel principal product line company generally considers customer purchase orders cases governed master sales agreements represent contract customer company’s contracts customers generally products typically include performance obligations professional services extended warranties material rights situations sales distributor company concluded contracts distributor company holds contract bearing enforceable rights obligations distributor part consideration contract company evaluates certain factors including customer’s ability pay credit risk contract company considers promise transfer products distinct identified performance obligation determining transaction price company evaluates whether price subject refund adjustment determine net consideration company expects entitled company’s standard payment terms less one year company elected assess whether contract significant financing component company allocates transaction price distinct product based relative standalone selling price product price specified purchase order considered standalone selling price observable input depicts price sold similar customer similar circumstances revenue recognized control product transferred customer ie company’s performance obligation satisfied typically occurs shipment company’s manufacturing site distribution center delivery customer’s named location certain circumstances revenue shipments retail customers recognized product consumed customer based terms arrangement transfer control satisfied point time determining whether control transferred company considers present right payment physical possession legal title along risks rewards ownership transferred customer certain circumstances company manufactures customized product without alternative use customers however arrangements entitle company right payment cost plus profit work completed company concluded control transfers point time times company receives orders products delivered multiple dates may extend across reporting periods company invoices delivery upon shipment recognizes revenues distinct product delivered assuming transfer control occurred scheduled delivery dates within one year optional exemption provided guidance revenues allocated future shipments partially completed contracts disclosed company generally provides assurance warranty products substantially conform published specification company’s liability limited either credit equal purchase price replacement defective part returns warranty historically immaterial company consider activities related warranty separate performance obligation certain products company separately sell extended warranty service policies customers company considers sale extended warranty separate performance obligation policies typically periods ranging one three years payments received deferred recognized policy period periods presented revenue recognized revenue deferred policies material consolidated financial statements timing revenue recognition billings cash collections company’s contracts customers vary based payment terms conditions customer contracts cases customers partially prepay goods cases appropriate credit evaluations payment due arrears addition constraints cause variability ultimate consideration recognized constraints typically include early payment discounts volume rebates rights return cooperative advertising market development funds company includes constraints estimated transaction price basis reasonably estimate amount variable consideration estimates based historical experience anticipated future performance company’s best judgment time timing company’s recognition revenue different timing payments made customer company recognizes either contract asset performance precedes contractual due date contract liability customer payment precedes performance contracts payment arrears recognized receivables opening closing balances company’s contract assets contract liabilities follows amount revenue recognized included opening contract liability balance 118 million 113 million years ended december 31 2019 2018 respectively revenue consists primarily revenue recognized shipments product prepaid well amortization extended warranty service policy revenue company recognize material revenue obligations satisfied prior periods impairment losses related contract assets years ended december 31 2019 2018 company incurs costs obtain fulfill contract however company elected recognize incremental costs obtain contract expense incurred amortization period one year less company elected treat shipping handling activities performed customer obtained control related goods fulfillment cost related cost accrued conjunction recording revenue goods 5 leases company adopted asc 842 effective january 1 2019 company variety categories lease arrangements including real estate automobiles manufacturing equipment facility equipment office equipment certain service arrangements dependent identified asset company’s real estate leases consist primarily manufacturing facilities office space warehouses represent approximately 85 company’s operating lease liabilities generally lease term 2 15 years remaining leases primarily consist automobiles machinery equipment used manufacturing processes eg forklifts pallets general office equipment certain service arrangements various lease terms company’s automobile leases typically terms ranging 3 5 years company’s remaining population leases terms ranging 2 15 years certain lease arrangements may contain renewal terms ranging 1 5 years majority company’s real estate automobile equipment leases consist fixed lease payments plus many company’s leases variable payments company’s real estate leases variable payments include common area maintenance property taxes insurance automobile leases variable payments primarily include maintenance taxes insurance equipment leases variable payments include maintenance payments based usage company elected account lease nonlease components single component leases therefore fixed costs within lease arrangement included fixed lease payments single combined lease component used measure lease liability variable lease costs recognized period event activity circumstance lease agreement occurs company’s lease agreements include company options either extend andor early terminate lease costs included company’s lease liability extent options reasonably certain exercised renewal options generally included lease term company’s existing leases company reasonably certain exercise renewal options company generally enter leases involving construction design underlying asset nearly assets company leases specialized nature company’s leases generally include termination options either party lease restrictive financial covenants company’s lease agreements generally include residual value guarantees rightofuse asset amounts reported consolidated balance sheet asset category december 31 2019 follows 1 included company’s consolidated balance sheet assets net 2 included company’s consolidated balance sheet property plant equipment maturity company’s operating finance lease liabilities december 31 2019 follows total lease cost consisted following amounts following information represents supplemental disclosure statement cash flows related operating finance leases following summarizes additional information related operating finance leases 6 goodwill intangibles goodwill company performs annual goodwill impairment testing reporting unit fiscal october month end earlier triggering event circumstance indicates impairment loss may occurred october 27 2019 testing date company 5794 million goodwill balance sheet 2019 company seven reporting units one reporting units water quality goodwill company performed qualitative analysis six remaining reporting units include blücher us drains fluid solutionseurope fluid solutionsamericas heating hot water solutions “hhws” apmea result qualitative analyses company determined fair values reporting units likely greater carrying amounts 2019 2018 company need proceed beyond qualitative analysis goodwill impairments recorded third quarter 2019 company completed acquisition within americas segment resulting 383 million goodwill acquisition considered material company’s consolidated financial statements changes carrying amount goodwill geographic segment follows longlived assets indefinitelived intangibles tested impairment least annually frequently events circumstances change business conditions indicate “more likely not” intangible asset might impaired company performs annual indefinitelived intangibles impairment assessment fourth quarter year 2019 company performed qualitative assessment certain tradenames fair value significantly exceeded carrying value 2018 quantitative assessment sales growth 2019 indicators impairment present remaining tradenames 2019 company performed quantitative assessment 2018 2017 impairment assessments company performed quantitative assessments indefinitelived intangible assets methodology employed quantitative assessments relief royalty method subset income approach based results assessments company recognize impairment indefinitelived intangibles 2019 2018 2017 intangible assets estimable lives longlived assets reviewed impairment least quarterly frequently events changes circumstances indicate carrying amount asset group may recoverable recoverability intangible assets estimable lives longlived assets measured comparison carrying amount asset group future net undiscounted pretax cash flows expected generated asset group comparisons indicate asset recoverable impairment loss recognized amount carrying amount asset group exceeds related estimated fair value estimated fair value based either discounted future pretax operating cash flows appraised values depending nature asset company determines discount rate analysis based weighted average cost capital using market guideline public companies related businesses allocate interest charges asset group measured judgment required estimate future operating cash flows 2019 2018 indications carrying amounts intangible assets estimable lives recoverable 2017 company recognized 10 million impairment charge americas segment technology asset change market expectations indicated carrying amount asset longer recoverable intangible assets include following aggregate amortization expense amortized intangible assets 2019 2018 2017 156 million 196 million 225 million respectively additionally future amortization expense amortizable intangible assets expected 143 million 2020 132 million 2021 119 million 2022 115 million 2023 113 million 2024 amortization expense provided straightline basis estimated useful lives intangible assets weightedaverage remaining life total amortizable intangible assets 110 years patents customer relationships technology trade names amortizable intangibles weightedaverage remaining lives 19 years 103 years 66 years 133 years 175 years respectively indefinitelived intangible assets include trade names trademarks 7 inventories net inventories consist following raw materials workinprocess finished goods net valuation reserves 279 million 274 million december 31 2019 2018 respectively finished goods 167 million 174 million december 31 2019 2018 respectively consigned 8 property plant equipment property plant equipment consist following 9 income taxes significant components company’s deferred income tax liabilities assets follows provision income taxes based following pretax income provision income taxes consists following 2017 tax cuts jobs act “2017 tax act” enacted december 22 2017 resulted significant changes us corporate income tax system changes included lowering us corporate income tax rate 35 21 elimination reduction certain domestic deductions credits 2017 tax act also transitioned international taxation worldwide system modified territorial system creating new taxes certain foreignsourced earnings certain related party payments referred global intangible lowtaxed income tax annual antibase erosion tax respectively 2017 tax act also imposed onetime mandatory deemed repatriation tax “toll tax” foreign subsidiaries’ previously untaxed accumulated foreign earnings changes tax rates tax laws accounted period enactment therefore company recorded provisional tax expense 251 million related 2017 tax act december 31 2017 amount also included immaterial benefit company’s 2017 current year tax expense year ended december 31 2018 company finalized impact 2017 tax act recorded benefit 37 million reducing net impact 214 million included 2018 adjustment 106 million benefit related determination foreign tax credits partial release related valuation allowance partially offset additional toll tax 102 million toll tax 2017 tax act imposed onetime toll tax required company pay us income taxes accumulated foreign subsidiary earnings previously subject us income tax rate 155 extent foreign cash equivalents 8 remaining earnings year ended december 31 2017 company recorded provisional amount 233 million related toll tax december 31 2018 company recorded tax expense based final guidance 2017 tax act 102 million resulted total toll tax charge 335 million paid eight years beginning 2018 accrue interest deferred tax remeasurement company’s deferred tax liabilities exceeded balance company’s deferred tax assets year ended december 31 2017 company recorded provisional amount tax benefit 12 million december 31 2018 company recorded final tax benefit 2 million net 14 million benefit reflecting decrease us corporate income tax rate tax foreign earnings result 2017 tax act company repatriate cumulative undistributed foreign earnings date back us minimal us income tax consequences onetime toll tax company recorded provisional amount deferred tax expense 146 million december 31 2018 company recorded final tax benefit 2 million net deferred tax expense 126 million future repatriation foreign earnings actual income taxes reported different would computed applying federal statutory tax rate income taxes reasons differences follows december 31 2019 company foreign net operating loss carry forwards 255 million income tax purposes considering valuation allowances 243 million losses carried forward indefinitely 12 million carried forward 2028 net operating losses consist 243 million related austrian operations 12 million related korean operations december 31 2019 us capital loss carry forwards utilized expired december 31 2019 december 31 2018 company foreign tax credit carry forwards 327 million 335 million respectively income tax purposes considering valuation allowances foreign tax credit carryforwards expire 2028 december 31 2019 december 31 2018 company valuation allowances 286 million 299 million respectively december 31 2019 223 million related foreign tax credits 63 million related austrian korean net operating losses december 31 2018 238 million related foreign tax credits 61 million related austrian net operating losses management believes ability company use foreign tax credits losses within applicable carry forward period rise level likely threshold company valuation allowance deferred tax assets management believes likely company recover net deferred tax assets management believes likely future reversals deferred tax liabilities together forecasted income sufficient fully recover deferred tax assets december 31 2017 company considered foreign earnings permanently reinvested outside us plans repatriate foreign earnings us unrecognized tax benefits december 31 2019 company gross unrecognized tax benefits approximately 93 million approximately 46 million recognized would affect effective tax rate difference amount unrecognized tax benefits amount would affect effective tax rate consists federal tax benefit state income tax items allowable correlative adjustments available certain jurisdictions reconciliation beginning ending amount unrecognized tax follows company estimates reasonably possible balance unrecognized tax benefits december 31 2019 may decrease approximately 35 million next twelve months result lapses statutes limitations settlements open audits february 2018 united states internal revenue service concluded audit company’s 2016 2015 tax years material adjustments result audit company conducts business variety locations throughout world resulting tax filings numerous domestic foreign jurisdictions company subject tax examinations regularly part normal course business company’s major jurisdictions us france germany canada netherlands statute limitations us subject tax examination 2016 later france germany canada netherlands subject tax examination 20122014 later jurisdictions exceptions longer subject tax examinations state local international jurisdictions tax years 2014 company accounts interest penalties related uncertain tax positions component income tax expense 10 accrued expenses liabilities accrued expenses liabilities consist following 11 financing arrangements company’s debt consists following principal payments next five years thereafter due follows millions 20201050 20212050 2022 thereafter 0 february 12 2016 company entered credit agreement “credit agreement” among company certain subsidiaries company become borrowers credit agreement jpmorgan chase bank na administrative agent swing line lender letter credit issuer lenders referred therein credit agreement provides 500 million fiveyear senior unsecured revolving credit facility “revolving credit facility” sublimit 100 million letters credit december 31 2019 company 100 million drawn line credit agreement also provides 300 million fiveyear term loan facility “term loan facility” available company single draw entire 300 million drawn february 2016 company 2250 million borrowings outstanding term loan december 31 2019 borrowings outstanding revolving credit facility bear interest fluctuating rate per annum equal applicable percentage defined case eurocurrency rate loans ice benchmark administration libor rate plus applicable percentage ranging 0975 145 determined reference company’s consolidated leverage ratio ii case base rate loans swing line loans highest federal funds rate plus 05 b rate interest effect day announced jpmorgan chase bank na “prime rate” c ice benchmark administration libor rate plus 10 plus applicable percentage ranging 000 045 determined reference company’s consolidated leverage ratio borrowings outstanding term loan facility bear interest fluctuating rate per annum equal applicable percentage defined ice benchmark administration libor rate plus applicable percentage ranging 1125 175 determined reference company’s consolidated leverage ratio interest rates december 31 2019 revolving credit facility term loan facility 281 315 respectively loan term loan facility amortizes follows 0 per annum first year 75 second third years 10 fourth fifth years remaining unpaid balance paid full maturity date payments due made ratably year quarterly installments company paid quarterly installments 300 million 2019 addition paying interest credit agreement company also required pay certain fees connection credit facility including limited unused facility fee letter credit fees credit agreement matures february 12 2021 subject extension certain circumstances subject terms credit agreement company may repay loans outstanding credit agreement time without premium penalty customary breakage costs subject terms credit agreement repaid amounts borrowed term loan facility may borrowed company maintains letters credit guarantee performance payment third parties accordance specified terms conditions amounts outstanding 258 million december 31 2019 december 31 2018 company’s letters credit primarily associated insurance coverage company’s letters credit generally expire within one year issuance drawn revolving credit facility instruments may exist expire without drawn therefore necessarily represent future cash flow obligations december 31 2019 company 4642 million unused available credit agreement 258 million standby letters credit outstanding credit agreement december 31 2019 company compliance covenants related credit agreement june 18 2010 company entered note purchase agreement certain institutional investors 2010 note purchase agreement pursuant 2010 note purchase agreement company issued senior notes 750 million principal due june 18 2020 december 31 2019 included within current maturities company pays interest outstanding balance notes rate 505 per annum payable semiannually june 18th december 18th principal notes shall become due payable company may option upon notice subject terms 2010 note purchase agreement prepay time part notes amount less 10 million paying principal amount plus makewhole amount dependent upon yield respective us treasury securities 2010 note purchase agreement includes operational financial covenants company required comply including among others maintenance certain financial ratios restrictions additional indebtedness liens dispositions december 31 2019 company compliance covenants related 2010 note purchase agreement 12 common stock class common stock class b common stock equal dividend liquidation rights share company’s class common stock entitled one vote matters submitted stockholders share class b common stock entitled ten votes matters shares class b common stock convertible shares class common stock onetoone basis option holder december 31 2019 company reserved total 2343195 shares class common stock issuance stockbased compensation plans 6279290 shares conversion class b common stock class common stock july 27 2015 company’s board directors authorized repurchase 100 million company’s class common stock time open market privately negotiated transactions february 6 2019 board directors authorized additional stock repurchase program 150 million company’s class common stock purchased time open market privately negotiated transactions stock repurchase programs company entered rule 10b51 plan permits shares repurchased company might otherwise precluded insider trading laws repurchase program may suspended discontinued time subject terms rule 10b51 plan company entered respect repurchase program 100 million stock repurchase program completely expended august 2019as december 31 2019 approximately 1423 million remaining authorized share repurchases 150 million program following table summarizes cost number shares class common stock repurchased two repurchase programs years ended december 31 2019 2018 13 stockbased compensation december 31 2019 company maintains one stock incentive plan second amended restated 2004 stock incentive plan “2004 stock incentive plan” december 31 2019 1148907 shares class common stock authorized future grants new equity awards plan company currently grants shares deferred stock awards key employees stock awards nonemployee members company’s board directors 2004 stock incentive plan company also previously granted shares restricted stock key employees stock awards nonemployee members company’s board directors vest immediately employees’ restricted stock awards deferred stock awards typically vest threeyear period rate onethird per year restricted stock awards outstanding upon grant whereas deferred stock awards outstanding upon vesting restricted stock awards deferred stock awards amortized expense straightline basis vesting period company also grants performance stock units key employees 2004 stock incentive plan performance stock units cliff vest end performance period set compensation committee board directors time grant upon vesting number shares company’s class common stock awarded performance stock unit recipient determined based company’s performance relative certain performance goals set time performance stock units granted recipient performance stock unit award may earn zero shares twice number target shares awarded recipient performance stock units amortized expense vesting period based company’s performance relative performance goals may adjusted changes estimated shares expected vest result adjustments related sharebased compensation expense recorded period change performance goals met awards earned previously recognized compensation expense reversed company granted performance stock units 2019 2018 2017 performance goals performance stock units based compound annual growth rate company’s revenue threeyear performance period company’s return invested capital “roic” third year performance period beginning 2019 company included “retirement vesting” provisions agreements deferred stock awards performance stock units provisions provide employee retires company attaining age 55 10 years service meets certain requirements including noncompetition nonsolicitation requirements would allowed continue vest deferred stock awards duration vesting periods would entitled receive pro rata portion performance stock units based period service elapsed performance period beginning 2015 company stopped granting stock options part annual equity awards employees previously 2004 stock incentive plan key employees granted nonqualified stock options purchase company’s class common stock minimal options remain outstanding vested expire ten years date grant options granted plan may exercise prices less 100 fair market value class common stock date grant company’s practice grant options fair market value grant date upon exercise options company issues shares class common stock company also management stock purchase plan allows granting restricted stock units rsus key employees annual basis key employees may elect receive portion annual incentive compensation rsus instead cash participating employees may use 50 annual incentive bonus purchase rsus purchase price equal 80 fair market value company’s class common stock date grant rsus vest either annually threeyear period grant date upon third anniversary grant date receipt shares underlying rsus deferred minimum three years greater number years chosen employee date grant aggregate 2000000 shares class common stock may issued management stock purchase plan december 31 2019 741048 shares class common stock authorized future grants company’s management stock purchase plan 2004 stock incentive plan following summary unvested restricted stock deferred stock awards activity related information total fair value shares vested 2019 2018 2017 84 million 102 million 77 million respectively december 31 2019 total unrecognized compensation cost related unvested restricted stock deferred stock awards approximately 88 million total weighted average remaining term 153 years 2019 2018 2017 company recognized compensation costs 85 million 76 million 69 million respectively aggregate intrinsic value restricted stock deferred shares granted outstanding approximated 196 million representing total pretax intrinsic value based company’s closing class common stock price 9976 december 31 2019 following summary unvested performance stock award activity related information total fair value shares vested 2019 2018 2017 63 million 58 million 35 million respectively december 31 2019 total unrecognized compensation cost related unvested performance stock awards approximately 78 million total weighted average remaining term 150 years 2019 2018 2017 company recognized compensation costs 85 million 52 million 48 million respectively aggregate intrinsic value performance shares granted outstanding approximated 237 million representing total pretax intrinsic value based company’s closing class common stock price 9976 december 31 2019 following summary stock option activity related information 2019 2018 company recognize compensation costs options 2017 company recognized compensation cost options 05 million december 31 2019 unrecognized compensation cost related unvested options december 31 2019 aggregate intrinsic value exercisable options approximately 05 million representing total pretax intrinsic value based company’s closing class common stock price 9976 december 31 2019 would received option holders option holders exercised options date total intrinsic value options exercised 2019 2018 2017 approximately 13 million 12 million 05 million respectively following table summarizes information options outstanding december 31 2019 management stock purchase plan total unrecognized compensation cost related unvested rsus approximately 09 million december 31 2019 total weighted average remaining term 141 years company recognized compensation cost 08 million 2019 10 million 2018 2017 dividends declared rsus paid individuals remain unpaid december 31 2019 totaled approximately 01 million summary company’s rsu activity related information shown following table december 31 2019 aggregate intrinsic values outstanding vested rsus approximately 46 million 16 million respectively representing total pretax intrinsic value based company’s closing class common stock price 9976 december 31 2019 would received rsus holders rsus settled date total intrinsic value rsus settled 2019 2018 2017 approximately 35 million 18 million 04 million respectively upon settlement rsus company issues shares class common stock following table summarizes information rsus outstanding december 31 2019 fair value share issued management stock purchase plan estimated date grant using blackscholesmerton model based following weighted average assumptions riskfree interest rate based upon us treasury yield curve time grant respective expected life rsus expected life estimated period time outstanding rsus volatility calculated using historical data expected dividend yield stock company’s best estimate expected future dividend yield assumptions used determine weighted average grantdate fair value rsus granted 2216 2180 1684 2019 2018 2017 respectively december 31 2019 company total unrecognized compensation costs related unvested stockbased compensation arrangements approximately 175 million total weighted average remaining term 151 years 2019 2018 2017 company recognized compensation costs related stockbased programs 178 million 138 million 139 million respectively 2019 2018 2017 stock compensation expense 09 million 09 million 08 million respectively recorded cost goods sold 169 million 129 million 131 million respectively recorded selling general administrative expenses 2017 company recorded approximately 01 million tax benefits compensation expense relating stock options 2019 2018 2017 company recorded 31 million 28 million 39 million respectively tax benefit stockbased plans 2019 2018 2017 recognition total stockbased compensation expense impacted basic diluted net income per common share 042 032 028 respectively 14 employee benefit plans company’s domestic employees eligible participate company’s 401k savings plan since january 1 2012 company provided base contribution 2 employee’s salary regardless whether employee participates plan company matches contribution 100 first 4 employee’s contribution company’s match contributions years ended december 31 2019 2018 2017 68 million 61 million 50 million respectively charges europe pension plans approximated 36 million 39 million 41 million years ended december 31 2019 2018 2017 respectively costs relate plans administered certain european subsidiaries benefits calculated according government requirements paid employees upon retirement change employment 15 contingencies environmental remediation accrual disclosure policy company defendant numerous legal matters arising ordinary course operations including involving product liability environmental matters commercial disputes company reviews lawsuits legal proceedings ongoing basis follows appropriate accounting guidance making accrual disclosure decisions company establishes accruals matters company assesses probable loss incurred amount loss reasonably estimated company establish accruals matters company believe probable loss incurred amount loss reasonably estimated company’s assessment whether loss probable based assessment ultimate outcome matter following appeals fasbissued asc 450 “contingencies” event “reasonably possible” “the chance future event events occurring remote less likely” event “remote” “the chance future event events occurring slight” thus references upper end range reasonably possible loss cases company able estimate range reasonably possible loss mean upper end range loss cases company believes risk loss slight may continue exposure loss excess amount accrued possible estimate reasonably possible loss range loss amount accrued matters disclosed estimate aggregated disclosed company records legal costs associated legal contingencies incurred except legal costs associated product liability claims included actuarial estimates used determining product liability accrual december 31 2019 company estimates aggregate amount reasonably possible loss excess amount accrued legal contingencies approximately 56 million pretax respect estimate reasonably possible loss management estimated reasonably possible loss based amount money damages claimed applicable ii allegations factual developments date iii available defenses based allegations andor iv potentially liable parties estimate based upon currently available information subject significant judgment variety assumptions known unknown uncertainties matters underlying estimate change time actual results may vary significantly current estimate event unfavorable outcome one matters ultimate liability may excess amounts currently accrued may material company’s operating results cash flows particular quarterly annual period however based information currently known management believes ultimate outcome matters resolved time likely material adverse effect financial condition company though outcome could material company’s operating results particular period depending part upon operating results period product liability company subject variety potential liabilities connection product liability cases significant volume liability matters company maintains high selfinsured retention limit within product liability general liability coverage company believes generally accordance industry practices product liability cases us management establishes product liability accrual includes legal costs associated accrued claims significant volume liability matters company utilizes thirdparty actuarial valuations incorporate historical trend factors company’s specific claims experience derived loss reports provided thirdparty claims administrators product liability accrual established considering applicable insurance coverage changes nature product liability claims actual settlement amounts could affect adequacy estimates require changes provisions liability estimate ultimate liability may less reported environmental remediation company named potentially responsible party respect limited number identified contaminated sites levels contamination vary significantly site related levels remediation efforts environmental liabilities recorded based probable cost known estimated minimum cost remediation accruals discounted present value unless amount timing expenditures fixed reliably determinable company accrues estimated environmental liabilities based assumptions subject number factors uncertainties circumstances affect reliability precision estimates include identification additional sites environmental regulations level cleanup required technologies available number financial condition contributors remediation time period remediation may occur company recognizes changes estimates new remediation requirements defined new information becomes available chemetco inc superfund site hartford illinois august 2017 watts regulator co whollyowned subsidiary company received “notice environmental liability” chemetco site group “group” alleging potentially responsible party chemetco inc superfund site hartford illinois “site” arranged disposal treatment hazardous substances contained materials sent site resulted release threat release hazardous substances site letter offered watts regulator co opportunity join group participate remedial investigation feasibility study “rifs” site watts regulator co joined group september 2017 added march 2018 signatory together 43 new group members administrative settlement agreement order consent united states environmental protection agency “usepa” governing completion rifs based information currently known management believes watts regulator co’s share costs rifs likely material adverse effect financial condition company material adverse effect company’s operating results particular period company unable estimate range reasonably possible loss matter damages specified rifs completed determine remediation plan implemented costs plan ii total number potentially responsible parties may agree fund perform remediation yet determined iii share contribution potentially responsible parties remediation determined iv number years required implement remediation plan acceptable usepa uncertain asbestos litigation company defending approximately 300 lawsuits different jurisdictions alleging injury death result exposure asbestos complaints cases typically name large number defendants identify particular company products source asbestos exposure date discovery failed yield evidence substantial exposure company products judgments entered company litigation lawsuits proceedings claims arising ordinary course operations also pending threatened company 16 financial instruments fair value carrying amounts cash equivalents trade receivables trade payables approximate fair value short maturity financial instruments fair value company’s 505 senior notes due june 2020 based quoted market prices similar notes level 2 fair value company’s borrowings outstanding credit agreement company’s variable rate debt approximates carrying value carrying amount estimated fair market value company’s longterm debt including current portion follows financial instruments company measures certain financial assets liabilities fair value recurring basis including deferred compensation plan assets related liabilities redeemable financial instruments derivatives fair values certain financial assets liabilities determined using following inputs december 31 2019 december 31 2018 1included company’s consolidated balance sheet assets net 2included company’s consolidated balance sheet accrued compensation benefits 3included company’s consolidated balance sheet current liabilities relates mandatorily redeemable equity instrument part acquisition apex valves limited “apex” 2015 4included company’s consolidated balance sheet accrued expenses liabilities november 30 2015 company acquired 80 outstanding shares apex aggregate purchase price 204 million company recorded longterm liability 55 million estimate acquisition date fair value contractual call option purchase remaining 20 within three years closing company acquired additional 10 ownership first quarter 2017 29 million increasing company’s ownership 90 apex outstanding shares fourth quarter 2018 company executed agreement extend exercise contractual call option company exercised contractual call option purchase remaining 10 apex shares third quarter 2019 approximately 28 million cash equivalents consist instruments remaining maturities three months less date purchase consist primarily money market funds carrying amount reasonable estimate fair value company uses financial instruments time enhance ability manage risk including foreign currency commodity pricing exposures exist part ongoing business operations use derivatives exposes company counterparty credit risk nonperformance market risk related changes currency exchange rates commodity prices company manages exposure counterparty credit risk diversification counterparties company’s counterparties derivative transactions substantial commercial banks significant experience using derivative instruments impact market risk fair value cash flows company’s derivative instruments monitored company restricts use derivative financial instruments hedging activities company enter contracts trading purposes company enter contracts speculative purposes use derivative instruments approved senior management written guidelines interest rate swaps credit agreement referenced note 11 notes consolidated financial statements company choose either adjusted libor alternative base rate “abr” revolving credit facility term loan facility accordingly company’s earnings cash flows exposed interest rate risk changes adjusted libor order manage company’s exposure changes cash flows attributable fluctuations liborindexed interest payments related company’s floating rate debt company entered two interest rate swaps interest rate swap company receives threemonth usdlibor subject 0 floor pays fixed rate 131375 notional amount 2250 million swaps mature february 12 2021 company formally documented hedge relationships hedge inception ensure interest rate swaps qualify hedge accounting quarterly basis company assesses whether interest rate swaps highly effective offsetting changes cash flow hedged item company hold issue interest rate swaps trading purposes swaps designated cash flow hedges years ended december 31 2019 2018 loss 39 million gain 07 million respectively recorded accumulated comprehensive loss recognize effective portion fair value interest rate swaps qualify cash flow hedge designated foreign currency hedges company’s foreign subsidiaries transact business including certain intercompany transactions foreign currencies transactions principally purchases sales materials company exposure number foreign currencies including canadian dollar euro chinese yuan since first quarter 2018 company used layering methodology whereby end quarter company enters forward exchange contracts hedging canadian dollar us dollar hedge approximately 70 80 forecasted intercompany purchase transactions one company’s canadian subsidiaries company’s us operating subsidiaries next twelve months beginning first quarter 2019 company used similar layering methodology entered forward exchange contracts hedging us dollar chinese yuan hedge 60 forecasted intercompany sales transactions one company’s chinese subsidiaries one company’s us operating subsidiaries next twelve months december 31 2019 designated foreign exchange hedge contracts cash flow hedges asc 815 derivatives hedging asc 815 company records effective portion designated foreign currency hedge contracts comprehensive income inventory turns sold thirdparty transaction associated hedged forecasted transaction occurs effective portion related gain loss designated foreign currency hedge reclassified earnings within cost goods sold event notional amount derivatives exceeds forecasted intercompany purchases given month excess hedge position attributed following month’s forecasted purchases however following month’s forecasted purchases cannot absorb excess hedge position current month effective portion hedge recorded comprehensive income reclassified earnings notional amounts outstanding december 31 2019 canadian dollar us dollar contracts us dollar chinese yuan contracts 135 million 16 million respectively combined fair value company’s designated foreign hedge contracts outstanding december 31 2019 liability balance 02 million december 31 2019 amount expected reclassified cost goods sold comprehensive income next twelve months programs loss 04 million 17 segment information company operates three geographic segments americas europe apmea segments sells similar products separate financial results reviewed company’s chief operating decisionmaker segment earns revenue income almost exclusively sale company’s products company sells products various end markets around world sales region based upon location entity recording sale see note 4 detail product lines sold region intercompany sales transactions eliminated accounting policies segment described note 2 notes consolidated financial statements following summary company’s significant accounts balances segment reconciled consolidated totals corporate expenses primarily administrative compensation expense compliance costs professional fees including corporaterelated legal audit expenses shareholder services benefit administration costs following includes us net sales us property plant equipment company’s americas segment following includes intersegment sales americas europe apmea 18 accumulated comprehensive loss accumulated comprehensive loss consists following 1 cash flow hedges include interest rate swaps designated foreign currency hedges see note 16 details 19 quarterly financial information unaudited note four quarters may sum full year due rounding 20 subsequent events february 6 2020 company declared quarterly dividend twentythree cents 023 per share outstanding share class common stock class b common stock payable march 13 2020 stockholders record february 28 2020 watts water technologies inc subsidiaries schedule iivaluation qualifying accounts amounts millions exhibit index exhibit description 31 restated certificate incorporation amended incorporated reference registrant’s quarterly report form 10q quarter ended june 30 2019 file 001 11499 32 amended restated bylaws incorporated reference registrant’s current report form 8k dated july 27 2015 file 00111499 4† description registrant’s class common stock 91 amended restated george b horne voting trust agreement1997 dated september 14 1999 incorporated reference registrant’s annual report form 10k year ended june 30 1999 file 00111499 101 supplemental compensation agreement effective september 1 1996 registrant timothy p horne incorporated reference registrant’s annual report form 10k year ended june 30 1996 file 00111499 102 amendment 1 dated july 25 2000 supplemental compensation agreement effective september 1 1996 registrant timothy p horne incorporated reference registrant’s quarterly report form 10q quarter ended september 30 2000 file 001 11499 103 amendment 2 dated october 23 2002 supplemental compensation agreement effective september 1 1996 registrant timothy p horne incorporated reference registrant’s annual report form 10k year ended december 31 2002 file 001 11499 104 amendment 3 dated august 18 2015 supplemental compensation agreement effective september 1 1996 registrant timothy p horne incorporated reference registrant’s current report form 8k dated august 18 2015 file 001 11499 105 amended restated stock restriction agreement dated october 30 1991 incorporated reference registrant’s current report form 8k dated november 14 1991 file 00111499 106 amendment dated august 26 1997 amended restated stock restriction agreement dated october 30 1991 incorporated reference registrant’s annual report form 10k year ended june 30 1997 file 00111499 107 registration rights agreement dated july 25 1986 incorporated reference registrant’s form s1 336515 part second amendment form s1 dated august 21 1986 108 form indemnification agreement registrant certain directors officers registrant incorporated reference registrant’s quarterly report form 10q quarter ended july 1 2018 file 001 11499 109 watts water technologies inc executive incentive bonus plan incorporated reference registrant’s annual report form 10k year ended december 31 2015 file 00111499 1010 watts water technologies inc executive officer incentive bonus plan incorporated reference registrant’s current report form 8k dated february 6 2019 file 00111499 1011 nonemployee director compensation arrangements incorporated reference registrant’s annual report form 10k year ended december 31 2018 file 00111499 1012† watts water technologies inc management stock purchase plan amended restated november 4 2019 1013 watts water technologies inc second amended restated 2004 stock incentive plan incorporated reference registrant’s current report form 8k dated may 15 2013 file 00111499 1014 form nonqualified stock option agreement watts water technologies inc second amended restated 2004 stock incentive plan incorporated reference registrant’s quarterly report form 10q quarter ended june 30 2013 file 001 11499 1015 form restricted stock award agreement employees watts water technologies inc second amended restated 2004 stock incentive plan incorporated reference registrant’s quarterly report form 10q quarter ended july 1 2018 file 00111499 exhibit description 1016 form deferred stock award agreement watts water technologies inc second amended restated 2004 stock incentive plan incorporated reference registrant’s quarterly report form 10q quarter ended march 31 2019 file 00111499 1017 form 2016 performance stock unit award agreement watts water technologies inc second amended restated 2004 stock incentive plan incorporated reference registrant’s annual report form 10k year ended december 31 2016 file 001 11499 1018 form 2017 performance stock unit award agreement watts water technologies inc second amended restated 2004 stock incentive plan incorporated reference registrant’s quarterly report form 10q quarter ended april 2 2017 file 00111499 1019 form 2018 performance stock unit award agreement watts water technologies inc second amended restated 2004 stock incentive plan incorporated reference registrant’s quarterly report form 10q quarter ended april 1 2018 file 00111499 1020 form 2019 performance stock unit award agreement watts water technologies inc second amended restated 2004 stock incentive plan incorporated reference registrant’s quarterly report form 10q quarter ended march 31 2019 file 00111499 1021 form 2014 nonqualified stock option agreement watts water technologies inc second amended restated 2004 stock incentive plan incorporated reference registrant’s quarterly report form 10q quarter ended june 29 2014 file 001 11499 1022 watts water technologies inc executive severance plan amended restated february 8 2018 incorporated reference registrant’s quarterly report form 10q quarter ended july 1 2018 file 00111499 1023 credit agreement dated february 12 2016 among registrant certain subsidiaries registrant borrowers jpmorgan chase bank na administrative agent swing line lender lc issuer lenders referred therein incorporated reference registrant’s current report form 8k dated february 9 2016 file 00111499 1024 guaranty dated february 12 2016 registrant subsidiaries registrant set forth therein favor jpmorgan chase bank na lenders referred therein incorporated reference registrant’s current report form 8k dated february 9 2016 file 00111499 1025 note purchase agreement dated june 18 2010 registrant purchasers named schedule thereto relating registrants 75000000 505 senior notes due june 18 2020 incorporated reference registrant’s current report form 8k dated june 18 2010 file 00111499 1026 form 505 senior note due june 18 2020 incorporated reference registrant’s current report form 8k dated june 18 2010 file 00111499 1027 form subsidiary guaranty connection registrant’s 505 senior notes due june 18 2020 including form joinder subsidiary guaranty incorporated reference registrant’s current report form 8k dated june 18 2010 file 00111499 21† subsidiaries 23† consent kpmg llp independent registered public accounting firm 311† certification principal executive officer pursuant rule 13a14a rule 15d14a securities exchange act 1934 amended 312† certification principal financial officer pursuant rule 13a14a rule 15d14a securities exchange act 1934 amended 321†† certification principal executive officer pursuant 18 usc section 1350 322†† certification principal financial officer pursuant 18 usc section 1350 101ins† inline xbrl instance document 101sch† inline xbrl taxonomy extension schema document 101cal† inline xbrl taxonomy extension calculation linkbase document 101def† inline xbrl taxonomy extension definition linkbase document exhibit description 101lab† inline xbrl taxonomy extension label linkbase document 101pre† inline xbrl taxonomy extension presentation linkbase document cover page interactive data file formatted inline xbrl contained exhibit 101 management contract compensatory plan arrangement †filed herewith ††furnished herewith attached exhibit 101 report following formatted inline xbrl extensible business reporting language consolidated statements operations years ended december 31 2019 2018 2017 ii consolidated statements comprehensive loss income years ended december 31 2019 2018 2017 iii consolidated balance sheets december 31 2019 december 31 2018 iv consolidated statements stockholders’ equity years ended december 31 2019 2018 2017 v consolidated statements cash flows years ended december 31 2019 2018 2017 vi notes consolidated financial statements signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized watts water technologies inc robert j pagano jr robert j pagano jr chief executive officer president dated february 20 2020 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated signature title date robert j pagano jr chief executive officer president director february 20 2020 robert j pagano jr principal executive officer shashank patel chief financial officer february 20 2020 shashank patel principal financial officer virginia halloran chief accounting officer february 20 2020 virginia halloran principal accounting officer christopher l conway director february 13 2020 christopher l conway david dunbar director february 13 2020 david dunbar louise k goeser director february 15 2020 louise k goeser jes munk hansen director february 16 2020 jes munk hansen w craig kissel chairman board february 16 2020 w craig kissel joseph noonan director february 13 2020 joseph noonan merilee raines director february 14 2020 merilee raines joseph w reitmeier director february 13 2020 joseph w reitmeieritem 15 exhibits financial statement schedules a1 financial statements following financial statements included separate section report commencing page numbers specified report independent registered public accounting firm consolidated statements operations years ended december 31 2020 2019 2018 consolidated statements comprehensive income years ended december 31 2020 2019 2018 consolidated balance sheets december 31 2020 2019 consolidated statements stockholders’ equity years ended december 31 2020 2019 2018 consolidated statements cash flows years ended december 31 2020 2019 2018 notes consolidated financial statements a2 schedules schedule iivaluation qualifying accounts years ended december 31 2020 2019 2018 required schedules provision made applicable accounting regulations securities exchange commission included notes consolidated financial statements a3 exhibits listed exhibit index immediately preceding signature page hereto filed part annual report form 10k item 16 form 10k summary none report independent registered public accounting firm stockholders board directors watts water technologies inc opinion consolidated financial statements audited accompanying consolidated balance sheets watts water technologies inc subsidiaries company december 31 2020 2019 related consolidated statements operations comprehensive income stockholders’ equity cash flows years threeyear period ended december 31 2020 related notes financial statement schedule ii valuation qualifying accounts collectively consolidated financial statements opinion consolidated financial statements present fairly material respects financial position company december 31 2020 2019 results operations cash flows years threeyear period ended december 31 2020 conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states pcaob company’s internal control financial reporting december 31 2020 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission” report dated february 18 2021 expressed unqualified opinion effectiveness company’s internal control financial reporting change accounting principle discussed note 2 consolidated financial statements company changed method accounting leases january 1 2019 due adoption accounting standards update asu 201602 leases asu 201801 land easement practical expedient transition topic 842 asu 201810 codification improvements topic 842 asu 201811 targeted improvements basis opinion consolidated financial statements responsibility company’s management responsibility express opinion consolidated financial statements based audits public accounting firm registered pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audit obtain reasonable assurance whether consolidated financial statements free material misstatement whether due error fraud audits included performing procedures assess risks material misstatement consolidated financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures consolidated financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation consolidated financial statements believe audits provide reasonable basis opinion critical audit matter critical audit matter communicated matter arising current period audit consolidated financial statements communicated required communicated audit committee 1 relates accounts disclosures material consolidated financial statements 2 involved especially challenging subjective complex judgments communication critical audit matter alter way opinion consolidated financial statements taken whole communicating critical audit matter providing separate opinions critical audit matter accounts disclosures relates evaluation assumptions underlying product liability accrual discussed notes 10 15 consolidated financial statements company’s product liability accrual december 31 2020 221 million product liability accrual represents actuarially determined estimated future costs product liability claims products disaggregated basis based historical loss trend factors company’s specific claims experience company’s estimated future costs include assumptions regarding frequency severity reported incurred reported claims identified evaluation assumptions used actuarial methods estimate product liability accrual critical audit matter specialized skills knowledge needed evaluate company’s assumptions regarding severity reported claims frequency severity incurred reported claims impact assumptions actuarial methods addition high degree auditor judgment required evaluate assumptions following primary procedures performed address critical audit matter evaluated design tested operating effectiveness certain internal controls related assumptions used actuarial methods estimate product liability accrual included controls development assumptions used estimate cost reported incurred reported claims tested claims data formed basis estimate selecting certain claims comparing relevant underlying claim information including documentation claim payments involved actuarial professional specialized skills knowledge assisted ●assessing actuarial methods used company calculate product liability accrual consistency generally accepted actuarial standards ●performing independent calculation product liability accrual utilizing company’s claims experience compared output actuarial calculations amounts recorded company kpmg llp served company’s auditor since 1997 boston massachusetts february 18 2021 watts water technologies inc subsidiaries consolidated statements operations amounts millions except per share information accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated statements comprehensive income amounts millions accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated balance sheets amounts millions except share information accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated statements stockholders’ equity amounts millions except share information accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated statements cash flows amounts millions accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries notes consolidated financial statements 1 description business watts water technologies inc company leading supplier products solutions systems manage conserve flow fluids energy buildings commercial residential markets americas europe asiapacific middle east africa apmea 140 years company designed produced valve systems safeguard regulate water systems energy efficient heating hydronic systems drainage systems water filtration technology helps purify conserve water covid19 march 2020 world health organization categorized covid19 pandemic president united states declared covid19 outbreak national emergency unprecedented widespread impact covid19 continues affect countries markets company operates new evolving government actions address covid19 pandemic continue occur regular basis year ended december 31 2020 temporary closures lockdowns restrictions mandated various governmental authorities intended combat covid19 pandemic negatively impacted company’s revenue varying levels within company’s business segments company’s operating response cost management capital preservation actions discussed within item 7 “management’s discussion analysis financial condition results operations” capital markets economies worldwide continue negatively impacted protective measures taken governments response covid19 pandemic measures resulted global economic recession economic disruption may material adverse effect company’s business customers continue curtail reduce overall spending may return prepandemic levels policymakers around globe responded fiscal policy actions bolster local economies magnitude overall effectiveness actions remain uncertain severity impact covid19 pandemic companys future business depend number factors including limited duration severity pandemic extent severity impact companys customers operations distributors suppliers uncertain cannot predicted companys future results operations liquidity could adversely impacted delays payments outstanding receivable amounts beyond normal payment terms supply chain disruptions uncertain demand impact initiatives programs company may undertake address financial operational challenges faced customers however company anticipate adverse impacts ability pay debt obligations become due date issuance consolidated financial statements extent covid19 pandemic may materially impact companys financial condition liquidity results operations uncertain due risks uncertainties resulting covid19 pandemic full extent impact company’s business remains difficult predict pandemic response pandemic continue evolve company intends continue assess evolving impact covid19 pandemic expects continue make adjustments responses address situation develops 2 accounting policies principles consolidation consolidated financial statements include accounts company majority whollyowned subsidiaries upon consolidation intercompany accounts transactions eliminated cash equivalents cash equivalents consist instruments remaining maturities three months less date purchase consist primarily money market funds carrying amount reasonable estimate fair value allowance credit losses allowance credit losses established represent company’s best estimate net realizable value outstanding amount receivables unable collect company developed financial asset pools consist business legal entities similar risk economic characteristics including types products customers trade receivable characteristics history credit losses trade receivables development company’s allowance credit losses varies asset pool general based review past due amounts historical writeoff experience aging trends affecting specific accounts changes customer payment terms general operational factors affecting accounts applicable current economic conditions reasonable supportable forecasted economic conditions affect collectability addition factors developed certain regions utilizing historical trends sales returns allowances cash discount activities derive reserve returns allowances cash discounts company also monitors creditworthiness company’s largest customers periodically reviews customer credit limits reduce risk company’s allowance credit losses december 31 2020 included adjustment estimated impact covid19 pandemic future collectability material financial statements circumstances relating specific customers change unanticipated changes occur general business environment company’s estimates recoverability receivables could adjusted concentration credit company sells products diversified customer base therefore significant concentrations credit risk 2020 2019 2018 customer accounted 10 company’s total sales accounts receivable inventories stated lower cost market using firstin firstout method market value determined replacement cost net realizable value company utilizes specific product identification historical product demand basis determining excess obsolete inventory reserve company identifies inventories exceed range one three years sales determined comparing current inventory balance unit sales trailing twelve months new products added inventory within past twelve months excluded analysis portion company’s products contain recoverable materials therefore excess obsolete reserve established net recoverable amounts changes market conditions lowerthanexpected customer demand changes technology features could result additional obsolete inventory saleable could require additional inventory reserve provisions goodwill intangible assets goodwill recorded consideration paid acquisitions exceeds fair value net tangible intangible assets acquired goodwill intangible assets indefinite useful lives amortized rather tested impairment least annually frequently events circumstances indicate “more likely not” might impaired change business conditions company performs annual goodwill indefinitelived intangible assets impairment assessment fourth quarter year longlived assets intangible assets estimable lives longlived assets reviewed indicators impairment least quarterly frequently events changes circumstances indicate carrying amount asset group may recoverable property plant equipment property plant equipment recorded cost depreciation provided straightline basis estimated useful lives assets range 10 40 years buildings improvements 3 15 years machinery equipment leasehold improvements depreciated lesser economic useful life asset remaining lease term leases company leases following classes underlying assets real estate automobiles manufacturing equipment facility equipment office equipment certain service arrangements dependent identified asset company determines arrangement qualifies lease inception company lessee recognizes statement financial position liability make lease payments rightofuse asset “rou” representing right use underlying asset finance operating leases lease term longer twelve months company elected shortterm lease recognition exemption leases qualify recognize rou assets lease liabilities shortterm leases company recognizes shortterm lease payments straightline basis lease term consolidated statement operations company determines initial classification measurement rou assets lease liabilities lease commencement date thereafter modified operating leases lease liability initially subsequently measured present value unpaid lease payments lease commencement date finance leases lease liability initially measured manner date operating leases subsequently measured amortized cost using effective interest method measuring lease liability requires certain estimates judgments estimates judgments include company determines 1 discount rate uses discount unpaid lease payments present value 2 lease term 3 lease payments ●the present value lease payments determined using interest rate implicit lease rate readily determinable otherwise company uses incremental borrowing rate generally company cannot determine interest rate implicit lease access lessor’s estimated residual value amount lessor’s deferred initial direct costs therefore company uses incremental borrowing rate discount rate lease company’s incremental borrowing rate lease rate interest would pay collateralized basis borrow amount equal lease payments similar term company’s incremental borrowing rate determined using portfolio approach geographic region considering many factors company’s specific credit risk amount lease payments collateralized nature lease borrowing term lease term geographical economic considerations ●the lease term company’s leases includes fixed noncancelable term lease plus periods covered options extend lease company reasonably certain exercise option b periods covered option terminate lease company reasonably certain exercise option c periods covered option extend terminate lease exercise option controlled lessor determining renewal option reasonably certain exercised company considers several economic factors including limited significance leasehold improvements incurred property whether asset difficult replace underlying contractual obligations specific characteristics unique particular lease would make reasonably certain exercise option ●lease payments included measurement lease liability include following ofixed payments including insubstance fixed payments owed lease term includes termination penalties company would owe lease term assumes company exercise termination option less lease incentives paid payable company ovariable lease payments depend index rate initially measured using index rate commencement date oamounts expected payable companyprovided residual value guarantee othe exercise price company option purchase underlying asset company reasonably certain exercise option rou asset initially measured cost comprises initial amount lease liability adjusted lease payments made lease commencement date plus initial direct costs incurred less lease incentives received operating leases rou asset subsequently measured throughout lease term carrying amount lease liability plus initial direct costs plus minus prepaid accrued lease payments less unamortized balance lease incentives received lease expense operating leases recognized straightline basis reasonably assured lease term based total lease payments included cost goods sold within selling general administrative expenses consolidated statements operations based primary use rou asset finance leases company recognizes amortization rou asset straightline basis lease commencement date earlier end useful life end lease term unless lease transfers ownership underlying asset company reasonably certain exercise option purchase underlying asset cases rou asset amortized useful life underlying asset amortization rou asset recognized depreciation consolidated statements operations interest expense related finance leases recognized using effective interest method included within interest expense variable lease payments associated company’s leases recognized period event activity circumstance lease agreement payments assessed occurs included cost goods sold within selling general administrative expenses consolidated statements operations based primary use rou asset rou assets operating finance leases periodically assessed impairment company uses longlived assets impairment guidance asc subtopic 36010 property plant equipment overall determine whether rou asset impaired amount impairment loss recognize company monitors events changes circumstances require reassessment one leases reassessment results remeasurement lease liability corresponding adjustment made carrying amount corresponding rou asset unless would reduce carrying amount rou asset amount less zero case amount adjustment would result negative rou asset balance recorded statement operations taxes income taxes assessed governmental authorities sale transactions recorded net basis excluded sales company’s consolidated statements operations income taxes income taxes accounted asset liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases operating loss tax credit carry forwards deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized income period includes enactment date company recognizes tax benefits item question meets morelikelythannot greater 50 likelihood sustained upon examination taxing authorities threshold foreign currency translation functional currency company’s foreign subsidiaries local currency nonus subsidiaries transact functional currency us dollar assets liabilities translated current rates exchange balance sheet date income expense items translated average foreign currency exchange rates period adjustments resulting translation financial statements foreign operations us dollars excluded determination net income recorded accumulated comprehensive income separate component equity transaction gains losses included income expense net consolidated statements operations subsidiaries functional currency assets liabilities differs local currency nonmonetary assets liabilities translated rate exchange effect date assets acquired monetary assets liabilities translated current rates exchange balance sheet date income expense items translated average foreign currency rates period translation adjustments subsidiaries included income expense net consolidated statements operations stockbased compensation company records compensation expense financial statements sharebased awards based grant date fair value awards restricted stock awards deferred stock awards stockbased compensation expense restricted stock awards deferred stock awards recognized requisite service periods awards straightline basis generally commensurate vesting term performance stock units offered company employees amortized expense vesting period based company’s performance relative performance goals may adjusted changes estimated shares expected vest result adjustments related sharebased compensation expense recorded period change company accounts forfeitures occur rather estimate expected forfeitures vesting period respective grant company reclassify benefits associated tax deductions excess recognized compensation cost operating activities financing activities consolidated statement cash flows financial instruments normal course business company manages risks associated commodity prices foreign exchange rates interest rates variety strategies including use hedging transactions executed accordance company’s policies company’s hedging transactions include limited use various derivative financial commodity instruments matter policy company use derivative instruments unless underlying exposure change value derivative instruments would substantially offset opposite change value underlying hedged items company use derivative instruments trading speculative purposes derivative instruments may designated accounted either hedge recognized asset liability fair value hedge forecasted transaction cash flow hedge fair value hedge effective ineffective portions change fair value derivative instrument along adjustment carrying amount hedged item fair value changes attributable hedged risk recognized earnings cash flow hedge changes fair value derivative instrument highly effective deferred accumulated comprehensive income loss underlying hedged item recognized earnings company two interest rate swaps december 31 2020 prior executing amended restated credit agreement “new credit agreement” april 24 2020 effective portion fair value interest rate swaps recorded comprehensive income result entering new credit agreement critical terms new credit agreement longer matched hedged item therefore two interest rate swaps longer qualified cash flow hedge accounting company subsequently began recognizing marktomarket fair value adjustments monthly basis earnings within interest expense also balance outstanding company’s revolving credit facility december 31 2020 notional amount interest rate swaps therefore december 31 2020 balance previously effective portion fair value interest rate swaps recorded comprehensive income reclassified earnings within interest expense two interest rate swaps effective cash flow hedges december 31 2019 company also foreign exchange hedges designated cash flow hedges december 31 2020 2019 refer note 16 details fair value cash flow hedge cease qualify hedge accounting terminated would continue carried balance sheet fair value settled hedge accounting would discontinued prospectively forecasted transaction longer probable occurring amounts previously deferred accumulated comprehensive income would recognized immediately earnings occasion company may enter derivative instrument qualify hedge accounting entered offset changes fair value underlying transaction required recognized earnings natural hedge instruments reflected consolidated balance sheets fair value changes fair value recognized earnings portions company’s outstanding debt exposed interest rate risks company monitors interest rate exposures ongoing basis maximize overall effectiveness interest rates fair value measurements fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date entity required maximize use observable inputs available minimize use unobservable inputs measuring fair value company certain financial assets liabilities measured fair value recurring basis certain nonfinancial assets liabilities may measured fair value nonrecurring basis fair value disclosures assets liabilities based threelevel hierarchy defined follows level 1 quoted prices active markets identical assets liabilities entity ability access measurement date level 2 observable inputs level 1 prices quoted prices similar assets liabilities quoted prices markets active inputs observable corroborated observable market data substantially full term assets liabilities level 3 unobservable inputs supported little market activity significant fair value assets liabilities assets liabilities subject hierarchy classified entirety based lowest level input significant fair value measurement company’s assessment significance particular input fair value measurement entirety requires judgment considers factors specific asset liability refer note 16 details shipping handling shipping handling costs included selling general administrative expense amounted 550 million 576 million 563 million years ended december 31 2020 2019 2018 respectively research development research development costs included selling general administrative expense amounted 422 million 396 million 345 million years ended december 31 2020 2019 2018 respectively revenue recognition company recognizes revenue core principle depict transfer control company’s customers amount reflecting consideration company expects entitled order achieve core principle company applies following fivestep approach 1 identify contract customer 2 identify performance obligations contract 3 determine transaction price 4 allocate transaction price performance obligations contract 5 recognize revenue performance obligation satisfied company’s revenue product sales recognized point time model point control transfers customer generally products shipped company’s manufacturing distribution facilities delivered customer’s named location sales tax valueadded tax taxes collected concurrent revenue producing activities excluded revenue freight costs billed customers shipping handling activities included revenue related cost included selling general administrative expenses see note 4 disclosures detail regarding revenue recognition estimates preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period worldwide spread covid19 created significant uncertainty global economy comparable recent events provide guidance effect covid19 global pandemic may result ultimate impact covid19 extent covid19 continues impact company’s business results operations financial condition depend future developments highly uncertain difficult predict use estimates specific accounting policies described appropriate actual results could differ estimates recently adopted accounting standards august 2018 financial accounting standards board “fasb” issued asu 201815 “intangiblesgoodwill otherinternaluse software subtopic 35040customer’s accounting implementation costs incurred cloud computing arrangement service contract” asu 201815 aligns requirements capitalizing implementation costs incurred hosting arrangement service contract requirements capitalizing implementation costs incurred develop obtain internaluse software guidance requires entity hosting arrangement service contract follow guidance subtopic 35040 determine implementation costs capitalize asset related service contract costs expense standard effective fiscal years beginning december 15 2019 including interim periods within reporting period company adopted standard first quarter 2020 material impact company’s financial statements august 2018 fasb issued asu 201813 “fair value measurement topic 820disclosure framework changes disclosure requirements fair value measurement” asu 201813 modifies disclosure requirements fair value measurements topic 820 standard effective fiscal years beginning december 15 2019 including interim periods within reporting period company adopted standard first quarter 2020 material impact company’s financial statements june 2016 fasb issued asu 201613 “financial instruments credit losses topic 326” asu 201613 replaces incurred loss impairment methodology previous united states generally accepted accounting principles “gaap” methodology reflects expected credit losses requires use forwardlooking expected credit loss model accounts receivable loans financial instruments financial assets standard applicable company’s balance sheet accounts receivable contract assets standard requires company pool financial assets based similar risk economic characteristics estimate expected credit losses contractual life asset standard effective reporting periods beginning december 15 2019 standard requires modified retrospective approach cumulativeeffect adjustment retained earnings beginning first reporting period guidance effective company adopted standard first quarter 2020 material impact company’s financial statements february 2016 fasb issued asu 201602 “leases topic 842” asu 201602 requires lessee recognize statement financial position liability make lease payments rou asset representing right use underlying asset lease term finance operating leases term longer twelve months topic 842 subsequently amended asu 201801 “land easement practical expedient transition topic 842” asu 201810 “codification improvements topic 842 leases” asu 201811 “targeted improvements” asu 201602 effective financial statements issued fiscal years beginning december 15 2018 including interim periods within fiscal years asc 842 leases classified finance operating classification determining pattern classification expense recognition income statement modified retrospective transition approach required applying new standard leases existing date initial application company could choose use either 1 effective date standard 2 beginning earliest comparable period presented financial statements date initial application company adopted new standard january 1 2019 used effective date standard date company’s initial application approach financial information disclosures required new standard provided dates periods january 1 2019 company designed necessary changes existing processes configured system requirements necessary implement new standard new standard provides number optional practical expedients throughout transition company elected “package practical expedients” permitted company reassess new standard company’s prior conclusions lease identification lease classification initial direct costs company elect useofhindsight practical expedient pertaining land easements latter applicable company also elected practical expedient separate lease nonlease components company’s leases result adopting asc 842 company recorded operating rou assets 336 million operating lease liabilities 339 million january 1 2019 consolidated balance sheet difference rou assets lease liabilities related impact eliminating deferred prepaid lease payments recognized previous lease accounting standard company’s adoption asc 842 result change company’s recognition existing finance leases january 1 2019 adoption new lease accounting standard material impact either consolidated statement operations consolidated statement cash flows however asu 201602 significantly affected company’s disclosures noncash activities related leases see note 5 consolidated financial statements accounting standards updates march 2020 fasb issued asu 202004 reference rate reform topic 848 facilitation effects reference rate reform financial reporting amendments provide optional guidance limited time ease potential burden accounting reference rate reform new guidance provides optional expedients exceptions applying gaap contracts hedging relationships transactions affected reference rate reform certain criteria met amendments apply contracts hedging relationships reference libor another reference rate expected discontinued due reference rate reform amendments effective immediately may applied prospectively contract modifications made hedging relationships entered evaluated december 31 2022 company currently evaluating contracts optional expedients provided new standard december 2019 fasb issued asu 201912 income taxes topic 740 simplifying accounting income taxes” asu simplifies accounting income taxes clarifying amending existing guidance related recognition franchise tax evaluation step tax basis goodwill effects enacted changes tax laws rates effective tax rate computation among clarifications effective date adoption asu calendar year beginning january 1 2021 early adoption permitted company currently evaluating impact guidance company’s financial statements expect adoption guidance material impact company’s financial statements 3 restructuring charges net company’s board directors approves major restructuring programs may involve discontinuance significant product lines shutdown significant facilities time company takes additional restructuring actions including involuntary terminations part major program company accounts costs period liability incurred costs included restructuring charges company’s consolidated statements operations summary pretax cost restructuring program follows company recorded pretax restructuring business segments follows actions company periodically initiates actions part major program total “other actions” pretax restructuring expense 99 million 43 million 34 million years ended december 31 2020 2019 2018 respectively included “other actions” year ended december 31 2020 actions taken americas europe apmea segments corporate primarily response covid19 pandemic also included “other actions” years ended 2019 2018 european restructuring activities initiated 2018 extended 2019 discussed “other actions” also include certain minor initiatives company incurred restructuring expenses adjusted prior restructuring reserves years ended december 31 2020 2019 2018 2020 actions second quarter 2020 management initiated certain restructuring actions respect company’s americas apmea segments well corporate third quarter 2020 initiated additional restructuring actions within company’s europe americas segments actions primarily response economic challenges related covid19 pandemic restructuring actions included costs mainly severance benefits due reductions force well costs relating asset writeoffs facility exit costs total pretax charge 2020 restructuring initiatives expected approximately 107 million 103 million incurred december 31 2020 december 31 2020 company paid approximately 50 million severance benefits related costs december 31 2020 restructuring reserve associated actions approximately 46 million primarily related severance benefits remaining expected costs relate asset write facility exit costs expected completed first half 2021 following table summarizes total expected incurred remaining pretax restructuring costs 2020 restructuring actions 2018 actions third quarter 2018 management initiated restructuring actions primarily associated european headquarters well cost savings initiatives certain european manufacturing facilities actions included reductions force related costs total pretax charges program reduced twelve months ended december 31 2020 approximately 03 million due primarily decreased severance costs resulted total program restructuring charges approximately 80 million fully incurred pretax charges year ended december 31 2019 2018 approximately 43 million 40 million respectively primarily included severance benefits restructuring reserve associated actions december 31 2020 approximately 05 million primarily relates severance benefits 2017 actions fourth quarter 2017 management initiated certain restructuring actions related reductions force within company’s europe segment restructuring activities primarily included severance benefits total pretax charges associated europe restructuring activities initially expected approximately 41 million costs fully incurred 2017 company reduced total pretax charges program approximately 34 million september 30 2018 primarily related reduced severance costs december 31 2019 actions completed amounts reserved associated actions 4 revenue recognition company leading supplier products manage conserve flow fluids energy buildings commercial residential markets 140 years company designed produced valve systems safeguard regulate water systems energy efficient heating hydronic systems drainage systems water filtration technology helps purify conserve water company distributes products four primary distribution channels wholesale original equipment manufacturers oems specialty doityourself diy company operates three geographic segments americas europe apmea segments sells similar products comprised following principal product lines ●residential commercial flow control productsincludes products typically sold plumbing hot water applications backflow preventers water pressure regulators temperature pressure relief valves thermostatic mixing valves ●hvac gas productsincludes commercial highefficiency boilers water heaters custom heat hot water solutions hydronic electric heating systems underfloor radiant applications hydronic pump groups boiler manufacturers alternative energy control packages flexible stainless steel connectors natural liquid propane gas commercial food service residential applications hvac acronym heating ventilation air conditioning ●drainage water reuse productsincludes drainage products engineered rain water harvesting solutions commercial industrial marine residential applications ●water quality productsincludes pointofuse pointofentry water filtration conditioning scale prevention systems commercial marine residential applications following table disaggregates revenue presented net sales financial statements reportable segment distribution channel principal product line company generally considers customer purchase orders cases governed master sales agreements represent contract customer company’s contracts customers generally products typically include performance obligations professional services extended warranties material rights situations sales distributor company concluded contracts distributor company holds contract bearing enforceable rights obligations distributor part consideration contract company evaluates certain factors including customer’s ability pay credit risk contract company considers promise transfer products distinct identified performance obligation determining transaction price company evaluates whether price subject refund adjustment determine net consideration company expects entitled company’s standard payment terms less one year company elected assess whether contract significant financing component company allocates transaction price distinct product based relative standalone selling price product price specified purchase order considered standalone selling price observable input depicts price sold similar customer similar circumstances revenue recognized control product transferred customer ie company’s performance obligation satisfied typically occurs shipment company’s manufacturing site distribution center delivery customer’s named location certain circumstances revenue shipments retail customers recognized product consumed customer based terms arrangement transfer control satisfied point time determining whether control transferred company considers present right payment physical possession legal title along risks rewards ownership transferred customer certain circumstances company manufactures customized product without alternative use customers however arrangements entitle company right payment cost plus profit work completed company concluded control transfers point time times company receives orders products delivered multiple dates may extend across reporting periods company invoices delivery upon shipment recognizes revenues distinct product delivered assuming transfer control occurred scheduled delivery dates within one year optional exemption provided guidance revenues allocated future shipments partially completed contracts disclosed company generally provides assurance warranty products substantially conform published specification company’s liability limited either credit equal purchase price replacement defective part returns warranty historically immaterial company consider activities related warranty separate performance obligation certain products company separately sell extended warranty service policies customers company considers sale separate performance obligations policies typically periods ranging one three years payments received deferred recognized policy period periods presented revenue recognized revenue deferred policies material consolidated financial statements timing revenue recognition billings cash collections company’s contracts customers vary based payment terms conditions customer contracts cases customers partially prepay goods cases appropriate credit evaluations payment due arrears addition constraints cause variability ultimate consideration recognized constraints typically include early payment discounts volume rebates rights return cooperative advertising market development funds company includes constraints estimated transaction price basis reasonably estimate amount variable consideration estimates based historical experience anticipated future performance company’s best judgment time timing company’s recognition revenue different timing payments made customer company recognizes either contract asset performance precedes contractual due date contract liability customer payment precedes performance contracts payment arrears recognized receivables opening closing balances company’s contract assets contract liabilities follows amount revenue recognized included opening contract liability balance 99 million 118 million years ended december 31 2020 2019 respectively revenue consists primarily revenue recognized shipments product prepaid well amortization extended warranty service policy revenue company recognize material revenue obligations satisfied prior periods impairment losses related contract assets years ended december 31 2020 2019 company incurs costs obtain fulfill contract however company elected recognize incremental costs obtain contract expense incurred amortization period one year less company elected treat shipping handling activities performed customer obtained control related goods fulfillment cost related cost accrued conjunction recording revenue goods 5 leases company adopted asc 842 effective january 1 2019 company variety categories lease arrangements including real estate automobiles manufacturing equipment facility equipment office equipment certain service arrangements dependent identified asset company’s real estate leases consist primarily manufacturing facilities office space warehouses represent approximately 90 company’s operating lease liabilities generally lease term 2 15 years remaining leases primarily consist automobiles machinery equipment used manufacturing processes eg forklifts pallets general office equipment certain service arrangements various lease terms company’s automobile leases typically terms ranging 3 5 years company’s remaining population leases terms ranging 2 15 years certain lease arrangements may contain renewal terms ranging 1 5 years majority company’s real estate automobile equipment leases consist fixed variable lease payments company’s real estate leases variable payments include common area maintenance property taxes insurance automobile leases variable payments primarily include maintenance taxes insurance equipment leases variable payments include maintenance payments based usage company elected account lease nonlease components single component leases therefore fixed costs within lease arrangement included fixed lease payments single combined lease component used measure lease liability variable lease costs recognized period event activity circumstance lease agreement occurs company’s lease agreements include company options either extend andor early terminate lease costs included company’s lease liability extent options reasonably certain exercised renewal options generally included lease term company’s existing leases company reasonably certain exercise renewal options company generally enter leases involving construction design underlying asset nearly assets company leases specialized nature company’s leases generally include termination options either party lease restrictive financial covenants company’s lease agreements generally include residual value guarantees rightofuse asset amounts reported consolidated balance sheet asset category december 31 2020 2019 follows 1 included company’s consolidated balance sheet assets net 2 included company’s consolidated balance sheet property plant equipment maturity company’s operating finance lease liabilities december 31 2020 follows total lease cost consisted following amounts following information represents supplemental disclosure statement cash flows related operating finance leases following summarizes additional information related operating finance leases 6 goodwill intangibles goodwill company performs annual goodwill impairment testing reporting unit fiscal october month end earlier triggering event circumstance indicates impairment loss may occurred october 25 2020 testing date company 5908 million goodwill balance sheet 2020 company seven reporting units one reporting units water quality goodwill company performed qualitative analysis six remaining reporting units include blücher us drains fluid solutionseurope fluid solutionsamericas heating hot water solutions “hhws” apmea result qualitative analyses company determined fair values reporting units likely greater carrying amounts 2020 2019 company need proceed beyond qualitative analysis goodwill impairments recorded addition annual impairment test performed october 25 2020 result impact covid19 global pandemic company continued review guidance outlined asc 350 determine event change circumstance indicate likely impairment loss incurred twelve months ended december 31 2020 company concluded triggering event occurred december 31 2020 “more likely not” company’s reporting units might impaired additionally company noted hhws reporting unit goodwill balance 2189 million december 31 2020 holds greatest amount goodwill least amount excess fair value carrying value based recent quantitative assessment company concluded triggering event occur year ended december 31 2020 performed qualitative analysis annual impairment test impact prolonged covid19 pandemic could impact results operations due changes assumptions utilized determination estimated fair values hhws reporting unit may significant enough trigger impairment determination company completed two acquisitions year ended december 31 2020 considered material consolidated financial statements third quarter 2020 company completed acquisition within apmea segment resulting 39 million goodwill additionally fourth quarter 2020 company completed acquisition within americas segment resulting 55 million goodwill changes carrying amount goodwill geographic segment follows longlived assets indefinitelived intangibles tested impairment least annually frequently events circumstances change business conditions indicate “more likely not” intangible asset might impaired company performs annual indefinitelived intangibles impairment assessment fourth quarter year 2020 2019 company performed qualitative assessment certain tradenames fair value significantly exceeded carrying value recent quantitative assessment indicators impairment present remaining tradenames 2020 2019 company performed quantitative assessment 2018 impairment assessments company performed quantitative assessments indefinitelived intangible assets methodology employed quantitative assessments relief royalty method subset income approach based results assessments company recognize impairment indefinitelived intangibles 2020 2019 2018 intangible assets estimable lives longlived assets reviewed impairment least quarterly frequently events changes circumstances indicate carrying amount asset group may recoverable recoverability intangible assets estimable lives longlived assets measured comparison carrying amount asset group future net undiscounted pretax cash flows expected generated asset group comparisons indicate asset recoverable impairment loss recognized amount carrying amount asset group exceeds related estimated fair value estimated fair value based either discounted future pretax operating cash flows appraised values depending nature asset company determines discount rate analysis based weighted average cost capital using market guideline public companies related businesses allocate interest charges asset group measured judgment required estimate future operating cash flows 2020 company recognized 10 million impairment charge longlived asset 04 million impairment charge amortizable technology asset within americas segment changes market expectations indicated carrying amount assets longer recoverable 2019 2018 indications carrying amounts intangible assets estimable lives recoverable intangible assets include following aggregate amortization expense amortized intangible assets 2020 2019 2018 152 million 156 million 196 million respectively additionally future amortization expense amortizable intangible assets expected 135 million 2021 121 million 2022 119 million 2023 117 million 2024 102 million 2025 amortization expense provided straightline basis estimated useful lives intangible assets weightedaverage remaining life total amortizable intangible assets 84 years patents customer relationships technology trade names amortizable intangibles weightedaverage remaining lives 05 years 88 years 50 years 119 years 165 years respectively indefinitelived intangible assets include trade names trademarks 7 inventories net inventories consist following raw materials workinprocess finished goods net valuation reserves 373 million 279 million december 31 2020 2019 respectively finished goods 163 million 167 million december 31 2020 2019 respectively consigned 8 property plant equipment property plant equipment consist following 9 income taxes significant components company’s deferred income tax liabilities assets follows provision income taxes based following pretax income provision income taxes consists following 2017 tax cuts jobs act “2017 tax act” enacted december 22 2017 resulted significant changes us corporate income tax system changes included lowering us corporate income tax rate 35 21 elimination reduction certain domestic deductions credits 2017 tax act also transitioned international taxation worldwide system modified territorial system creating new taxes certain foreignsourced earnings certain related party payments referred global intangible lowtaxed income tax “gilti” annual antibase erosion tax respectively 2017 tax act also imposed onetime mandatory deemed repatriation tax “toll tax” foreign subsidiaries’ previously untaxed accumulated foreign earnings changes tax rates tax laws accounted period enactment therefore company recorded provisional tax expense 251 million related 2017 tax act december 31 2017 year ended december 31 2018 company finalized impact 2017 tax act recorded benefit 37 million reducing net impact 214 million included 2018 adjustment 106 million benefit related determination foreign tax credits partial release related valuation allowance partially offset additional toll tax 102 million 2020 final tax regulations released respect gilti tax regime regulations permit exclusion gilti items foreign income subject high effective tax rate referred gilti high tax exclusion “hte” new regulations company allowed review gilti income 2018 2019 tax years company elected exclusion 2018 2019 tax years resulting total tax benefit 21 million recorded 2020 toll tax 2017 tax act imposed onetime toll tax required company pay us income taxes accumulated foreign subsidiary earnings previously subject us income tax rate 155 extent foreign cash equivalents 8 remaining earnings year ended december 31 2017 company recorded provisional amount 233 million related toll tax december 31 2018 company recorded tax expense based final guidance 2017 tax act 102 million resulted total toll tax charge 335 million paid eight years beginning 2018 accrue interest deferred tax remeasurement company’s deferred tax liabilities exceeded balance company’s deferred tax assets year ended december 31 2017 company recorded provisional amount tax benefit 12 million december 31 2018 company recorded final tax benefit 2 million net 14 million benefit reflecting decrease us corporate income tax rate tax foreign earnings result 2017 tax act company repatriate cumulative undistributed foreign earnings date back us minimal us income tax consequences onetime toll tax company recorded provisional amount deferred tax expense 146 million december 31 2018 company recorded final tax benefit 2 million net deferred tax expense 126 million future repatriation foreign earnings actual income taxes reported different would computed applying federal statutory tax rate income taxes reasons differences follows december 31 2020 company foreign domestic net operating loss carry forwards 272 million 38 million respectively income tax purposes considering valuation allowances 272 million losses carried forward indefinitely 25 million domestic losses expire 2035 2040 13 million carried forward indefinitely net operating losses consist 272 million related austrian operations 38 million related united states operations december 31 2020 new us capital loss carry forward 10 million considering valuation allowances generated expire 2025 december 31 2020 december 31 2019 company foreign tax credit carry forwards 344 million 327 million respectively income tax purposes considering valuation allowances foreign tax credit carryforwards expire 2027 2030 december 31 2020 december 31 2019 company valuation allowances 421 million 286 million respectively december 31 2020 344 million related foreign tax credits 67 million related austrian net operating losses 10 million related domestic capital loss carry forward december 31 2019 223 million related foreign tax credits 63 million related austrian korean net operating losses 121 million increase december 31 2019 december 31 2020 valuation allowance related foreign tax credits due recently issued final tax regulations changed certain requirements determining foreign source income realizability foreign tax credits management believes ability company use foreign tax credits losses within applicable carry forward period rise level likely threshold company valuation allowance deferred tax assets management believes likely company recover net deferred tax assets management believes likely future reversals deferred tax liabilities together forecasted income sufficient fully recover deferred tax assets december 31 2017 company considered foreign earnings permanently reinvested outside us plans repatriate foreign earnings us unrecognized tax benefits december 31 2020 company gross unrecognized tax benefits approximately 117 million approximately 51 million recognized would affect effective tax rate difference amount unrecognized tax benefits amount would affect effective tax rate consists allowable correlative adjustments available certain jurisdictions reconciliation beginning ending amount unrecognized tax follows company estimates reasonably possible balance unrecognized tax benefits december 31 2020 may decrease 31 million 56 million next twelve months result lapses statutes limitations settlements 23 million 29 million recognized would affect effective tax rate february 2018 united states internal revenue service concluded audit company’s 2016 2015 tax years material adjustments result audit company conducts business variety locations throughout world resulting tax filings numerous domestic foreign jurisdictions company subject tax examinations regularly part normal course business company’s major jurisdictions us france germany italy canada statute limitations us subject tax examination 2017 later france germany italy canada subject tax examination 2016 later jurisdictions exceptions longer subject tax examinations state local international jurisdictions tax years 2013 company accounts interest penalties related uncertain tax positions component income tax expense 10 accrued expenses liabilities accrued expenses liabilities consist following 11 financing arrangements company’s debt consists following principal payments next two years due follows millions 20210 20222000 february 2016 company entered credit agreement “prior credit agreement” among company certain subsidiaries company become borrowers prior credit agreement jpmorgan chase bank na administrative agent swing line lender letter credit issuer lenders referred therein prior credit agreement provided 500 million fiveyear senior unsecured revolving credit facility “prior revolving credit facility” sublimit 100 million letters credit prior credit agreement also provided 300 million fiveyear term loan facility “term loan facility” available company single draw entire 300 million drawn february 2016 april 24 2020 company entered amended restated credit agreement new credit agreement among company certain subsidiaries company become borrowers thereunder jpmorgan chase bank na administrative agent swing line lender letter credit issuer lenders referred therein new credit agreement amends restates prior credit agreement entirety increasing amount revolving credit available 500 million 800 million extending maturity one additional year february 2022 senior unsecured revolving credit facility revolving credit facility also includes sublimits 100 million letters credit 15 million swing line loans december 31 2020 company drawn 2000 million line credit 162 million letters credit outstanding resulted 5838 million unused available credit revolving credit facility term loan facility prior credit agreement terminated paid effective april 24 2020 funds revolving credit facility borrowings outstanding revolving credit facility bear interest fluctuating rate per annum equal applicable percentage defined case eurocurrency rate loans adjusted british bankers association libor rate times less 100 plus applicable percentage ranging 150 210 determined reference companys consolidated leverage ratio ii case alternate base rate loans swing line loans interest times less 200 greatest prime rate effect day b frbny rate effect day plus 05 c adjusted libor rate plus 10 one month interest period dollars interest rate december 31 2020 revolving credit facility 25 december 31 2020 company compliance covenants related new credit agreement addition paying interest new credit agreement company also required pay certain fees connection revolving credit facility including limited unused facility fee letter credit fees new credit agreement matures february 12 2022 subject extension certain circumstances subject terms new credit agreement company may repay loans outstanding new credit agreement time without premium penalty customary breakage costs subject terms new credit agreement new credit agreement imposes various restrictions company subsidiaries including restrictions pertaining incurrence additional indebtedness ii limitations liens iii making distributions dividends payments iv mergers consolidations acquisitions v dispositions assets vi certain consolidated leverage ratios consolidated interest coverage ratios vii transactions affiliates viii changes governing documents ix changes control result entering new credit agreement interest rate swaps referred note 16 notes consolidated financial statements longer effective offsetting changes cash flow hedged item critical terms new credit agreement match hedged item company subsequently began recognizing marktomarket fair value adjustments monthly basis consolidated statement operations continued expiration date swaps february 12 2021 also balance outstanding company’s revolving credit facility december 31 2020 notional amount interest rate swaps therefore december 31 2020 balance previously effective portion fair value interest rate swaps recorded comprehensive income reclassified earnings within interest expense company maintains letters credit guarantee performance payment third parties accordance specified terms conditions amounts outstanding 162 million december 31 2020 258 million december 31 2019 company’s letters credit primarily associated insurance coverage company’s letters credit generally expire within one year issuance instruments may exist expire without drawn therefore necessarily represent future cash flow obligations june 18 2010 company entered note purchase agreement certain institutional investors 2010 note purchase agreement pursuant 2010 note purchase agreement company issued senior notes 750 million principal due june 18 2020 june 18 2020 company borrowed 400 million revolving credit facility used 350 million company’s available cash pay amounts outstanding 2010 note purchase agreement 12 earnings per share stock repurchase program class common stock class b common stock equal dividend liquidation rights share company’s class common stock entitled one vote matters submitted stockholders share class b common stock entitled ten votes matters shares class b common stock convertible shares class common stock onetoone basis option holder december 31 2020 company reserved total 2252875 shares class common stock issuance stockbased compensation plans 6144290 shares conversion class b common stock class common stock basic net income per common share calculated dividing net income weighted average number common shares outstanding calculation diluted net income per share assumes conversion dilutive securities net income number shares used compute net income per share basic assuming full dilution reconciled since july 27 2015 company’s board directors authorized two stock repurchase programs first program approved repurchase 100 million second repurchase program 150 million company’s class common stock purchased time open market privately negotiated transactions stock repurchase programs company entered rule 10b51 plan permits shares repurchased company might otherwise precluded insider trading laws repurchase program may suspended discontinued time subject terms rule 10b51 plans company entered respect repurchase program company temporarily suspended stock repurchase program portion second quarter 2020 measure conserve cash response business impact covid19 pandemic repurchase program reinstated effective june 29 2020 pursuant terms new 10b51 plan entered june 12 2020 100 million stock repurchase program completely expended august 2019 december 31 2020 approximately 1134 million remaining authorized share repurchases 150 million program following table summarizes cost number shares class common stock repurchased two repurchase programs years ended december 31 2020 2019 13 stockbased compensation december 31 2020 company maintains one stock incentive plan second amended restated 2004 stock incentive plan “2004 stock incentive plan” december 31 2020 1083096 shares class common stock authorized future grants new equity awards plan company currently grants shares deferred stock awards key employees stock awards nonemployee members company’s board directors 2004 stock incentive plan company also previously granted shares restricted stock key employees stock awards nonemployee members company’s board directors vest immediately employees’ restricted stock awards deferred stock awards typically vest threeyear period rate onethird per year restricted stock awards outstanding upon grant whereas deferred stock awards outstanding upon vesting restricted stock awards deferred stock awards amortized expense straightline basis vesting period company also grants performance stock units key employees 2004 stock incentive plan performance stock units cliff vest end performance period set compensation committee board directors time grant currently three years upon vesting number shares company’s class common stock awarded performance stock unit recipient determined based company’s performance relative certain performance goals set time performance stock units granted recipient performance stock unit award may earn zero shares twice number target shares awarded recipient performance stock units amortized expense vesting period based company’s performance relative performance goals may adjusted changes estimated shares expected vest result adjustments related sharebased compensation expense recorded period change performance goals met awards earned previously recognized compensation expense reversed company granted performance stock units 2020 2019 2018 performance goals performance stock units based compound annual growth rate company’s revenue threeyear performance period company’s return invested capital “roic” third year performance period beginning 2019 company included “retirement vesting” provisions agreements deferred stock awards performance stock units provisions provide employee retires company attaining age 55 10 years service meets certain requirements including noncompetition nonsolicitation requirements would allowed continue vest deferred stock awards duration vesting periods would entitled receive pro rata portion performance stock units based period service elapsed performance period beginning 2015 company stopped granting stock options part annual equity awards employees previously 2004 stock incentive plan key employees granted nonqualified stock options purchase company’s class common stock minimal options remain outstanding vested expire ten years date grant options granted plan may exercise prices less 100 fair market value class common stock date grant company’s practice grant options fair market value grant date upon exercise options company issues shares class common stock company also management stock purchase plan allows granting restricted stock units rsus key employees annual basis key employees may elect receive portion annual incentive compensation rsus instead cash participating employees may use 50 annual incentive bonus purchase rsus purchase price equal 80 fair market value company’s class common stock date grant rsus vest either annually threeyear period grant date upon third anniversary grant date receipt shares underlying rsus deferred minimum three years greater number years chosen employee date grant aggregate 2000000 shares class common stock may issued management stock purchase plan december 31 2020 731163 shares class common stock authorized future grants company’s management stock purchase plan 2004 stock incentive plan following summary unvested restricted stock deferred stock awards activity related information total fair value shares vested 2020 2019 2018 81 million 84 million 102 million respectively december 31 2020 total unrecognized compensation cost related unvested restricted stock deferred stock awards approximately 69 million total weighted average remaining term 148 years 2020 2019 2018 company recognized compensation costs 77 million 85 million 76 million respectively aggregate intrinsic value restricted stock deferred shares granted outstanding approximated 203 million representing total pretax intrinsic value based company’s closing class common stock price 12170 december 31 2020 following summary unvested performance stock award activity related information total fair value shares vested 2020 2019 2018 100 million 63 million 58 million respectively december 31 2020 total unrecognized compensation cost related unvested performance stock awards approximately 55 million total weighted average remaining term 149 years 2020 2019 2018 company recognized compensation costs 43 million 85 million 52 million respectively aggregate intrinsic value performance shares granted outstanding approximated 253 million representing total pretax intrinsic value based company’s closing class common stock price 12170 december 31 2020 following summary stock option activity related information 2020 2019 2018 company recognize compensation costs options december 31 2020 unrecognized compensation cost related unvested options december 31 2020 aggregate intrinsic value exercisable options approximately 04 million representing total pretax intrinsic value based company’s closing class common stock price 12170 december 31 2020 would received option holders option holders exercised options date total intrinsic value options exercised 2020 2019 2018 approximately 03 million 13 million 12 million respectively following table summarizes information options outstanding december 31 2020 management stock purchase plan total unrecognized compensation cost related unvested rsus approximately 08 million december 31 2020 total weighted average remaining term 139 years company recognized compensation cost 07 million 2020 08 million 2019 10 million 2018 dividends declared rsus paid individuals remain unpaid accrued december 31 2020 totaled approximately 01 million summary company’s rsu activity related information shown following table december 31 2020 aggregate intrinsic values outstanding vested rsus approximately 54 million 19 million respectively representing total pretax intrinsic value based company’s closing class common stock price 12170 december 31 2020 would received rsus holders rsus settled date total intrinsic value rsus settled 2020 2019 2018 approximately 23 million 35 million 18 million respectively upon settlement rsus company issues shares class common stock following table summarizes information rsus outstanding december 31 2020 fair value share issued management stock purchase plan estimated date grant using blackscholesmerton model based following weighted average assumptions riskfree interest rate based upon us treasury yield curve time grant respective expected life rsus expected life estimated period time outstanding rsus volatility calculated using historical data expected dividend yield stock company’s best estimate expected future dividend yield assumptions used determine weighted average grantdate fair value rsus granted 2236 2216 2180 2020 2019 2018 respectively december 31 2020 company total unrecognized compensation costs related unvested stockbased compensation arrangements approximately 132 million total weighted average remaining term 148 years 2020 2019 2018 company recognized compensation costs related stockbased programs 127 million 178 million 138 million respectively 2020 2019 2018 stock compensation expense 09 million recorded cost goods sold 118 million 169 million 129 million respectively recorded selling general administrative expenses 2020 2019 2018 company recorded 21 million 31 million 28 million respectively tax benefit stockbased plans 2020 2019 2018 recognition total stockbased compensation expense impacted basic diluted net income per common share 030 042 032 respectively 14 employee benefit plans company’s domestic employees eligible participate company’s 401k savings plan since january 1 2012 company provided base contribution 2 employee’s salary regardless whether employee participates plan company matches contribution 100 first 4 employee’s contribution company’s match contributions years ended december 31 2020 2019 2018 67 million 68 million 61 million respectively charges europe pension plans approximated 34 million 36 million 39 million years ended december 31 2020 2019 2018 respectively costs relate plans administered certain european subsidiaries benefits calculated according government requirements paid employees upon retirement change employment 15 contingencies environmental remediation accrual disclosure policy company defendant numerous legal matters arising ordinary course operations including involving product liability environmental matters commercial disputes company reviews lawsuits legal proceedings ongoing basis follows appropriate accounting guidance making accrual disclosure decisions company establishes accruals matters company assesses probable loss incurred amount loss reasonably estimated company establish accruals matters company believe probable loss incurred amount loss reasonably estimated company’s assessment whether loss probable based assessment ultimate outcome matter following appeals fasbissued asc 450 “contingencies” event “reasonably possible” “the chance future event events occurring remote less likely” event “remote” “the chance future event events occurring slight” thus references upper end range reasonably possible loss cases company able estimate range reasonably possible loss mean upper end range loss cases company believes risk loss slight may continue exposure loss excess amount accrued possible estimate reasonably possible loss range loss amount accrued matters disclosed estimate aggregated disclosed company records legal costs associated legal contingencies incurred except legal costs associated product liability claims included actuarial estimates used determining product liability accrual december 31 2020 company estimates aggregate amount reasonably possible loss excess amount accrued legal contingencies approximately 62 million pretax respect estimate reasonably possible loss management estimated reasonably possible loss based amount money damages claimed applicable ii allegations factual developments date iii available defenses based allegations andor iv potentially liable parties estimate based upon currently available information subject significant judgment variety assumptions known unknown uncertainties matters underlying estimate change time actual results may vary significantly current estimate event unfavorable outcome one matters ultimate liability may excess amounts currently accrued may material company’s operating results cash flows particular quarterly annual period however based information currently known management believes ultimate outcome matters resolved time likely material adverse effect financial condition company though outcome could material company’s operating results particular period depending part upon operating results period product liability company subject variety potential liabilities connection product liability cases significant volume liability matters company maintains high selfinsured retention limit within product liability general liability coverage company believes generally accordance industry practices product liability cases us management establishes product liability accrual includes legal costs associated accrued claims significant volume liability matters company utilizes thirdparty actuarial valuations incorporate historical trend factors company’s specific claims experience derived loss reports provided thirdparty claims administrators product liability accrual established considering applicable insurance coverage changes nature product liability claims actual settlement amounts could affect adequacy estimates require changes provisions liability estimate ultimate liability may less reported environmental remediation company named potentially responsible party respect limited number identified contaminated sites levels contamination vary significantly site related levels remediation efforts environmental liabilities recorded based probable cost known estimated minimum cost remediation accruals discounted present value unless amount timing expenditures fixed reliably determinable company accrues estimated environmental liabilities based assumptions subject number factors uncertainties circumstances affect reliability precision estimates include identification additional sites environmental regulations level cleanup required technologies available number financial condition contributors remediation time period remediation may occur company recognizes changes estimates new remediation requirements defined new information becomes available chemetco inc superfund site hartford illinois august 2017 watts regulator co whollyowned subsidiary company received “notice environmental liability” chemetco site group “group” alleging potentially responsible party chemetco inc superfund site hartford illinois “site” arranged disposal treatment hazardous substances contained materials sent site resulted release threat release hazardous substances site letter offered watts regulator co opportunity join group participate remedial investigation feasibility study “rifs” portion site watts regulator co joined group september 2017 added march 2018 signatory administrative settlement agreement order consent united states environmental protection agency “usepa” governing completion rifs based information currently known management believes watts regulator co’s share costs rifs likely material adverse effect financial condition company material adverse effect company’s operating results particular period company unable estimate range reasonably possible loss matter damages specified rifs first portion site completed rifs process remainder site yet initiated determine remediation plans implemented costs plans ii total amount material sent site total number potentially responsible parties may agree fund perform remediation determined iii share contribution potentially responsible parties remediation determined iv number years required implement remediation plan acceptable usepa uncertain asbestos litigation company defending approximately 400 lawsuits different jurisdictions alleging injury death result exposure asbestos complaints cases typically name large number defendants identify particular company products source asbestos exposure date discovery failed yield evidence substantial exposure company products judgments entered company litigation lawsuits proceedings claims arising ordinary course operations also pending threatened company 16 financial instruments fair value carrying amounts cash equivalents trade receivables trade payable approximate fair value short maturity financial instruments fair value company’s variable rate debt revolving credit facility approximates carrying value financial instruments company measures certain financial assets liabilities fair value recurring basis including deferred compensation plan assets related liabilities redeemable financial instruments derivatives fair values certain financial assets liabilities determined using following inputs december 31 2020 december 31 2019 1included company’s consolidated balance sheet assets net 2included company’s consolidated balance sheet accrued compensation benefits 3included company’s consolidated balance sheet accrued expenses liabilities 4included company’s consolidated balance sheet noncurrent liabilities relates contingent consideration part acquisition australian valve group pty ltd “avg” table provides summary changes fair value financial assets liabilities measured fair value recurring basis using significant unobservable inputs level 3 period december 31 2019 december 31 2020 connection immaterial acquisition avg completed third quarter 2020 contingent liability 28 million recognized estimate acquisition date fair value contingent consideration liability classified level 3 fair value hierarchy based probability achievement future performance metrics date acquisition observable market failure meet performance metrics would reduce liability zero complete achievement would increase liability maximum contingent consideration 47 million liability december 31 2020 32 million cash equivalents consist instruments remaining maturities three months less date purchase consist primarily money market funds carrying amount reasonable estimate fair value company uses financial instruments time enhance ability manage risk including foreign currency commodity pricing exposures exist part ongoing business operations use derivatives exposes company counterparty credit risk nonperformance market risk related changes currency exchange rates commodity prices company manages exposure counterparty credit risk diversification counterparties company’s counterparties derivative transactions substantial commercial banks significant experience using derivative instruments impact market risk fair value cash flows company’s derivative instruments monitored company restricts use derivative financial instruments hedging activities company enter contracts trading purposes company enter contracts speculative purposes use derivative instruments approved senior management written guidelines interest rate swaps february 12 2016 company entered credit agreement “prior credit agreement” pursuant received funding commitment term loan 300 million revolving commitment “revolver” 500 million facility company could choose either adjusted libor alternative base rate “abr” accordingly company’s earnings cash flows exposed interest rate risk changes adjusted libor order manage company’s exposure changes cash flows attributable fluctuations liborindexed interest payments related company’s floating rate debt company entered two interest rate swaps interest rate swap company received threemonth usdlibor subject 0 floor paid fixed rate 131375 notional amount 2250 million swaps expected mature date prior credit agreement february 12 2021 designated cash flow hedges april 24 2020 company entered new credit agreement new credit agreement amends restates prior credit agreement entirety increasing amount revolving credit available 500 million 800 million extending maturity one additional year february 2022 part new credit agreement libor rate subject 1 floor opposed 0 floor prior credit agreement change libor floor new credit agreement caused interest rate swaps longer considered highly effective offsetting changes cash flow hedged item critical terms new credit agreement longer match hedged item result cash flow hedges longer qualified hedge accounting date execution new credit agreement company subsequently began recognizing marktomarket fair value adjustments monthly basis consolidated statement operations continued expiration date swaps february 12 2021 balance outstanding company’s revolving credit facility december 31 2020 notional amount interest rate swaps therefore balance previously effective portion fair value interest rate swaps recorded comprehensive income 15 million reclassified earnings within interest expense december 31 2020 year ended december 31 2019 loss 39 million recorded accumulated comprehensive loss recognize effective portion fair value interest rate swaps qualified cash flow hedge designated foreign currency hedges company’s foreign subsidiaries transact business including certain intercompany transactions foreign currencies transactions principally purchases sales materials company exposure number foreign currencies including canadian dollar euro chinese yuan company uses layering methodology whereby end quarter company enters forward exchange contracts hedging canadian dollar us dollar hedge 85 forecasted intercompany purchase transactions one company’s canadian subsidiaries company’s us operating subsidiaries next twelve months company uses similar layering methodology entering forward exchange contracts hedging us dollar chinese yuan hedge 60 forecasted intercompany sales transactions one company’s chinese subsidiaries one company’s us operating subsidiaries next twelve months december 31 2020 designated foreign exchange hedge contracts cash flow hedges asc 815 derivatives hedging asc 815 company records effective portion designated foreign currency hedge contracts comprehensive income inventory turns sold thirdparty transaction associated hedged forecasted transaction occurs effective portion related gain loss designated foreign currency hedge reclassified earnings within cost goods sold event notional amount derivatives exceeds forecasted intercompany purchases given month excess hedge position attributed following month’s forecasted purchases however following month’s forecasted purchases cannot absorb excess hedge position current month effective portion hedge recorded comprehensive income reclassified earnings notional amounts outstanding december 31 2020 canadian dollar us dollar contracts us dollar chinese yuan contracts 143 million 50 million respectively combined fair value company’s designated foreign currency hedge contracts outstanding december 31 2020 liability balance 01 million december 31 2020 amount expected reclassified cost goods sold comprehensive income next twelve months programs loss 01 million 17 segment information company operates three geographic segments americas europe apmea segments sells similar products separate financial results reviewed company’s chief operating decisionmaker segment earns revenue income almost exclusively sale company’s products company sells products various end markets around world sales region based upon location entity recording sale see note 4 detail product lines sold region intercompany sales transactions eliminated accounting policies segment described note 2 notes consolidated financial statements following summary company’s significant accounts balances segment reconciled consolidated totals corporate expenses primarily administrative compensation expense compliance costs professional fees including corporaterelated legal audit expenses shareholder services benefit administration costs following includes us net sales us property plant equipment company’s americas segment following includes intersegment sales americas europe apmea 18 accumulated comprehensive loss accumulated comprehensive loss consists following 1 cash flow hedges include interest rate swaps designated foreign currency hedges see note 16 details 19 quarterly financial information unaudited note four quarters may sum full year due rounding 20 subsequent events february 8 2021 company declared quarterly dividend twentythree cents 023 per share outstanding share class common stock class b common stock payable march 15 2021 stockholders record march 1 2021 watts water technologies inc subsidiaries schedule iivaluation qualifying accounts amounts millions exhibit index exhibit description 31 restated certificate incorporation amended incorporated reference registrant’s quarterly report form 10q quarter ended june 30 2019 file 001 11499 32 amended restated bylaws incorporated reference registrant’s current report form 8k dated july 27 2015 file 00111499 4† description registrant’s class common stock 91 amended restated george b horne voting trust agreement1997 dated september 14 1999 incorporated reference registrant’s annual report form 10k year ended june 30 1999 file 00111499 101 supplemental compensation agreement effective september 1 1996 registrant timothy p horne incorporated reference registrant’s annual report form 10k year ended june 30 1996 file 00111499 102 amendment 1 dated july 25 2000 supplemental compensation agreement effective september 1 1996 registrant timothy p horne incorporated reference registrant’s quarterly report form 10q quarter ended september 30 2000 file 001 11499 103 amendment 2 dated october 23 2002 supplemental compensation agreement effective september 1 1996 registrant timothy p horne incorporated reference registrant’s annual report form 10k year ended december 31 2002 file 001 11499 104 amendment 3 dated august 18 2015 supplemental compensation agreement effective september 1 1996 registrant timothy p horne incorporated reference registrant’s current report form 8k dated august 18 2015 file 001 11499 105 amended restated stock restriction agreement dated october 30 1991 incorporated reference registrant’s current report form 8k dated november 14 1991 file 00111499 106 amendment dated august 26 1997 amended restated stock restriction agreement dated october 30 1991 incorporated reference registrant’s annual report form 10k year ended june 30 1997 file 00111499 107 registration rights agreement dated july 25 1986 incorporated reference registrant’s form s1 336515 part second amendment form s1 dated august 21 1986 108† form indemnification agreement registrant certain directors officers registrant 109 watts water technologies inc executive officer incentive bonus plan incorporated reference registrant’s current report form 8k dated february 6 2019 file 00111499 1010 nonemployee director compensation arrangements incorporated reference registrant’s annual report form 10k year ended december 31 2018 file 00111499 1011 watts water technologies inc management stock purchase plan amended restated november 4 2019 incorporated reference registrant’s annual report form 10k year ended december 31 2019 file 001 11499 1012 watts water technologies inc second amended restated 2004 stock incentive plan incorporated reference registrant’s current report form 8k dated may 15 2013 file 00111499 1013 form nonqualified stock option agreement watts water technologies inc second amended restated 2004 stock incentive plan incorporated reference registrant’s quarterly report form 10q quarter ended june 30 2013 file 001 11499 1014 form restricted stock award agreement employees watts water technologies inc second amended restated 2004 stock incentive plan incorporated reference registrant’s quarterly report form 10q quarter ended july 1 2018 file 00111499 exhibit description 1015 form deferred stock award agreement watts water technologies inc second amended restated 2004 stock incentive plan incorporated reference registrant’s quarterly report form 10q quarter ended march 31 2019 file 00111499 1016 form 2018 performance stock unit award agreement watts water technologies inc second amended restated 2004 stock incentive plan incorporated reference registrant’s quarterly report form 10q quarter ended april 1 2018 file 00111499 1017 form 2019 performance stock unit award agreement watts water technologies inc second amended restated 2004 stock incentive plan incorporated reference registrant’s quarterly report form 10q quarter ended march 31 2019 file 00111499 1018 form 2020 performance stock unit award agreement watts water technologies inc second amended restated 2004 stock incentive plan incorporated reference registrant’s quarterly report form 10q quarter ended march 29 2020 file 00111499 1019 form 2014 nonqualified stock option agreement watts water technologies inc second amended restated 2004 stock incentive plan incorporated reference registrant’s quarterly report form 10q quarter ended june 29 2014 file 001 11499 1020 watts water technologies inc executive severance plan amended restated february 8 2018 incorporated reference registrant’s quarterly report form 10q quarter ended july 1 2018 file 00111499 1021 credit agreement dated february 12 2016 among registrant certain subsidiaries registrant borrowers jpmorgan chase bank na administrative agent swing line lender lc issuer lenders referred therein incorporated reference registrant’s current report form 8k dated february 9 2016 file 00111499 1022 guaranty dated february 12 2016 registrant subsidiaries registrant set forth therein favor jpmorgan chase bank na lenders referred therein incorporated reference registrant’s current report form 8k dated february 9 2016 file 00111499 1023 amended restated credit agreement dated april 24 2020 among registrant subsidiary borrowers party thereto lenders party thereto jp morgan chase bank na administrative agent bank america na keybank national association wells fargo bank national association td bank na cosyndication agents pnc bank national association us bank national association codocumentation agents incorporated reference registrant’s current report form 8k dated april 24 2020 file 00111499 1024 amended restated guaranty dated april 24 2020 registrant subsidiaries registrant set forth therein favor jpmorgan chase bank na lenders referred therein incorporated reference registrant’s current report form 8k dated april 24 2020 file 001 11499 1025 note purchase agreement dated june 18 2010 registrant purchasers named schedule thereto relating registrants 75000000 505 senior notes due june 18 2020 incorporated reference registrant’s current report form 8k dated june 18 2010 file 00111499 1026 form 505 senior note due june 18 2020 incorporated reference registrant’s current report form 8k dated june 18 2010 file 00111499 1027 form subsidiary guaranty connection registrant’s 505 senior notes due june 18 2020 including form joinder subsidiary guaranty incorporated reference registrant’s current report form 8k dated june 18 2010 file 00111499 21† subsidiaries 23† consent kpmg llp independent registered public accounting firm 311† certification principal executive officer pursuant rule 13a14a rule 15d14a securities exchange act 1934 amended exhibit description 312† certification principal financial officer pursuant rule 13a14a rule 15d14a securities exchange act 1934 amended 321†† certification principal executive officer pursuant 18 usc section 1350 322†† certification principal financial officer pursuant 18 usc section 1350 101ins† inline xbrl instance document 101sch† inline xbrl taxonomy extension schema document 101cal† inline xbrl taxonomy extension calculation linkbase document 101def† inline xbrl taxonomy extension definition linkbase document 101lab† inline xbrl taxonomy extension label linkbase document 101pre† inline xbrl taxonomy extension presentation linkbase document cover page interactive data file formatted inline xbrl contained exhibit 101 management contract compensatory plan arrangement †filed herewith ††furnished herewith attached exhibit 101 report following formatted inline xbrl extensible business reporting language consolidated statements operations years ended december 31 2020 2019 2018 ii consolidated statements comprehensive loss income years ended december 31 2020 2019 2018 iii consolidated balance sheets december 31 2020 december 31 2019 iv consolidated statements stockholders’ equity years ended december 31 2020 2019 2018 v consolidated statements cash flows years ended december 31 2020 2019 2018 vi notes consolidated financial statements signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized watts water technologies inc robert j pagano jr robert j pagano jr chief executive officer president dated february 18 2021 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated signature title date robert j pagano jr chief executive officer president director february 18 2021 robert j pagano jr principal executive officer shashank patel chief financial officer february 18 2021 shashank patel principal financial officer virginia halloran chief accounting officer february 18 2021 virginia halloran principal accounting officer christopher l conway director february 13 2021 christopher l conway michael j dubose director february 10 2021 michael j dubose david dunbar director february 14 2021 david dunbar louise k goeser director february 11 2021 louise k goeser jes munk hansen director february 12 2021 jes munk hansen w craig kissel chairperson board director february 10 2021 w craig kissel joseph noonan director february 10 2021 joseph noonan merilee raines director february 15 2021 merilee raines joseph w reitmeier director february 11 2021 joseph w reitmeieritem 15 exhibits financial statement schedules a1 financial statements following financial statements included separate section report commencing page numbers specified report independent registered public accounting firm consolidated statements operations years ended december 31 2005 2004 2003 consolidated balance sheets december 31 2005 2004 consolidated statements stockholders’ equity years ended december 31 2005 2004 2003 consolidated statements cash flows years ended december 31 2005 2004 2003 notes consolidated financial statements 5990 a2 schedules schedule iivaluation qualifying accounts years ended december 31 2005 2004 2003 required schedules provision made applicable accounting regulations securities exchange commission included notes consolidated financial statements a3 exhibits listed exhibit index immediately preceding exhibits filed part annual report form 10k signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated report independent registered public accounting firm board directors stockholders watts water technologies inc audited accompanying consolidated balance sheets watts water technologies inc subsidiaries december 31 2005 2004 related consolidated statements operations stockholders’ equity cash flows years threeyear period ended december 31 2005 connection audits consolidated financial statements also audited financial statement schedule consolidated financial statements financial statement schedule responsibility company’s management responsibility express opinion consolidated financial statements financial statement schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position watts water technologies inc subsidiaries december 31 2005 2004 results operations cash flows years threeyear period ended december 31 2005 conformity us generally accepted accounting principles also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states effectiveness watts water technologies inc’s internal control financial reporting december 31 2005 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso report dated march 1 2006 expressed unqualified opinion management’s assessment effective operation internal control financial reporting boston massachusetts march 1 2006 watts water technologies inc subsidiaries consolidated statements operations amounts thousands except per share information accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated balance sheets amounts thousands except share information accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated statements stockholders’ equity amounts thousands except share information accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated statements cash flows amounts thousands accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries notes consolidated financial statements 1 description business watts water technologies inc company designs manufactures sells extensive line water safety flow control products primarily water quality water safety water flow control water conservation markets located predominantly north america europe china 2 accounting policies principles consolidation consolidated financial statements include accounts company majority wholly owned subsidiaries upon consolidation significant intercompany accounts transactions eliminated cash equivalents cash equivalents consist highly liquid investments maturities three months less date original issuance investment securities investment securities december 31 2004 consisted auction rate certificates whose underlying investments aaa rated municipal bonds certificates bought sold auction reset dates 35 days certificates traded par value approximates market value december 31 2004 company classifies debt securities available sale availableforsale securities recorded fair value unrealized holding gains losses net related tax effect availableforsale securities excluded earnings reported separate component comprehensive income realized gains losses sale availableforsale securities determined specificidentification basis decline market value availableforsale security cost deemed otherthantemporary results reduction carrying amount fair value impairment charged earnings new cost basis security established determine whether impairment otherthantemporary company considers whether ability intent hold investment market price recovery considers whether evidence indicating cost investment recoverable outweighs evidence contrary evidence considered assessment includes reasons impairment severity duration impairment changes value subsequent yearend forecasted performance investee premiums discounts amortized accreted life related availableforsale security adjustment yield using effectiveinterest method dividend interest income recognized earned allowance doubtful accounts allowance doubtful accounts includes reserves bad debts sales returns allowances company analyzes aging accounts receivable individual accounts receivable historical bad debts concentration receivables customer credit worthiness current economic trends changes customer payment terms company specifically analyzes individual accounts receivable watts water technologies inc subsidiaries notes consolidated financial statements continued establishes specific reserves financially troubled customers addition factors developed certain regions utilizing historical trends sales returns allowances derive reserve returns allowances concentration credit company sells products diversified customer base therefore significant concentrations credit risk except approximately 107 103 111 company’s total sales 2005 2004 2003 respectively one company sales transacted within north america geographic segment inventories stated lower cost primarily firstin firstout method market value determined replacement cost net realizable value historical experience used basis determining reserve excess obsolete inventories goodwill intangible assets goodwill recorded consideration paid acquisitions exceeds fair value net tangible intangible assets acquired goodwill intangible assets indefinite useful lives amortized rather tested annually impairment test performed october 30 2005 impairment goodwill longlived assets goodwill intangible assets indefinite lives tested annually impairment accordance provisions fas 142 company’s impairment review based discounted cash flow approach reporting unit level requires management judgment respect revenue expense growth rates changes working capital selection use appropriate discount rate company uses judgment assessing whether assets may become impaired annual impairment tests indicators unexpected adverse business conditions economic factors unanticipated technological change competitive activities loss key personnel acts governments courts may signal asset become impaired intangible assets estimable lives longlived assets reviewed impairment whenever events changes circumstances indicate carrying amount asset group may recoverable accordance financial accounting standards board statement 144 “accounting impairment disposal longlived assets” fas 144 recoverability intangible assets estimable lives longlived assets measured comparison carrying amount asset group future net undiscounted pretax cash flows expected generated asset group comparisons indicate asset recoverable impairment loss recognized amount carrying amount asset group exceeds related estimated fair value estimated fair value based either discounted future pretax operating cash flows appraised values depending nature asset company determines discount rate analysis based expected internal rate return related business allocate interest charges asset group measured judgment required estimate discounted future operating cash flows watts water technologies inc subsidiaries notes consolidated financial statements continued changes carrying amount goodwill follows intangible assets include following presented “other assets net” consolidated balance sheets aggregate amortization expense amortized intangible assets year ended december 31 2005 2004 2003 2576000 1761000 763000 respectively additionally future amortization expense intangible assets approximates 5861000 2006 5284000 2007 5135000 2008 4860000 2009 4842000 2010 amortization expense provided straightline basis estimated useful lives intangible assets weightedaverage remaining life total amortizable intangibles 101 years patents amortizable intangibles weightedaverage remaining lives 115 years 100 years respectively intangible assets subject amortization primarily include trademarks unpatented technology property plant equipment property plant equipment recorded cost depreciation provided straightline basis estimated useful lives assets range 10 40 years buildings improvements 3 15 years machinery equipment income taxes income taxes accounted asset liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement watts water technologies inc subsidiaries notes consolidated financial statements continued carrying amounts existing assets liabilities respective tax bases operating loss tax credit carry forwards deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized income period includes enactment date foreign currency translation financial statements subsidiaries located outside united states generally measured using local currency functional currency balance sheet accounts including goodwill foreign subsidiaries translated united states dollars yearend exchange rates income expense items translated weighted average exchange rates period net translation gains losses included comprehensive income separate component stockholders’ equity company provide us income taxes foreign currency translation adjustments since provide taxes undistributed earnings foreign subsidiaries gains losses foreign currency transactions subsidiaries included net earnings stockbased compensation company accounts stockbased compensations accordance accounting principles board opinion 25 “accounting stock issued employees” apb 25 related interpretations company records stockbased compensation expense associated management stock purchase plan due discount market price stockbased compensation expense amortized expense straightline basis vesting period following table illustrates effect reported net income earnings per common share company applied fair value method measure stockbased compensation described fully note 13 required disclosure provisions financial accounting standards board 123 “accounting stockbased compensation” fas 123 amended financial accounting standards board 148 “accounting stockbased compensation transition disclosure” fas 148 watts water technologies inc subsidiaries notes consolidated financial statements continued net income per common share basic net income per common share calculated dividing net income weighted average number common shares outstanding calculation diluted earnings per share assumes conversion dilutive securities see note 13 net income number shares used compute net earnings per share basic assuming full dilution reconciled derivative financial instruments normal course business company manages risks associated commodity prices foreign exchange rates interest rates variety strategies including use hedging transactions executed accordance company’s policies company’s hedging transactions include limited use various derivative financial commodity instruments matter policy company use derivative instruments unless underlying exposure change value derivative instruments would substantially offset opposite change value underlying hedged items company use derivative instruments trading speculative purposes using qualifying criteria defined financial accounting standards board statement 133 “accounting derivative instruments hedging activities” fas 133 derivative instruments designated accounted either hedge recognized asset liability fair value hedge forecasted transaction cash flow hedge fair value hedge effective ineffective portions change fair value derivative instrument along adjustment carrying amount hedged item fair value changes attributable hedged risk recognized earnings cash flow hedge changes fair value derivative instrument highly effective deferred accumulated comprehensive income loss underlying hedged item recognized earnings ineffective portion fair value changes qualifying hedges recognized earnings immediately fair value cash flow hedge cease qualify hedge accounting terminated would continue carried balance sheet fair value settled hedge accounting would discontinued prospectively forecasted transaction longer probable occurring amounts previously deferred accumulated comprehensive income would recognized immediately earnings occasion company may enter derivative instrument hedge accounting required entered offset changes fair value underlying transaction required recognized earnings natural hedge instruments watts water technologies inc subsidiaries notes consolidated financial statements continued reflected consolidated balance sheets fair value changes fair value recognized earnings certain forecasted transactions primarily intercompany sales united states canada assets exposed foreign currency risk company monitors foreign currency exposures ongoing basis maximize overall effectiveness foreign currency hedge positions 2005 2004 company used foreign currency forward contracts means hedging exposure foreign currency risks company’s foreign currency forwards designated qualify cash flow hedges criteria fas 133 fas 133 requires changes fair value derivatives qualify cash flow hedges recognized comprehensive income ineffective portion derivative’s change fair value recognized immediately earnings portions company’s outstanding debt exposed interest rate risks company monitors interest rate exposures ongoing basis maximize overall effectiveness interest rates 2005 2004 company used interest rate swap means hedging exposure interest rate risks shipping handling shipping handling costs included selling general administrative expense amounted 28123000 25110000 22111000 years ended december 31 2005 2004 2003 respectively research development research development costs included selling general administrative expense amounted 11576000 9942000 9178000 years ended december 31 2005 2004 2003 respectively revenue recognition company recognizes revenue following criteria met company entered binding agreement product shipped title passes sales price customer fixed determinable collectability reasonably assured provisions estimated returns allowances made time sale recorded reduction sales included allowance doubtful accounts consolidated balance sheets company records provisions sales incentives primarily volume rebates adjustment net sales accordance financial accounting standards board’s emerging issues task force eitf issue 0014 “accounting certain sales incentives” eitf 0014 eitf issue 019 “accounting consideration given vendor customer reseller vendor’s products” basis presentation certain amounts 2004 reclassified permit comparison 2005 presentation estimates preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect reported watts water technologies inc subsidiaries notes consolidated financial statements continued amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates new accounting standards november 2004 financial accounting standards board fasb issued financial accounting standards board statement 151 “inventory costs” fas 151 fas 151 amends guidance accounting research bulletin 43 chapter 4 “inventory pricing” clarify accounting inventory costs provisions statement effective fiscal years beginning june 15 2005 although early application permitted company expect impact statement material consolidated financial statements december 2004 fasb issued final standard accounting sharebased payments sbp financial accounting standards board statement 123r fas 123r requires companies expense value employee stock options similar awards statement applies outstanding unvested sbp awards company’s adoption date securities exchange commission delayed implementation fiscal years beginning june 15 2005 therefore company implemented fas 123r effective january 1 2006 utilizing modified prospective method requires recognizing expense options remaining vesting period portion options’ fair value attributable vested awards prior adoption never recognized impact statement company’s results operations based equity instruments outstanding december 31 2005 fiscal year ending december 31 2006 expected approximately 003 per share december 2004 fasb issued financial accounting standards board statement 153 “exchanges nonmonetary assets amendment apb opinion 29 accounting nonmonetary transactions” fas 153 amendments made fas 153 based principle exchanges nonmonetary assets measured based fair value assets exchanged amendments eliminate narrow exception nonmonetary exchanges similar productive assets replace broader exception exchanges nonmonetary assets commercial substance previously opinion 29 required accounting exchange productive asset similar productive asset equivalent interest similar productive asset based recorded amount asset relinquished statement effective nonmonetary asset exchanges occurring fiscal periods beginning june 15 2005 earlier application permitted nonmonetary asset exchanges occurring fiscal periods beginning date issuance provisions statement shall applied prospectively january 2006 march 2005 fasb issued fasb interpretation 47 “accounting conditional asset retirement obligations” fin 47 fin 47 interpretation fasb statement 143 “accounting asset retirement obligations” fas 143 serves clarify entity required recognize liability fair value conditional asset retirement obligation incurred liability’s fair value reasonably estimated fin 47 also clarifies entity would sufficient information reasonably estimate liability fin 47 effective later end fiscal years ending december 15 2005 company concluded fin 47 material impact consolidated financial statements december 31 2005 may 2005 fasb issued financial accounting standards board statement 154 “accounting changes error corrections”fas 154 replacement apb opinion 20 watts water technologies inc subsidiaries notes consolidated financial statements continued “accounting changes” replacement fasb statement 3 “reporting accounting changes interim financial statements” fas 154 changes accounting reporting change accounting principle statement requires retrospective application prior periods financial statements voluntary changes accounting principles changes required new accounting standards standard include specific transition provisions unless impracticable statement effective accounting changes corrections errors fiscal years beginning december 15 2005 earlier application permitted accounting changes corrections errors fiscal years beginning june 1 2005 3 discontinued operations september 1996 company divested municipal water group businesses included henry pratt james jones company edward barber company ltd costs expenses related municipal water group 2005 2004 relate legal settlement costs associated james jones litigation see note 15 company also recorded expense payments made selling shareholders james jones company pursuant company’s original purchase agreement years ended december 31 2005 2004 2003 company recorded net tax charge 91000 72000 446000 respectively 2004 company divested interest minorityowned subsidiary jameco international llc jameco llc previously consolidated result financial accounting standards board interpretation 46 “consolidation variable interest entitiesrevised” fin 46r jameco llc recorded north american segment management determined jameco llc longterm strategic fit company decided divest interest result company recorded impairment charge net tax 739000 write investment estimated fair value 250000 additionally years ended december 31 2004 2003 company recorded net loss 54000 net income 54000 respectively operations jameco llc jameco llc imports sells vitreous china imported faucets faucet parts imported bathroom accessories north american home improvement retail market condensed operating statements balance sheets discontinued operations summarized watts water technologies inc subsidiaries notes consolidated financial statements continued assets liabilities 2005 2004 primarily relate reserves james jones litigation statements cashflows 2005 2004 2003 primarily relate operating activities 4 restructuring charges company recorded charges net recoveries 2545000 2968000 1655000 2005 2004 2003 respectively expenses incurred 2005 primarily accelerated depreciation planned closure us manufacturing plant reduction estimated useful lives certain manufacturing equipment net recoveries european severance related charges asset writedowns expenses incurred 2004 primarily accelerated depreciation planned closure us manufacturing plant reduction estimated useful lives certain manufacturing equipment severance costs expenses incurred 2003 primarily accelerated depreciation asset writedowns severance costs asset writedowns consist primarily writeoffs inventory related product lines company discontinued part restructuring plan primarily recorded cost goods sold accelerated depreciation based shorter remaining estimated useful lives certain fixed assets primarily recorded cost goods sold costs consist primarily removal shipping costs associated relocation manufacturing equipment primarily recorded cost goods sold expensed incurred severance costs recorded restructuring charges details company’s manufacturing restructuring plan december 31 2005 follows watts water technologies inc subsidiaries notes consolidated financial statements continued 5 business acquisitions following acquisitions accounted purchase method accounting accordingly results included company’s consolidated results operation since respective dates acquisition december 28 2005 whollyowned subsidiary company acquired 100 stock dormont manufacturing company dormont located export pennsylvania approximately 94875000 net cash acquired approximately 1505000 preliminary allocations goodwill intangible assets approximately 43227000 35945000 respectively amount recorded intangible assets primarily customer relationships estimated 13year lives trade names indefinite lives dormont provides flexible stainless steel connectors natural liquid propane gas dormont works appliance oem’s provide internal component assemblies private label gas connectors sold oem brand appliance multiple leading retail chains dormont also supplies residential gas connectors multiple trade channels home improvement retailers following pro forma consolidated results operations prepared though acquisition dormont occurred beginning periods shown pro forma information however necessarily indicative results operations would achieved acquisition occurred beginning periods presented necessarily indicative future results december 2 2005 whollyowned subsidiary company acquired 100 stock core industries inc core spx corporation approximately 45000000 cash core consists febco mueller steam specialty polyjet valves product lines preliminary allocations goodwill intangible assets approximately 11272000 14528000 respectively amount recorded intangible assets primarily trade names indefinite lives customer relationships estimated 12year lives febco manufacturer backflow prevention valves strong presence residential commercial landscape irrigation mueller steam specialty allows us expand large diameter commercial strainer check valves polyjet valves offers customized sleeve valve used severe service applications provide precise flow pressure control november 4 2005 whollyowned subsidiary company acquired assets flexflow tubing llp flexflow located langley british columbia canada approximately 6200000 preliminary allocations goodwill intangible assets approximately 3180000 868000 respectively amount recorded intangible assets primarily customer relationships estimated 12year lives flexflow manufactures pex tubing potable nonpotable applications watts water technologies inc subsidiaries notes consolidated financial statements continued july 8 2005 whollyowned subsidiary company acquired water connector business donald e savard company savard asset purchase transaction approximately 3680000 allocations goodwill intangible assets approximately 1350000 1750000 respectively amount recorded intangible assets primarily trade names indefinite lives customer relationships 14year lives july 5 2005 whollyowned subsidiary company acquired 100 outstanding stock microflex nv microflex located rotselaar belgium approximately 14900000 net cash acquired approximately 875000 allocations goodwill intangible assets approximately 6507000 5315000 respectively amount recorded intangible assets primarily customer relationships 7year lives trade names indefinite lives microflex produces distributes flexible preinsulated waterproof pex pipes hot cold water transport well range accessory products including couplings caps insulation kits hvac water protection markets june 20 2005 whollyowned subsidiary company acquired water softener business alamo water refiners inc alamo located san antonio texas asset purchase transaction approximately 5100000 allocation intangible assets approximately 285000 primarily trade name indefinite life allocation goodwill water softener products alamo consistent company’s theme water quality provide many synergistic opportunities utilized conjunction existing water filtration water quality businesses may 11 2005 whollyowned subsidiary company acquired 100 outstanding stock electro controls ltd electro controls located hounslow united kingdom approximately 11737000 net cash acquired approximately 5014000 allocations goodwill intangible assets approximately 5788000 315000 respectively amount recorded intangible assets primarily trade names indefinite lives electro controls designs assembles range electrical controls hvac market sales primarily united kingdom january 5 2005 whollyowned subsidiary company acquired 100 outstanding stock hf scientific inc hf located fort myers florida approximately 7260000 cash plus 800000 assumed debt allocations goodwill intangible assets approximately 4178000 2660000 respectively amount recorded intangible assets primarily customer relationships 15year lives trade names indefinite lives hf manufactures distributes line instrumentation equipment test kits chemical reagents used monitoring water quality variety applications january 4 2005 whollyowned subsidiary company acquired substantially assets sea tech inc sea tech located wilmington north carolina approximately 10100000 cash allocations goodwill intangible assets approximately 6505000 3033000 respectively amount recorded intangible assets primarily customer relationships 15year lives trade names indefinite lives sea tech provides costeffective solutions fluidic connection needs sea tech offers wide range standard custom quick connect fittings valves manifolds pex tubing designed address specific customer requirements watts water technologies inc subsidiaries notes consolidated financial statements continued certain current prior years acquisition agreements contain either earnout provision put feature remaining common stock yet purchased company 2005 company accrued approximately 1500000 earnout costs prior year acquisition also paid 2005 calculations typically based multiple future gross margins operating earnings defined agreements amounts contingent consideration determinable beyond reasonable doubt therefore liabilities established earnouts payments accounted additional purchase price 6 accumulated comprehensive income loss comprehensive income loss consist following 7 inventories net inventories consist following finished goods 15423000 14549000 december 31 2005 2004 respectively consigned watts water technologies inc subsidiaries notes consolidated financial statements continued 8 property plant equipment property plant equipment consists following 9 income taxes significant components company’s deferred income tax liabilities assets follows provision income taxes continuing operations based following pretax income watts water technologies inc subsidiaries notes consolidated financial statements continued provision income taxes continuing operations consists following actual income taxes reported continuing operations different would computed applying federal statutory tax rate income continuing operations income taxes reasons difference follows december 31 2005 company foreign net operating loss carry forwards 13300000 income tax purposes 12500000 losses carried forward indefinitely 800000 losses expire 2008 net operating losses consist 10400000 related german operations 1700000 austrian operations 400000 related swedish operations 800000 related chinese operations company provide valuation allowance december 31 2005 provided 838000 december 31 2004 portion net operating loss carry forwards company’s earnings related german operations measurably improved therefore company believes valuation allowance longer necessary company believes likely able recover deferred tax assets watts water technologies inc subsidiaries notes consolidated financial statements continued undistributed earnings company’s foreign subsidiaries amounted approximately 163100000 december 31 2005 earnings considered indefinitely reinvested accordingly provision us federal state income taxes recorded thereon upon distribution earnings form dividends otherwise company subject withholding taxes payable various foreign countries determination amount us income tax liability would incurred practicable complexities associated hypothetical calculation however unrecognized foreign tax credits would available reduce portion us income tax liability withholding taxes approximately 2140000 would payable upon remittance previously unremitted earnings december 31 2005 american job creation act 2004 ajca signed federal law october 22 2004 ajca contain onetime foreign dividend repatriation provision provides 85 special deduction respect certain qualifying dividends foreign subsidiaries limited period company repatriate dividends foreign affiliates provision 10 accrued expenses liabilities accrued expenses liabilities consist following watts water technologies inc subsidiaries notes consolidated financial statements continued 11 financing arrangements longterm debt consists following principal payments next five years thereafter due follows thousands 200613635 2007355 2008324 2009167500 201050171 thereafter75000 company maintains letters credit guarantee performance payment third parties accordance specified terms conditions amounts outstanding approximately 48651000 december 31 2005 42570000 december 31 2004 company’s letters credit primarily associated insurance coverage lesser extent foreign purchases company’s letters credit generally expire within one year issuance drawn revolving credit facility increase primarily associated insurance coverage instruments may exist expire without drawn therefore necessarily represent future cash flow obligations closing dormont acquisition dormont longterm debt outstanding 8900000 form two series taxable variable rate demand bonds 1998 series 1500000 outstanding 2000 series 7400000 outstanding due provisions trust agreements could redeemed dates subsequent closing bonds secured letter credit bank maintained security interest assets dormont condition purchase gain bank’s consent sale dormont company dormont’s former owners required establish cash collateral account bonds amount equal potential obligation dormont bank letter credit reimbursement agreements entire obligation bonds approximates 9096000 represents 8900000 bond principal plus interest watts water technologies inc subsidiaries notes consolidated financial statements continued related fees closing portion dormont purchase price placed cash collateral account guarantee payment company recorded escrow deposit prepaid expenses assets december 31 2005 1998 series bonds repaid full january 17 2006 2000 series bonds repaid full february 1 2006 former owners using cash collateral account september 23 2004 company entered unsecured revolving credit facility syndicate banks revolving credit facility revolving credit facility provides multicurrency unsecured borrowings standby letters credit 300000000 expires september 2009 borrowings outstanding revolving credit facility bear interest fluctuating rate per annum applicable percentage equal case eurocurrency rate loans british bankers association libor rate plus applicable percentage 0875 based company’s current consolidated leverage ratio debt rating ii case base rate loans swing line loans higher federal funds rate plus 05 b annual rate interest announced bank america na “prime rate” 2005 average interest rate revolving credit facility us dollar borrowings approximately 50 euro based borrowings approximately 27 revolving credit facility replaced unsecured revolving credit facility provided revolving credit agreement dated february 28 2002 revolving credit facility used pay debt existed previous credit facility expire february 2005 revolving credit facility includes operational financial covenants customary facilities type including among others restrictions additional indebtedness liens investments maintenance certain leverage ratios december 31 2005 company compliance covenants related revolving credit facility company 100096000 unused potentially available credit revolving credit facility december 31 2005 may 15 2003 company completed private placement 125000000 senior unsecured notes consisting 50000000 principal amount 487 senior notes due 2010 75000000 principal amount 547 senior notes due 2013 company used net proceeds private placement purchase treasury securities repay 75000000 principal amount 8375 notes due december 2003 additional net proceeds used repay approximately 32000000 outstanding previous revolving credit facility balance net proceeds used general corporate purposes payment interest senior unsecured notes due semiannually may 15th november 15th year senior unsecured notes issued watts water technologies inc pari passu revolving credit facility subsidiary level senior unsecured notes allow company debt senior notes amount 150000000 plus 5 stockholders’ equity ii debt pari passu junior senior unsecured notes extent company maintains compliance 200 100 fixed charge coverage ratio notes include prepayment provision might require makewhole payment note holders payment dependent upon level respective treasuries notes include customary terms conditions including events default effective july 1 2005 company entered threeyear interest rate swap counter party notional amount 25000000 outstanding revolving credit facility company swapped threemonth euribor plus 06 fixed rate 302 company designated swap hedge using cash flow method december 31 2005 fair value swap approximately 484000 watts water technologies inc subsidiaries notes consolidated financial statements continued 12 common stock class common stock class b common stock equal dividend liquidation rights share company’s class common stock entitled one vote matters submitted stockholders share class b common stock entitled ten votes matters shares class b common stock convertible shares class common stock onetoone basis option holder december 31 2005 company reserved total 4153065 class common stock issuance stockbased compensation plans 7343880 shares conversion class b common stock class common stock 13 stockbased compensation four stock option plans key employees outside directors granted currently outstanding incentive stock options isos nonqualified stock options nsos purchase company’s class common stock one plan 2004 stock incentive plan currently available grant new options old plan become exercisable fiveyear period rate 20 per year expire ten years date grant 2004 stock incentive plan options become exercisable fouryear period rate 25 per year expire ten years grant date isos nsos granted plans exercise prices less 100 50 fair market value common stock date grant respectively december 31 2005 2485000 shares class common stock authorized future grants options company’s stock option plans following summary stock option activity related information watts water technologies inc subsidiaries notes consolidated financial statements continued following table summarizes information options outstanding december 31 2005 company issued 5616 shares restricted stock directors vest three years fair market price 2671 per share amounting approximately 150000 deferred compensation restricted stock awards amortized expense straightline basis vesting period 2004 company issued 32133 shares restricted stock directors including company’s chief executive officer vest three years fair market price 2500 2650 per share amounting approximately 805000 deferred compensation restricted stock awards amortized expense straightline basis vesting period company also management stock purchase plan allows granting restricted stock units rsus key employees purchase 1000000 shares class common stock 67 fair market value date grant rsus vest annually threeyear period date grant difference rsu price fair market value date grant amortized compensation expense ratably vesting period december 31 2005 328061 rsus outstanding dividends declared rsus paid individuals remain unpaid december 31 2005 total approximately 162000 deferred compensation restricted stock rsu plans december 31 2005 anticipated expensed follows 2006 1016000 2007 574000 company elected follow apb 25 related interpretations accounting stockbased compensation addition company provides pro forma disclosure stockbased compensation measured fair value requirements fas 123 pro forma disclosures calculated awards granted june 30 1995 provided footnote 2 required fas 148 weighted average grant date fair value options granted 1190 901 594 years ending december 31 2005 2004 2003 respectively also weighted average grant date fair value rsus related management stock purchase plan 1260 841 539 years ending december 31 2005 2004 2003 respectively fair value company’s stockbased awards employees used reconciliation note 2 estimated using blackscholes option pricing model following assumptions watts water technologies inc subsidiaries notes consolidated financial statements continued fair value company’s management stock purchase plan awards employees used reconciliation note 2 estimated using blackscholes option pricing model following assumptions 14 employee benefit plans company sponsors funded unfunded defined benefit pension plans covering substantially domestic employees benefits based primarily years service employees’ compensation funding policy company plans contribute annual amount exceed maximum amount deducted federal income tax purposes company uses september 30 measurement date plans funded status defined benefit plans amounts recognized balance sheet follows watts water technologies inc subsidiaries notes consolidated financial statements continued amounts recognized statement financial position follows information pension plans accumulated benefit obligation excess plan assets follows components net periodic benefit cost follows additional information assumptions weightedaverage assumptions used determine benefit obligations watts water technologies inc subsidiaries notes consolidated financial statements continued weightedaverage assumptions used determine net periodic benefit costs discount rates selected based upon rates return measurement date utilizing benchmark pension discount rates currently available expected available period maturity pension benefits selecting expected longterm rate return assets company considers average rate earnings expected funds invested provide benefits plan includes considering trust’s asset allocation expected returns likely earned life plan basis consistent prior year plan assets weighted average asset allocations asset category follows company’s written retirement plan investment policy sets forth investment policy objectives constraints watts water technologies inc pension plan retirement plan investment policy set forth pension plan committee defines general investment principles directs investment management policy addressing preservation capital risk aversion adherence investment discipline investment managers make reasonable effort control risk evaluated quarterly commonly accepted benchmarks ensure risk assumed commensurate given investment style objectives portfolio designed achieve balanced return current income modest growth capital achieving returns excess rate inflation investment horizon order preserve purchasing power plan assets plan assets required invested liquid securities derivative investments allowed prohibited investments include limited following commodities futures contracts private placements options limited partnerships venturecapital investments real estate properties interestonly io principalonly po residual tranche cmos watts water technologies inc stock prohibited transactions include limited following short selling margin transactions watts water technologies inc subsidiaries notes consolidated financial statements continued allowable assets include cash equivalents fixed income securities equity securities mutual funds gics specific guidelines regarding allocation assets follows equities shall comprise 25 75 total portfolio fixed income shall comprise 30 65 investment performance monitored regular basis investments reallocated stay within specific guidelines equityfixed income allocation 5545 preferred securities one company government agency exceed 10 total fund 20 total fund invested one industry individual treasury securities may represent 50 total fund total allocation treasury bonds notes may represent 100 plan’s aggregate bond position cash flows information related company’s pension funds cash flow follows contributions made january 2006 approximated 3100000 contributions expected made 2006 approximate 120000 expected benefit payments paid pension plans follows additionally substantially company’s domestic employees eligible participate certain 401k savings plans company matches specified percentage employee contributions subject certain limitations company’s match contributions included selling general administrative expense years ended december 31 2005 2004 2003 423000 421000 300000 respectively charges european pension plans approximated 2000000 1900000 1400000 years ended december 31 2005 2004 2003 respectively costs relate plans administered certain european subsidiaries benefits calculated according government requirements paid employees upon retirement change employment watts water technologies inc subsidiaries notes consolidated financial statements continued company entered supplemental compensation agreement timothy p horne september 1 1996 per agreement upon ceasing employee company mr horne must make available requested board work minimum 300 500 hours per year consultant return certain annual compensation long physically able mr horne complies consulting provisions agreement shall receive supplemental compensation annual basis 400000 per year exchange services performed long physically able event physical disability subsequent commencing consulting services company mr horne continue receive 400000 annually payment consulting services provided mr horne expensed incurred company mr horne retired effective december 31 2002 therefore supplemental compensation period began january 1 2003 accordance financial accounting standards board statement 106 “employers accounting post retirement benefits pensions” company accrue future postretirement disability benefits period january 1 2003 time mr horne becomes physically unable perform consulting services period disability benefits earned 15 contingencies environmental remediation james jones litigation previously disclosed june 25 1997 nora armenta relator filed civil action california superior court los angeles county armenta case james jones company james jones mueller co tyco international us watts industries inc watts water technologies inc watts company formerly owned james jones relator filed qui tam provision california state false claims act cal govt code § 12650 et seq california false claims act generally alleged james jones defendants violated statute delivering “defective” “nonconforming” waterworks parts thirtyfour municipal water systems state california relator filed first amended complaint november 1998 second amended complaint december 2000 brought total number plaintiffs 161 june 2002 trial court excluded 47 cities total 161 relator able obtain appellate modification order still appealed end case date 11 named cities intervened attempts four named cities intervene denied one allegations second amended complaint complaintsinintervention purchased nonconforming james jones waterworks parts may leach public drinking water elevated amounts lead may create public health risk made ‘81 bronze alloy uns c8440 contain lead specified advertised ‘85 bronze alloy uns c83600 contention based average difference 2 lead content ‘81 bronze 6 8 lead ‘85 bronze 4 6 lead assumption would mean increased consumable lead public drinking water could cause public health concern company believes evidence discovery available date indicate case addition ‘81 bronze used extensively municipal home plumbing systems approved municipal local national codes federal environmental protection agency also defines metal pipe fittings 8 lead “lead free” section 1417 federal safe drinking water act watts water technologies inc subsidiaries notes consolidated financial statements continued case relator seeks three times unspecified amount actual damages alleges municipalities suffered hundreds millions dollars damages also seeks civil penalties 10000 false claim alleges defendants responsible tens thousands false claims finally relator requests award costs action including attorneys’ fees december 1998 los angeles department water power ladwp intervened case filed complaint settled city los angeles far significant city 7300000 plus attorneys’ fees codefendants contributed 20 million toward settlement august 2003 additional settlement payment made 13000000 11000000 company 2000000 james jones settled claims three phase cities santa monica san francisco east bay municipal utility district chosen relator strongest claims tried first settlement payment included relator’s statutory share claims three cities dismissed addition 13000000 payment company obligated pay relator’s attorney’s fees phase settlement court permitted defendants select five additional cities serve plaintiffs second trial phase case contra costa corona santa ana santa cruz vallejo chosen watts james jones reached agreement settle claims city santa ana total 45000 amount approximates santa ana’s purchases james jones products relevant period santa ana settlement approved court completed june 22 2005 court dismissed claims remaining phase ii cities contra costa corona santa cruz vallejo court ruled relator cities required show cities received spec parts related specific invoices showing made although city’s claim unique ruling significant claims remaining cities relator appealed litigation inherently uncertain company unable predict outcome appeal september 15 2004 relator’s attorneys filed new common law fraud lawsuit california superior court city banning fortyfive cities water districts james jones watts mueller co based transactions alleged armenta case thirtyfour plaintiffs new lawsuit also plaintiffs armenta case january 4 2006 court denied much defendants’ demurrer filed claimsplitting statute limitations grounds litigation inherently uncertain company unable predict outcome new lawsuit company reserve approximately 21000000 respect james jones litigation consolidated balance sheet december 31 2005 company believes basis available information reserve adequate cover probable reasonably estimable losses resulting armenta case insurance coverage litigation zurich american insurance company zurich discussed company currently unable make estimate range additional losses february 14 2001 insurers denied coverage claims armenta case company filed complaint coverage insurers california superior court coverage case james jones filed similar complaint cases consolidated trial court made summary adjudication rulings zurich must pay reasonable defense costs incurred watts water technologies inc subsidiaries notes consolidated financial statements continued james jones armenta case since april 23 1998 well future defense costs end armenta case july 2004 california court appeal affirmed rulings december 1 2004 california supreme court denied zurich’s appeal decision denial permanently established zurich’s obligation pay armenta defense costs watts approximately 16900000 plus future costs james jones estimated 17300000 plus future costs zurich currently making payments incurred armenta defense costs however noted zurich asserts defense costs paid subject reimbursement 2002 trial court made summary adjudication ruling zurich must indemnify pay watts james jones amounts paid settle city los angeles zurich’s attempt obtain appellate review order denied zurich still able appeal order end coverage case 2004 trial court made another summary adjudication ruling zurich must indemnify pay watts james jones 13000000 paid settle claims phase cities described zurich’s attempt obtain appellate review ruling denied december 3 2004 california court appeal zurich still able appeal order end coverage case although zurich made payments required indemnity orders company currently unable predict finality orders since zurich appeal end coverage case company recorded reimbursed indemnity settlement amounts reimbursed defense costs liability pending court resolution indemnification matter relates zurich asserted amounts estimated 51000000 defense costs indemnity amounts paid settlements paid company james jones subject reimbursement deductible agreements related insurance policies zurich company zurich prevail argument james jones would possible indemnity claim company exposure armenta case company believes armenta case viewed one occurrence deductible amount 500000 per occurrence reimbursement claims subject arbitration wattszurich deductible agreements zurich claims reimbursement right defense costs paid arises six deductible agreements company contends two deductible agreements apply company contends final decision california supports position number deductible agreements apply defense costs january 31 2006 federal district court chicago illinois determined disputes deductible agreements effect period zurich issued primary policies arbitrator could decide agreements would control reimbursement claims company appealed ruling management counsel anticipate company ultimately prevail reimbursement issue zurich based management’s assessment company believe ultimate outcome james jones litigation material adverse effect liquidity financial condition results operations assessment based available information litigation inherently uncertain actual liability company resolve litigation fully cannot predicted certainty exists reasonable possibility company may ultimately incur losses james jones litigation excess amount accrued company intends continue contest vigorously aspects james jones litigation watts water technologies inc subsidiaries notes consolidated financial statements continued environmental remediation company named potentially responsible party prp respect limited number identified contaminated sites levels contamination vary significantly site related levels remediation efforts environmental liabilities recorded based probable cost known estimated minimum cost remediation company accrues estimated environmental liabilities based assumptions subject number factors uncertainties circumstances affect reliability precision estimates include identification additional sites environmental regulations level cleanup required technologies available number financial condition contributors remediation time period remediation may occur company recognizes changes estimates new remediation requirements defined new information becomes available company reserve approximately 1500000 environmental accrual company estimates likely paid environmental remediation liabilities next five ten years based facts currently known company believe ultimate outcome matters material adverse effect liquidity financial condition results operations company’s environmental matters inherently uncertain exists possibility company may ultimately incur losses matters excess amount accrued however company cannot currently estimate amount additional losses asbestos litigation company defending approximately 121 cases filed primarily exclusively mississippi new jersey state courts alleging injury death result exposure asbestos filings typically name multiple defendants filed behalf many plaintiffs identify particular watts products source asbestos exposure date watts dismissed case scheduled trial date comes near discovery fails yield evidence exposure watts product based facts currently known company believe ultimate outcome claims material adverse effect liquidity financial condition results operations litigation march 26 2003 class action complaint filed watts north carolina hospitality group inc circuit court maryland prince george’s county alleges certain commercial valve models contain design defect causes fail prematurely june 7 2004 trial court issued opinion order denied plaintiff’s request class certification ruling appealed end 2004 january 17 2006 ruling affirmed maryland court special appeals based facts currently known company believe ultimate outcome matter material adverse effect liquidity financial condition results operations lawsuits proceedings claims arising ordinary course operations also pending threatened company based facts currently known company believe ultimate outcome litigation matters material adverse effect liquidity financial condition results operations watts water technologies inc subsidiaries notes consolidated financial statements continued 16 financial instruments fair value carrying amounts cash equivalents investment securities trade receivables trade payables approximate fair value short maturity financial instruments fair value company’s 487 senior notes due 2010 547 senior notes due 2013 based quoted market prices fair value company’s variable rate debt approximates carrying value carrying amount estimated fair market value company’s longterm debt including current portion follows derivative instruments company uses foreign currency forward exchange contracts reduce impact currency fluctuations certain anticipated intercompany purchase transactions expected occur within year certain foreign currency transactions related gains losses recognized incomeexpense contracts expire generally period underlying foreign currency denominated transaction contracts subject company market risk exchange movement offset gains losses related foreign currency denominated transactions december 31 2005 2004 2003 company outstanding forward contracts buy foreign currencies company uses commodity futures contracts fix price certain portion certain raw materials used manufacturing process contracts highly correlate actual purchases commodity contract values reflected cost commodity actually purchased commodity contracts utilized years ended december 31 2005 2004 2003 effective july 1 2005 company entered threeyear interest rate swap counter party notional amount 25000000 outstanding revolving credit facility company swapped threemonth euribor plus 06 fixed rate 302 company designated swap hedge using cash flow method december 31 2005 fair value swap approximately 484000 watts water technologies inc subsidiaries notes consolidated financial statements continued leases company leases certain manufacturing facilities sales offices warehouses equipment generally leases carry renewal provisions require company pay maintenance costs future minimum lease payments capital leases noncancelable operating leases december 31 2005 follows 17 segment information criteria set forth financial accounting standards board 131 “disclosure segments enterprise related information” company operates three geographic segments north america europe china segments sell similar products managed separately separate financial results reviewed company’s chief operating decisionmaker intercompany transactions eliminated sales region based upon location entity recording sale accounting policies segment described summary significant accounting policies see note 2 watts water technologies inc subsidiaries notes consolidated financial statements continued following summary company’s significant accounts balances segment reconciled consolidated totals corporate expenses primarily compensation expense sarbanesoxley compliance professional fees including legal audit expenses shareholder services benefit administration costs allocated geographic segments viewed corporate functions support activities north america segment consists us net sales 582279000 507061000 439436000 years ended december 31 2005 2004 2003 respectively north american segment also consists us longlived assets 86099000 67032000 67450000 december 31 2005 2004 2003 respectively intersegment sales year ended december 31 2005 north america europe china 4847000 5279000 48770000 respectively intersegment sales year ended december 31 2004 north america europe china 6040000 6834000 27030000 respectively intersegment sales year ended december 31 2003 north america europe china 4180000 3656000 12146000 respectively watts water technologies inc subsidiaries notes consolidated financial statements continued 18 quarterly financial information unaudited 1 fourth quarter 2004 company identified corrected errors related certain accrued expenses adjustments net income necessary correct errors amounted 2289000 007 per share portions adjustments related year ended december 31 2004 fourth quarter 2004 1520000 005 per share 411000 001 per share respectively impact amount related prior periods material financial statements prior periods thus amount related prior periods including first three quarters 2004 recorded fourth quarter 2004 watts water technologies inc subsidiaries notes consolidated financial statements continued 19 related party transactions 2004 agreement executed relocation firm purchase sell home company’s chief executive officer also member company’s board directors relocation firm purchased home company’s chief executive officer company’s behalf price based fair market appraisals obtained company accordingly company charged income continuing operations approximately 285000 representing difference original appraised value home final sale price third party company owns 20 interest wwwplumbworldcouk limited plumbworld variable interest entity plumbworld primarily ebusiness sells bathroom sanitary appliances well plumbing heating products tools plumbing consumables latest fiscal year sales approximately 11600000 company nominal investment approximately 500 plumbworld maintains loan receivable amount approximately 603000 plumbworld company entered agreement majority shareholders plumbworld exchange 20 ownership interest full receipt loan receivable company expects receive installment payments loan receivable september 2006 time relinquish shares plumbworld company continues account investment plumbworld using equity method company leases land buildings occupied chinese joint venture joint venture partner lease classified operating lease extends another 18 years total rental expense 2005 2004 2003 approximated 275000 year total lease costs remaining term lease approximate 4950000 20 subsequent events february 7 2006 company declared quarterly dividend nine cents 009 per share company’s class common stock class b common stock increase 001 per share compared dividend paid comparable period last year watts water technologies inc subsidiaries schedule iivaluation qualifying accounts amounts thousands three years ended december 31 exhibit index exhibit description 21 stock purchase agreement dated december 8 2005 among watts water technologies inc watts regulator co evan j segal stacy brovitz 14 31 restated certificate incorporation amended 22 32 amended restated bylaws amended 1 91 amended restated george b horne voting trust agreement1997 dated september 14 1999 15 101 supplemental compensation agreement effective september 1 1996 registrant timothy p horne 9 amendment 1 dated july 25 2000 16 amendment 2 dated october 23 2002 3 102 deferred compensation agreement registrant timothy p horne amended 4 103 form indemnification agreement registrant certain directors officers registrant 23 104 1996 stock option plan dated october 15 1996 10 first amendment dated february 28 2003 3 105 watts industries inc retirement plan salaried employees dated december 30 1994 amended restated effective january 1 1994 8 amendment 1 9 amendment 2 9 amendment 3 9 amendment 4 dated september 4 1996 12 amendment 5 dated january 1 1998 15 amendment 6 dated may 3 1999 15 amendment 7 dated june 7 1999 15 106 watts industries inc pension plan amended restated effective january 1 1997 3 first amendment dated october 25 2002 3 107 registration rights agreement dated july 25 1986 5 108 executive incentive bonus plan amended restated 21 109 amended restated stock restriction agreement dated october 30 1991 2 amendment dated august 26 1997 12 1010 watts industries inc 1991 nonemployee directors’ nonqualified stock option plan 6 amendment 1 9 1011 watts industries inc 2003 nonemployee directors’ stock option plan 3 1012 letter credit issued fleet national bank successor bankboston na benefit zurichamerican insurance company dated june 25 1999 amended january 22 2001 17 1013 form stock restriction agreement management stockholders 5 1014 credit agreement dated september 23 2004 among watts water technologies inc certain subsidiaries bank america na jp morgan chase bank wachovia bank national association key bank national association suntrust bank certain lenders 20 amendment 1 dated march 21 2005 24 1015 watts water technologies inc management stock purchase plan amended restated 21 1016 stock purchase agreement dated june 19 1996 among mueller co tyco valves limited watts investment company tyco international ltd registrant 11 1017 relocation management agreement registrant cendant mobility services corporation dated april 6 2004 18 1018 note purchase agreement dated may 15 2003 registrant purchasers named schedule thereto relating registrant’s 50000000 487 senior notes series due may 15 2010 75000000 547 senior notes series b due may 15 2013 7 1019 form 487 senior note due may 15 2010 7 1020 form 547 senior note due may 15 2013 7 1021 watts water technologies inc 2004 stock incentive plan 17 1022 nonemployee director compensation arrangements 21 1023 watts water technologies inc supplemental employees retirement plan amended restated effective may 4 2004 19 1024 form incentive stock option agreement watts water technologies inc 2004 stock incentive plan 20 1025 form nonqualified stock option agreement watts water technologies inc 2004 stock incentive plan 20 1026 form restricted stock award agreement employees watts water technologies inc 2004 stock incentive plan 20 1027 form restricted stock award agreement employees watts water technologies inc 2004 stock incentive plan 20 1028 form restricted stock award agreement nonemployee directors watts water technologies inc 2004 stock incentive plan 20 statement regarding computation earnings per common share 13 subsidiaries consent kpmg llp 311 certification principal executive officer pursuant rule 13a14a rule 15d14a securities exchange act 1934 amended 312 certification principal financial officer pursuant rule 13a14a rule 15d14a securities exchange act 1934 amended 321 certification principal executive officer pursuant 18 usc section 1350 322 certification principal financial officer pursuant 18 usc section 1350 1 incorporated reference registrant’s registration statement form s3 333105989 filed securities exchange commission june 10 2003 2 incorporated reference registrant’s current report form 8k dated november 14 1991 file 00111499 3 incorporated reference registrant’s annual report form 10k year ended december 31 2002 file 00111499 4 incorporated reference registrant’s form s1 336515 dated june 17 1986 5 incorporated reference registrant’s form s1 336515 part second amendment form s1 dated august 21 1986 6 incorporated reference amendment 1 registrant’s annual report form 10k year ended june 30 1992 file 00111499 7 incorporated reference registrant’s current report form 8k dated may 15 2003 file 00111499 8 incorporated reference registrant’s annual report form 10k year ended june 30 1995 file 00111499 9 incorporated reference registrant’s annual report form 10k year ended june 30 1996 file 00111499 10 incorporated reference registrant’s form s8 33332685 dated august 1 1997 11 incorporated reference registrant’s current report form 8k dated september 4 1996 file 001 11499 12 incorporated reference registrant’s annual report form 10k year ended june 30 1997file 001 11499 13 incorporated reference notes consolidated financial statements note 2 report 14 incorporated reference registrant’s current report form 8k dated december 28 2005 file 00111499 registrant hereby agrees furnish supplementally copy omitted schedule similar attachment agreement securities exchange commission upon request 15 incorporated reference registrant’s annual report form 10k year ended june 30 1999 file 00111499 16 incorporated reference registrant’s quarterly report form 10q quarter ended september 30 2000 file 00111499 17 incorporated reference registrant’s annual report form 10k year ended december 31 2003 file 00111499 18 incorporated reference registrant’s quarterly report form 10q quarter ended march 28 2004 file 00111499 19 incorporated reference registrant’s quarterly report form 10q quarter ended june 27 2004 file 00111499 20 incorporated reference registrant’s quarterly report form 10q quarter ended september 26 2004 file 00111499 21 incorporated reference registrant’s current report form 8k dated february 8 2005 file 00111499 22 incorporated reference registrant’s quarterly report form 10q quarter ended july 3 2005 file 00111499 23 incorporated reference registrant’s quarterly report form 10q quarter ended october 2 2005 file 00111499 24 incorporated reference registrant’s current report form 8k dated march 21 2005 file 00111499 management contract compensatory plan arrangementitem 15 exhibits financial statement schedules a1 financial statements following financial statements included separate section report commencing page numbers specified report independent registered public accounting firm consolidated statements operations years ended december 31 2008 2007 2006 consolidated balance sheets december 31 2008 2007 consolidated statements stockholders equity years ended december 31 2008 2007 2006 consolidated statements cash flows years ended december 31 2008 2007 2006 notes consolidated financial statements 64102 a2 schedules schedule iivaluation qualifying accounts years ended december 31 2008 2007 2006 required schedules provision made applicable accounting regulations securities exchange commission included notes consolidated financial statements a3 exhibits listed exhibit index immediately preceding exhibits filed part annual report form 10k signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized watts water technologies inc patrick okeefe patrick okeefe chief executive officer president director dated february 27 2009 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated report independent registered public accounting firm board directors stockholders watts water technologies inc audited accompanying consolidated balance sheets watts water technologies inc subsidiaries december 31 2008 2007 related consolidated statements operations stockholders equity cash flows years threeyear period ended december 31 2008 connection audits consolidated financial statements also audited financial statement schedule consolidated financial statements financial statement schedule responsibility companys management responsibility express opinion consolidated financial statements financial statement schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position watts water technologies inc subsidiaries december 31 2008 2007 results operations cash flows years threeyear period ended december 31 2008 conformity us generally accepted accounting principles also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein discussed note 2 consolidated financial statements company adopted recognition disclosure provisions statement financial accounting standards 158 employers accounting defined benefit pension postretirement plansan amendment fasb statements 87 88 106 132r effective december 31 2006 measurement date provisions january 1 2007 also discussed note 2 consolidated financial statements company adopted fasb interpretation 48 accounting uncertainty income taxesan interpretation fasb statement 109 effective january 1 2007 also audited accordance standards public company accounting oversight board united states watts water technologies incs internal control financial reporting december 31 2008 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso report dated february 27 2009 expressed unqualified opinion effectiveness companys internal control financial reporting boston massachusetts february 27 2009 watts water technologies inc subsidiaries consolidated statements operations amounts millions except per share information accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated balance sheets amounts millions except share information accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated statements stockholders equity amounts millions except share information accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated statements cash flows amounts millions accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries notes consolidated financial statements 1 description business watts water technologies inc company designs manufactures sells extensive line water safety flow control products primarily water quality water conservation water safety water flow control markets located predominantly north america europe china 2 accounting policies principles consolidation consolidated financial statements include accounts company majority wholly owned subsidiaries upon consolidation significant intercompany accounts transactions eliminated cash equivalents cash equivalents consist highly liquid investments maturities three months less date original issuance investment securities investment securities december 31 2008 2007 consisted auction rate securities ars whose underlying investments municipal bonds student loans 2008 investments rights issued ubs securities purchased par value rights issued ubs received connection settlement agreement see note 16 additional information regarding rights issued ubs december 31 2008 company classified debt securities investment rights ubs trading securities trading securities recorded fair value company determines fair value obtaining market value available quoted prices active markets absence quoted prices company uses inputs determine fair value investments changes fair value well realized gains losses sale securities recorded incurred consolidated statements operations income expense december 31 2007 company classified ars availableforsale recorded ars fair value allowance doubtful accounts allowance doubtful accounts includes reserves bad debts sales returns allowances company analyzes aging accounts receivable individual accounts receivable historical bad debts concentration receivables customer credit worthiness current economic trends changes customer payment terms company specifically analyzes individual accounts receivable establishes specific reserves financially troubled customers addition factors developed certain regions utilizing historical trends sales returns allowances derive reserve returns allowances concentration credit company sells products diversified customer base therefore significant concentrations credit risk except approximately 100 companys total sales 2006 one customer sales transacted within north america geographic segment 2008 2007 one customer accounted 100 companys total sales watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued inventories stated lower cost using primarily firstin firstout method market value determined replacement cost net realizable value historical experience used basis determining reserve excess obsolete inventories goodwill intangible assets goodwill recorded consideration paid acquisitions exceeds fair value net tangible intangible assets acquired goodwill intangible assets indefinite useful lives amortized rather tested annually impairment test performed october 26 2008 impairment goodwill longlived assets goodwill intangible assets indefinite lives tested annually impairment accordance provisions financial accounting standards board statement 142 goodwill intangible assets fas 142 companys impairment review based discounted cash flow approach reporting unit level requires management judgment respect revenue expense growth rates changes working capital selection use appropriate discount rate company uses judgment assessing whether assets may become impaired annual impairment tests indicators unexpected adverse business conditions economic factors unanticipated technological change competitive activities loss key personnel acts governments courts may signal asset become impaired intangible assets estimable lives longlived assets reviewed impairment whenever events changes circumstances indicate carrying amount asset group may recoverable accordance financial accounting standards board statement 144 accounting impairment disposal longlived assets fas 144 recoverability intangible assets estimable lives longlived assets measured comparison carrying amount asset group future net undiscounted pretax cash flows expected generated asset group comparisons indicate asset recoverable impairment loss recognized amount carrying amount asset group exceeds related estimated fair value estimated fair value based either discounted future pretax operating cash flows appraised values depending nature asset company determines discount rate analysis based expected internal rate return related business allocate interest charges asset group measured judgment required estimate future operating cash flows result recent economic downturn business developments goodwill companys water quality reporting unit impaired fourth quarter 2008 water quality reporting unit includes number businesses purchased time recently company acquired substantially assets topway global inc topway november 2007 recent decline commercial residential projects threatened legislation state california water softeners principal market topway sales declined prior year levels companys expectations although company continues see positive results businesses within water quality reporting unit decline sales fourth quarter 2008 coupled current economic outlook negatively impacted expected cash flows reporting unit company completed assessment fair value net assets watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued reporting unit recorded pretax impairment 220 million fourth quarter 2008 company estimated fair value reporting unit using expected present value future cash flows changes carrying amount goodwill follows adjustments north american goodwill year ended december 31 2008 relate approximately 04 million earnout provision adjustment china goodwill year ended december 31 2008 includes writeoff goodwill relating disposition tianjin tanggu watts valve company ltd twt finalization changsha valve works purchase price allocation adjustments north american goodwill year ended december 31 2007 relate accrual approximately 38 million earnout provisions adjustment european goodwill year ended december 31 2007 includes finalization ats expansion group purchase price allocation ats expansion group acquired may 2006 adjustment china goodwill year ended december 31 2007 includes finalization changsha valve works purchase price allocation changsha valve works acquired april 2006 intangible assets include following watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued aggregate amortization expense amortized intangible assets years ended december 31 2008 2007 2006 133 million 105 million 86 million respectively additionally future amortization expense amortizable intangible assets approximates 144 million 2009 142 million 2010 140 million 2011 125 million 2012 113 million 2013 amortization expense provided straightline basis estimated useful lives intangible assets weightedaverage remaining life total amortizable intangible assets 108 years patents customer relationships technology amortizable intangibles weightedaverage remaining lives 82 years 102 years 52 years 191 years respectively intangible assets subject amortization primarily include trademarks unpatented technology property plant equipment property plant equipment recorded cost depreciation provided straightline basis estimated useful lives assets range 10 40 years buildings improvements 3 15 years machinery equipment taxes income taxes assessed governmental authorities sale transactions recorded net basis excluded sales companys consolidated statements operations income taxes income taxes accounted asset liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases operating loss tax credit carry forwards deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized income period includes enactment date january 1 2007 company adopted provisions financial interpretation 48 accounting uncertainty income taxes fin 48 purpose fin 48 increase comparability financial reporting income taxes fin 48 requires order tax benefit booked income statement item question must meet morelikelythannot greater 50 likelihood sustained upon examination taxing authorities threshold adoption fin 48 material effect companys financial statements cumulative effect booked beginning retained earnings 2008 company reduced unrecognized tax benefits approximately 22 million result finalizing federal state income tax audits company estimates reasonably possible portion currently remaining unrecognized tax benefit may recognized end 2009 result conclusion federal income tax audit amount expense accrued penalties interest 11 million worldwide december 31 2008 company gross unrecognized tax benefits approximately 23 million approximately 19 million recognized would affect effective tax rate difference amount unrecognized tax benefits amount would impact effective tax rate consists federal tax benefit state income tax items reconciliation watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued beginning ending amount unrecognized tax benefits separate analysis accrued interest related unrecognized tax benefits follows company currently audit internal revenue service 2005 2006 tax years expected completion date audit november 2009 company anticipate significant adjustments time watts conducts business variety locations throughout world resulting tax filings numerous domestic foreign jurisdictions company subject tax examinations regularly part normal course business companys major jurisdictions us canada china netherlands uk germany italy france exceptions company longer subject us federal state local nonus income tax examinations years 2003 company accounts interest penalties related uncertain tax positions component income tax expense statute limitations major jurisdictions open us year 2005 later canada 2004 later netherlands 2004 later foreign currency translation financial statements subsidiaries located outside united states generally measured using local currency functional currency balance sheet accounts including goodwill foreign subsidiaries translated united states dollars yearend exchange rates income expense items translated weighted average exchange rates period net translation gains losses included comprehensive income separate component stockholders equity company provide us income taxes foreign currency translation adjustments since provide taxes undistributed earnings foreign subsidiaries gains losses foreign currency transactions subsidiaries included net earnings stockbased compensation effective january 1 2006 company adopted financial accounting standards board statement 123r sharebased paymentfas 123r utilizing modified prospective method described fas 123r modified prospective method compensation cost recognized sharebased payments granted effective date unvested awards granted prior effective date accordance fas 123r prior period amounts restated fas 123r also requires excess tax benefits associated sharebased payments classified financing activities statements consolidated cash flows rather operating cash flows required previous regulations watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued december 31 2008 company three stockbased compensation plans total unrecognized compensation costs related unvested stockbased compensation arrangements approximately 76 million total weighted average remaining term 21 years 2008 2007 2006 company recognized compensation costs related stockbased programs approximately 53 million 60 million 30 million respectively selling general administrative expenses company recorded approximately 07 million 07 million 04 million tax benefit 2008 2007 2006 respectively compensation expense relating stock options 2008 2007 2006 company recorded approximately 11 million 13 million 06 million respectively tax benefit stockbased plans 2008 2007 2006 recognition total stockbased compensation expense impacted basic diluted net income per common share 010 006 respectively net income per common share basic net income per common share calculated dividing net income weighted average number common shares outstanding calculation diluted income per share assumes conversion dilutive securities see note 13 net income number shares used compute net income per share basic assuming full dilution reconciled computation diluted net income per share years ended december 31 2008 2007 excludes effect potential exercise options purchase approximately 10 million 05 million shares respectively exercise price option greater average market price class common stock effect would antidilutive year ended december 31 2008 company repurchased approximately 16 million shares class common stock derivative financial instruments normal course business company manages risks associated commodity prices foreign exchange rates interest rates variety strategies including use hedging transactions executed accordance companys policies companys hedging transactions include limited use various derivative financial commodity instruments matter policy company use derivative instruments unless underlying exposure change value derivative instruments would substantially offset watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued opposite change value underlying hedged items company use derivative instruments trading speculative purposes using qualifying criteria defined financial accounting standards board statement 133 accounting derivative instruments hedging activities fas 133 derivative instruments designated accounted either hedge recognized asset liability fair value hedge forecasted transaction cash flow hedge fair value hedge effective ineffective portions change fair value derivative instrument along adjustment carrying amount hedged item fair value changes attributable hedged risk recognized earnings cash flow hedge changes fair value derivative instrument highly effective deferred accumulated comprehensive income loss underlying hedged item recognized earnings fair value cash flow hedge cease qualify hedge accounting terminated would continue carried balance sheet fair value settled hedge accounting would discontinued prospectively forecasted transaction longer probable occurring amounts previously deferred accumulated comprehensive income would recognized immediately earnings occasion company may enter derivative instrument qualify hedge accounting entered offset changes fair value underlying transaction required recognized earnings natural hedge instruments reflected consolidated balance sheets fair value changes fair value recognized earnings foreign currency derivatives include forward foreign exchange contracts primarily canadian dollars metal derivatives include commodity swaps copper 2008 company used copper swap means hedging exposure metal prices see note 16 portions companys outstanding debt exposed interest rate risks company monitors interest rate exposures ongoing basis maximize overall effectiveness interest rates 2006 company used interest rate swap means hedging exposure interest rate risks companys interest rate swap qualify cash flow hedge criteria fas 133 swap terminated october 3 2006 shipping handling shipping handling costs included selling general administrative expense amounted 396 million 391 million 373 million years ended december 31 2008 2007 2006 respectively research development research development costs included selling general administrative expense amounted 175 million 151 million 127 million years ended december 31 2008 2007 2006 respectively revenue recognition company recognizes revenue following criteria met company entered binding agreement product shipped title passes sales price customer fixed determinable collectability reasonably assured provisions watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued estimated returns allowances made time sale recorded reduction sales included allowance doubtful accounts consolidated balance sheets company records provisions sales incentives primarily volume rebates adjustment net sales accordance financial accounting standards boards emerging issues task force eitf issue 0014 accounting certain sales incentives eitf 0014 eitf issue 019 accounting consideration given vendor customer reseller vendors products estimates preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates new accounting standards june 2008 financial accounting standards board fasb issued fasb staff position fsp eitf issue 0361 determining whether instruments granted sharebased payment transactions participating securities fsp eitf 0361 fsp eitf 0361 requires unvested sharebased payment awards contain rights receive nonforfeitable dividends dividend equivalents included twoclass method computing earnings per share described statement financial accounting standards fas 128 earnings per share fsp effective financial statements issued fiscal years beginning december 15 2008 interim periods within years accordingly adopt fsp eitf 0361 fiscal year 2009 adoption fsp eitf 0361 expected material impact consolidated financial statements may 2008 fasb issued fas 162 hierarchy generally accepted principles fas 162 identifies sources accounting principles framework selecting principles used preparation financial statements nongovernmental entities presented conformity generally accepted accounting principles gaap united states gaap hierarchy fas 162 effective 60 days following secs approval public company accounting oversight board amendments au section 411 meaning present fairly conformity generally accepted accounting principles adoption fas 162 expected impact companys consolidated financial statements april 2008 fasb issued fsp fas 1423 determination useful life intangible assets fsp amends factors considered developing renewal extension assumptions used determine useful life recognized intangible asset fas 142 goodwill intangible assets fas 142 objective fsp improve consistency useful life recognized intangible asset fas 142 period expected cash flows used measure fair value asset fas 141r principles gaap fsp applies intangible assets whether acquired business combination otherwise shall effective financial statements issued fiscal years beginning december 15 2008 interim periods within fiscal years applied prospectively intangible assets acquired effective date early adoption prohibited watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued adoption fsp significant impact companys consolidated financial statements march 2008 fasb issued fas 161 disclosures derivative instruments hedging activitiesan amendment fasb statement 133 fas 161 expands current disclosure requirements fas 133 accounting derivative instruments hedging activities entities must provide enhanced disclosures quarterly basis regarding entity uses derivatives related hedged items accounted fas 133 derivatives related hedged items affect entitys financial position performance cash flow fas 161 effective prospectively annual interim periods beginning november 15 2008 accordingly company adopt fas 161 2009 december 2007 fasb issued fas 141 r business combinations fas 141r requires identifiable assets liabilities noncontrolling interests goodwill acquired business combination recorded full fair value fas 141r business combinations accounted acquisition method significant changes among others current guidance resulting fas 141r includes requirement contingent assets liabilities contingent consideration shall recorded estimated fair value acquisition date subsequent changes fair value charged credited earnings acquisitionrelated costs expensed rather treated part acquisition fas 141r effective periods beginning december 15 2008 company expects adoption fas 141r increase costs charged operations acquisitions made january 1 2009 december 2007 fasb issued fas 160 noncontrolling interests consolidated financial statements amendment arb 151 fas 160 requires noncontrolling interests previously referred minority interest treated separate component equity outside equity current practice fas 160 applies noncontrolling interests transactions noncontrolling interest holders consolidated financial statements fas 160 effective periods beginning december 15 2008 company expect adoption fas 160 material impact consolidated financial statements february 2007 fasb issued fas 159 fair value option financial assets financial liabilitiesincluding amendment fas 115 fas 159 permits entities choose measure many financial instruments certain items fair value fas 159 effective financial statements issued fiscal years beginning november 15 2007 interim periods within fiscal years earlier application encouraged company elected measure eligible financial instruments fair value therefore adoption fas 159 impact consolidated financial statements september 2006 fasb issued fas 157 fair value measurements fas 157 defines fair value establishes guidelines measuring fair value expands disclosures regarding fair value measurements fas 157 require new fair value measurements rather eliminates inconsistencies guidance found various prior accounting pronouncements effective fiscal years beginning november 15 2007 february 2008 fasb issued fasb fsp 1572 delayed effective date fas 157 nonfinancial assets nonfinancial liabilities except recognized disclosed fair value financial statements recurring basis least annually fiscal years beginning november 15 2008 interim periods within fiscal years nonfinancial items include assets liabilities reporting units measured fair value goodwill impairment test nonfinancial assets acquired liabilities watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued assumed business combination effective january 1 2008 company adopted fas 157 financial assets liabilities recognized fair value recurring basis partial adoption fas 157 financial assets liabilities material impact companys consolidated financial position results operations cash flows september 2006 securities exchange commission issued staff accounting bulletin 108 considering effects prior year misstatements quantifying misstatements current year financial statements sab 108 provides interpretive guidance effects carryover reversal prior year misstatements considered quantifying current year misstatement sab 108 effective fiscal years ending november 15 2006 company adopted provisions sab 108 fiscal year 2006 impact sab 108 material consolidated financial statements september 2006 fasb issued fas 158 employers accounting defined benefit pension postretirement plansan amendment fasb statements 87 88 106 132r fas 158 requires employer recognize statement financial position asset plans overfunded status liability plans underfunded status b measure plans assets obligations determine funded status end employers fiscal year c recognize changes funded status defined benefit postretirement plan year changes occur changes reported comprehensive income requirement recognize funded status benefit plan disclosure requirements effective end fiscal year ending december 15 2006 companies publicly traded equity securities requirement measure plan assets benefit obligations date employers fiscal yearend statement financial position effective fiscal years ending december 15 2008 although earlier adoption permitted result requirement recognize funded status company benefit plans december 31 2006 company recorded increase pension liability approximately 83 million decrease approximately 13 million assets net decrease accumulated comprehensive income approximately 58 million net tax company earlyadopted measurement date provisions fas 158 effective january 1 2007 companys pension plans previously used september 30 measurement date plans measured december 31 consistent companys fiscal year end noncash effect adoption measurement date provisions fas 158 material effect companys results operations july 2006 fasb issued financial interpretation 48 accounting uncertainty income taxes fin 48 clarifies accounting uncertainty income taxes recognized financial statements accordance sfas 109 accounting income taxes fin 48 provides tax benefit uncertain tax position may recognized likely position sustained upon examination based technical merits interpretation also provides guidance measurement derecognition classification interest penalties accounting interim periods disclosure transition fin 48 effective fiscal years beginning december 15 2006 company adopted provisions fin 48 fiscal year 2007 impact material consolidated financial statements march 2006 fasb issued fas 156 accounting servicing financial assetsan amendment fasb statement 140 fas 156 fas 156 amends fas statement no140 accounting transfers servicing financial assets extinguishments liabilities respect accounting separately recognized servicing assets servicing liabilities fas 156 addresses recognition measurement separately recognized servicing assets liabilities watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued provides approach simplify efforts obtain hedgelike offset accounting company adopted provisions fas 156 fiscal year 2007 impact material consolidated financial statements february 2006 fasb issued fas 155 accounting certain hybrid financial instrumentsan amendment fasb statements 133 140 fas 155 fas 155 amends fas 133 accounting derivatives hedging activities fas 140 accounting transfers servicing financial assets extinguishments liabilities allows entity remeasure fair value hybrid financial instrument contains embedded derivative otherwise would require bifurcation host holder irrevocably elects account whole instrument fair value basis subsequent changes fair value instrument would recognized earnings company adopted provisions fas 155 fiscal year 2007 impact material consolidated financial statements 3 discontinued operations september 1996 company divested municipal water group businesses included henry pratt james jones company edward barber company ltd costs expenses related municipal water group relate legal settlement costs associated james jones litigation see note 15 condensed operating statements balance sheets discontinued operations summarized assets liabilities 2008 2007 primarily relate reserves james jones litigation statements cash flows amounts 2008 2007 2006 relate operating activities watts water technologies inc subsidiaries notes consolidated financial statements continued 4 restructuring income charges 2007 company undertook review certain product lines overall manufacturing capacity based review company initiated global restructuring program approved companys board directors october 30 2007 company also discontinued certain product lines program expected include shutdown five manufacturing facilities rightsizing sixth facility including relocation joint venture facility china previously disclosed restructuring program charges certain product line discontinuances include pretax charges totaling approximately 129 million charges primarily severance 43 million relocation costs 28 million asset writedowns expected net losses asset disposals 20 million result elimination approximately 330 positions worldwide product lines discontinued accelerated depreciation resulted pretax charge 43 million 2007 total net aftertax charges program expected approximately 94 million 44 million noncash costs incurred 2010 company expects spend approximately 134 million capital expenditures consolidate operations fund approximately 80 million amount proceeds sale buildings assets disposed part restructuring program annual cash savings net tax estimated 45 million fully realized second half 2010 following table presents total estimated pretax charges incurred global restructuring program product line discontinuances initiated 2007 companys reportable segments 2008 company recorded pretax charges approximately 57 million pretax costs 03 million recorded costs goods sold primarily accelerated depreciation pretax costs 56 million recorded restructuring charges primarily severance costs asset writedowns accelerated depreciation related companys relocation 60 owned chinese joint venture company also recognized income 02 million minority interest representing 40 liability chinese joint venture partner restructuring plan 2007 company recorded pretax charges approximately 75 million pretax costs 43 million recorded costs goods sold primarily product line discontinuances pretax costs 32 million recorded restructuring charges primarily asset writedowns related companys wholly owned chinese manufacturing plants accelerated depreciation related companys relocation 60 owned chinese joint venture severance costs china north america company also recognized income 09 million minority interest representing 40 liability chinese joint venture partners restructuring plan 2006 company recorded charges 47 million costs goods sold primarily manufacturing severance costs related companys relocation plan 60 owned chinese joint venture company recorded income 57 million restructuring income charges primarily comprised gains approximately 82 million related sales buildings italy partially offset charges approximately 21 million severance costs watts water technologies inc subsidiaries notes consolidated financial statements continued 4 restructuring income charges continued related companys european restructuring plans approximately 04 million accelerated amortization related companys chinese restructuring plan company also recognized income 15 million minority interest representing 40 liability chinese joint venture partners respect table restructuring costs consist primarily severance costs 2007 severance costs recorded restructuring charges income 2006 recorded cost goods sold asset writedowns consist primarily writeoffs fixed assets accelerated depreciation product line discontinuances consist inventory writeoffs related product lines company discontinued recorded cost goods sold costs consist gains sales buildings 2006 removal shipping costs associated relocation manufacturing equipment 2007 details companys manufacturing restructuring plans december 31 2008 follows watts water technologies inc subsidiaries notes consolidated financial statements continued 5 business acquisitions disposition may 30 2008 company acquired outstanding stock blücher approximately 1835 million purchase price consisted 1701 million cash assumption debt 134 million net cash acquired blücher leading provider stainless steel drainage systems europe residential commercial industrial market places worldwide leader providing stainless steel drainage products marine industry blücher provides company new product platform europe allowing company offer broader product line existing customer base company accounting transaction business combination fas 141 business combinations company completed purchase price allocation resulted recognition 645 million intangible assets 895 million goodwill intangible assets comprised primarily customer relationships patents estimated lives 10 years trade names indefinite lives consolidated results operations include results blücher since acquisition date may 30 2008 company completed acquisition beginning 2007 net sales income continuing operations earnings per share continuing operations would follows amounts millions except per share information unaudited second quarter 2008 company completed acquisition remaining 40 ownership joint venture china twt 33 million cash twt manufactured products support us operations well sell local china market third quarter 2008 company relocated business supporting us twt existing operation china company entered agreement sell twt agreement company determined risks rewards ownership twt effectively transferred buyer october 18 2008 company determined longer primary beneficiary operating results twt therefore deconsolidated twt october 18 2008 equity transfer company buyer yet approved local authorities company deferred 11 million gain sale upon final approval transfer chinese government authority company expects recognize gain 2009 deferred gain recorded current liability accompanying consolidated balance sheet november 9 2007 company acquired assets business topway located brea california approximately 184 million allocations goodwill intangible assets approximately 76 million 82 million respectively amount recorded intangible assets primarily customer relationships estimated useful life 10 years trade names indefinite lives topway manufactures wide variety water softeners pointofentry filter units pointofuse drinking water systems residential commercial industrial applications certain acquisition agreements prior years contain either earnout provision put feature remaining common stock yet purchased company 2008 company accrued approximately 04 million earnout provision charged goodwill paid 2009 2007 company accrued approximately 38 million earnout provisions watts water technologies inc subsidiaries notes consolidated financial statements continued 5 business acquisitions disposition continued charged goodwill paid 2008 2006 company accrued approximately 40 million earnout provisions charged goodwill paid 2007 calculations typically based multiple future gross margins operating earnings defined agreements 6 accumulated comprehensive income loss accumulated comprehensive income loss consist following 7 inventories net inventories consist following finished goods 191 million 203 million december 31 2008 2007 respectively consigned 8 property plant equipment property plant equipment consists following watts water technologies inc subsidiaries notes consolidated financial statements continued 9 income taxes significant components companys deferred income tax liabilities assets follows provision income taxes continuing operations based following pretax income watts water technologies inc subsidiaries notes consolidated financial statements continued 9 income taxes continued provision income taxes continuing operations consists following actual income taxes reported continuing operations different would computed applying federal statutory tax rate income continuing operations income taxes reasons difference follows december 31 2008 company foreign net operating loss carry forwards 161 million income tax purposes 62 million losses carried forward indefinitely 49 million losses expire 2016 50 million expire 2017 net operating losses consist 50 million related german operations 12 million austrian operations 99 million netherland operations december 31 2008 company valuation allowance 47 million capital loss sustained us management believes likely company would use loss within applicable carryforward period entire 32 million beginning year valuation allowance pertained twt chinese subsidiary disposed 2008 company valuation allowance deferred tax assets management believes likely company recover net deferred tax assets watts water technologies inc subsidiaries notes consolidated financial statements continued 9 income taxes continued enacted changes income tax laws material effect company 2008 2007 2006 undistributed earnings companys foreign subsidiaries amounted approximately 3125 million december 31 2008 2516 million december 31 2007 1689 million december 31 2006 earnings considered indefinitely reinvested accordingly provision us federal state income taxes recorded thereon upon distribution earnings form dividends otherwise company subject withholding taxes payable various foreign countries determination amount us income tax liability would incurred practicable complexities associated hypothetical calculation however unrecognized foreign tax credits may available reduce portion us income tax liability withholding taxes approximately 61 million would payable upon remittance previously unremitted earnings december 31 2008 10 accrued expenses liabilities accrued expenses liabilities consist following watts water technologies inc subsidiaries notes consolidated financial statements continued 11 financing arrangements longterm debt consists following principal payments next five years thereafter due follows millions 200945 2010508 2011557 201208 2013757 thereafter2268 company maintains letters credit guarantee performance payment third parties accordance specified terms conditions amounts outstanding approximately 393 million december 31 2008 450 million december 31 2007 companys letters credit primarily associated insurance coverage lesser extent foreign purchases companys letters credit generally expire within one year issuance drawn revolving credit facility instruments may exist expire without drawn therefore necessarily represent future cash flow obligations april 27 2006 company completed private placement 2250 million 585 senior unsecured notes due april 2016 2006 note purchase agreement 2006 note purchase agreement includes operational financial covenants company required comply including among others maintenance certain financial ratios restrictions additional indebtedness liens dispositions events default 2006 note purchase agreement include failure comply financial operational covenants well bankruptcy insolvency events company may option upon notice noteholders prepay time part notes amount less 10 million paying principal amount plus makewhole amount dependent upon yield respective us treasury securities december 31 2008 company compliance covenants related 2006 note purchase agreement payment interest senior unsecured notes due semiannually april 30th october 30th year additionally company amended 2003 note purchase agreement reflect existence subsidiary guarantors substantially conform certain provisions 2003 note purchase agreement 2006 note purchase agreement watts water technologies inc subsidiaries notes consolidated financial statements continued 11 financing arrangements continued april 27 2006 company amended restated unsecured revolving credit facility syndicate banks amended revolving credit facility revolving credit facility provides multicurrency unsecured borrowings standby letters credit 3500 million expires april 2011 borrowings outstanding revolving credit facility bear interest fluctuating rate per annum equal applicable percentage equal case eurocurrency rate loans british bankers association libor rate plus applicable percentage 0625 determined reference companys consolidated leverage ratio debt rating ii case base rate loans swing line loans higher federal funds rate plus 05 b rate interest effect day announced bank america na prime rate 2008 average interest rate revolving credit facility eurobased borrowings approximately 52 revolving credit facility includes operational financial covenants customary facilities type including among others restrictions additional indebtedness liens investments maintenance certain leverage ratios december 31 2008 company compliance covenants related revolving credit facility 2600 million unused potentially available credit revolving credit facility us dollar denominated debt 550 million eurobased borrowings outstanding revolving credit facility 350 million standby letters credit outstanding revolving credit facility may 15 2003 company completed private placement 1250 million senior unsecured notes consisting 500 million principal amount 487 senior notes due 2010 750 million principal amount 547 senior notes due 2013 payment interest senior unsecured notes due semiannually may 15th november 15th year senior unsecured notes issued watts water technologies inc pari passu revolving credit facility senior unsecured notes allow company debt senior notes amount 1500 million plus 5 stockholders equity ii debt pari passu junior senior unsecured notes extent company maintains compliance 20 10 fixed charge coverage ratio notes include prepayment provision might require makewhole payment note holders payment dependent upon level respective treasuries notes include customary terms conditions including events default 12 common stock class common stock class b common stock equal dividend liquidation rights share companys class common stock entitled one vote matters submitted stockholders share class b common stock entitled ten votes matters shares class b common stock convertible shares class common stock onetoone basis option holder december 31 2008 company reserved total 4340324 class common stock issuance stockbased compensation plans 7293880 shares conversion class b common stock class common stock november 2007 company announced board directors authorized repurchase 3000000 shares class common stock december 31 2008 company repurchased 245 million shares stock total cost 681 million 13 stockbased compensation company maintains three stock incentive plans key employees outside directors granted incentive stock options isos nonqualified stock options nsos purchase companys class common stock one plan 2004 stock incentive plan watts water technologies inc subsidiaries notes consolidated financial statements continued 13 stockbased compensation continued currently available grant new equity awards stock options granted prior plans became exercisable fiveyear period rate 20 per year expire ten years date grant 2004 stock incentive plan options become exercisable fouryear period rate 25 per year expire ten years grant date isos nsos granted plans may exercise prices less 100 50 fair market value class common stock date grant respectively companys current practice grant options fair market value grant date december 31 2008 2827218 shares class common stock authorized future grants new equity awards companys stock incentive plans company also grants shares restricted stock key employees nonemployee members companys board directors 2004 stock incentive plan vest either immediately threeyear period rate onethird per year restricted stock awards amortized expense straightline basis vesting period company also management stock purchase plan allows granting restricted stock units rsus key employees annual basis key employees may elect receive portion annual incentive compensation rsus instead cash rsu provides key employee right purchase share class common stock 67 fair market value date grant rsus vest annually threeyear period grant date aggregate 2000000 shares class common stock may issued management stock purchase plan 2004 stock incentive plan december 31 2008 total unrecognized compensation cost related unvested stock options approximately 37 million total weighted average remaining term 28 years 2008 2007 2006 company recognized compensation cost 23 million 27 million 14 million respectively selling general administrative expenses following summary stock option activity related information watts water technologies inc subsidiaries notes consolidated financial statements continued 13 stockbased compensation continued december 31 2008 aggregate intrinsic values exercisable options approximately 14 million representing total pretax intrinsic value based companys closing class common stock price 2497 december 31 2008 would received option holders option holders exercised options date total intrinsic value options exercised 2008 2007 2006 approximately 08 million 14 million 22 million respectively upon exercise options company issues shares class common stock following table summarizes information options outstanding december 31 2008 fair value option granted 2004 stock incentive plan estimated date grant using blackscholesmerton model based following weighted average assumptions riskfree interest rate based upon us treasury yield curve time grant respective expected life option expected life estimated period time outstanding options volatility calculated using historical data expected dividend yield stock companys best estimate expected future dividend yield company applied estimated forfeiture rate 15 stock options rates calculated based upon historical activity estimate granted shares expected vest actual forfeitures differ expected rates company may required make additional adjustments compensation expense future periods assumptions used determine weighted average grantdate fair value stock options 1010 1275 1350 years ending december 31 2008 2007 2006 respectively watts water technologies inc subsidiaries notes consolidated financial statements continued 13 stockbased compensation continued following summary unvested restricted stock activity related information total fair value shares vested 2008 2007 2006 14 million 14 million 04 million respectively december 31 2008 total unrecognized compensation cost related unvested restricted stock approximately 27 million total weighted average remaining term 15 years 2008 2007 2006 company recognized compensation costs 18 million 16 million 06 million respectively selling general administrative expenses company applied estimated forfeiture rate 10 restricted stock issued key employees aggregate intrinsic value restricted stock granted outstanding approximated 29 million representing total pretax intrinsic value based companys closing class common stock price 2497 december 31 2008 management stock purchase plan total unrecognized compensation cost related unvested rsus approximately 12 million december 31 2008 total weighted average remaining term 15 years 2008 2007 2006 company recognized compensation cost 12 million 17 million 10 million respectively selling general administrative expenses dividends declared rsus paid individuals remain unpaid december 31 2008 total approximately 02 million watts water technologies inc subsidiaries notes consolidated financial statements continued 13 stockbased compensation continued summary companys rsus activity related information 2008 shown following table december 31 2008 aggregate intrinsic values outstanding vested rsus approximately 09 million 06 million respectively representing total pretax intrinsic value based companys closing class common stock price 2497 december 31 2008 would received rsus holders rsus settled date total intrinsic value rsus settled 2008 2007 2006 approximately 07 million 25 million 14 million respectively upon settlement rsus company issues shares class common stock following table summarizes information rsus outstanding december 31 2008 watts water technologies inc subsidiaries notes consolidated financial statements continued 13 stockbased compensation continued fair value share issued management stock purchase plan estimated date grant using blackscholesmerton model based following weighted average assumptions riskfree interest rate based upon us treasury yield curve time grant respective expected life rsus expected life estimated period time outstanding rsus volatility calculated using historical data expected dividend yield stock companys best estimate expected future dividend yield company applied estimated forfeiture rate 10 rsus rates calculated based upon historical activity estimate granted shares expected vest actual forfeitures differ expected rates company may required make additional adjustments compensation expense future periods assumptions used determine weighted average grantdate fair value rsus granted 1144 1679 1360 2008 2007 2006 respectively company distributed dividends 044 per share 2008 040 per share 2007 036 per share 2006 companys class common stock class b common stock 14 employee benefit plans company sponsors funded unfunded noncontributing defined benefit pension plans together cover substantially domestic employees benefits based primarily years service employees compensation funding policy company plans contribute annual amount exceed maximum amount deducted federal income tax purposes beginning 2007 company uses december 31 measurement date plans prior 2007 company used september 30 measurement date plans watts water technologies inc subsidiaries notes consolidated financial statements continued 14 employee benefit plans continued funded status defined benefit plans amounts recognized consolidated balance sheet follows amounts recognized consolidated balance sheet follows amounts recognized accumulated comprehensive income consist watts water technologies inc subsidiaries notes consolidated financial statements continued 14 employee benefit plans continued information pension plans accumulated benefit obligation excess plan assets follows components net periodic benefit cost follows estimated net actuarial loss prior service cost defined benefit pension plans amortized accumulated comprehensive income net periodic benefit cost next year 29 million 02 million respectively assumptions weightedaverage assumptions used determine benefit obligations weightedaverage assumptions used determine net periodic benefit costs discount rates selected based upon rates return measurement date utilizing bond matching approach match expected benefit cash flows selecting expected longterm rate return assets company considers average rate earnings expected funds invested provide benefits plan includes considering trusts asset allocation expected returns likely earned life plan basis consistent prior year watts water technologies inc subsidiaries notes consolidated financial statements continued 14 employee benefit plans continued plan assets weighted average asset allocations asset category follows companys written retirement plan investment policy sets forth investment policy objectives constraints watts water technologies inc pension plan retirement plan investment policy set forth pension plan committee defines general investment principles directs investment management policy addressing preservation capital risk aversion adherence investment discipline investment managers make reasonable effort control risk evaluated quarterly commonly accepted benchmarks ensure risk assumed commensurate given investment style objectives portfolio designed achieve balanced return current income modest growth capital achieving returns excess rate inflation investment horizon order preserve purchasing power plan assets plan assets required invested liquid securities derivative investments allowed prohibited investments include limited following commodities futures contracts private placements options limited partnerships venturecapital investments real estate properties interestonly io principalonly po residual tranche cmos watts water technologies inc stock prohibited transactions include limited following short selling margin transactions allowable assets include cash equivalents fixed income securities equity securities mutual funds gics specific guidelines regarding allocation assets follows equities shall comprise 25 75 total portfolio fixed income shall comprise 30 65 investment performance monitored regular basis investments reallocated stay within specific guidelines equityfixed income allocation 5545 preferred securities one company government agency exceed 10 total fund 20 total fund invested one industry individual treasury securities may represent 50 total fund total allocation treasury bonds notes may represent 100 plans aggregate bond position watts water technologies inc subsidiaries notes consolidated financial statements continued 14 employee benefit plans continued cash flows information related companys pension funds cash flow follows company expects contribute approximately 60 million 2009 expected benefit payments paid pension plans follows additionally substantially companys domestic employees eligible participate certain 401k savings plans company matches specified percentage employee contributions subject certain limitations companys match contributions included selling general administrative expense years ended december 31 2008 2007 2006 06 million year respectively charges european pension plans approximated 33 million 30 million 19 million years ended december 31 2008 2007 2006 respectively costs relate plans administered certain european subsidiaries benefits calculated according government requirements paid employees upon retirement change employment company entered supplemental compensation agreement timothy p horne september 1 1996 per agreement upon ceasing employee company mr horne must make available requested board work minimum 300 500 hours per year consultant return certain annual compensation long physically able mr horne complies consulting provisions agreement shall receive supplemental compensation annual basis 400000 per year subject cost living increases year exchange services performed long physically able event physical disability subsequent commencing consulting services company mr horne continue receive 400000 annually payment consulting services provided mr horne expensed incurred company mr horne retired effective december 31 2002 therefore supplemental compensation period began january 1 2003 accordance financial accounting standards board statement 106 employers accounting post retirement benefits pensions company accrue future postretirement disability benefits period january 1 2003 time mr horne becomes physically unable perform consulting services period disability benefits earned watts water technologies inc subsidiaries notes consolidated financial statements continued 15 contingencies environmental remediation james jones litigation june 25 1997 nora armenta relator filed civil action california superior court los angeles county armenta case james jones company james jones mueller co tyco international us company formerly owned james jones relator filed qui tam provision california state false claims act cal govt code § 12650 et seq california false claims act generally alleged james jones defendants violated statute delivering defective nonconforming waterworks parts municipal water systems state california relator filed first amended complaint november 1998 second amended complaint december 2000 brought total number plaintiffs 161 complaint alleges purchased nonconforming james jones waterworks parts may leach public drinking water elevated amounts lead may create public health risk made 81 bronze alloy uns c8440 contain lead specified advertised 85 bronze alloy uns c83600 contention based average difference 2 lead content 81 bronze 6 8 lead 85 bronze 4 6 lead assumption would mean increased consumable lead public drinking water could cause public health concern company believes evidence discovery available date indicates case addition 81 bronze used extensively municipal home plumbing systems approved municipal local national codes federal environmental protection agency also defines metal pipe fittings 8 lead free section 1417 federal safe drinking water act case relator seeks three times unspecified amount actual damages alleges municipalities suffered hundreds millions dollars damages also seeks civil penalties 10000 false claim alleges defendants responsible tens thousands false claims finally relator requests award costs action including attorneys fees december 1998 los angeles department water power ladwp intervened case filed complaint company settled city los angeles far significant city 73 million plus attorneys fees codefendants contributed 20 million toward settlement august 2003 additional settlement payment made 130 million 110 million us 20 million james jones settled claims three phase cities santa monica san francisco east bay municipal utility district chosen relator strongest claims tried first addition 130 million payment company obligated pay relators attorneys fees june 22 2005 court dismissed claims phase ii cities selected second trial phase contra costa corona santa cruz vallejo court ruled relator cities required show cities received specification parts related specific invoices showing made although citys claim unique ruling significant claims remaining cities relator appealed june 29 2007 appellate court dismissed appeal however judgment appealed conclusion entire case trial court scheduled trial october 6 2009 six phase iii cities litigation inherently uncertain company unable predict outcome case september 15 2004 relators attorneys filed lawsuit california superior court city banning 42 cities water districts james jones watts mueller co watts water technologies inc subsidiaries notes consolidated financial statements continued 15 contingencies environmental remediation continued based transactions alleged armenta case alleging common law fraud october 2008 court dismissed claims 11 cities timebarred first phase trial selected cities scheduled april 13 2010 litigation inherently uncertain company unable predict outcome case february 14 2001 companys insurers denied coverage claims armenta case company filed complaint coverage insurers california superior court coverage case james jones filed similar complaint cases consolidated trial court made summary adjudication rulings zurich must pay reasonable defense costs incurred company james jones armenta case since april 23 1998 well defense costs future end armenta case august 2004 california court appeal affirmed rulings december 1 2004 california supreme court denied zurichs appeal decision denial permanently established zurichs obligation pay armenta defense costs company james jones zurich currently making payments incurred armenta defense costs however noted zurich asserts defense costs paid subject reimbursement november 22 2002 trial court entered summary adjudication order zurich must indemnify pay company james jones amounts paid settle city los angeles august 6 2004 trial court made another summary adjudication ruling zurich must indemnify pay company james jones 130 million paid settle claims phase cities described zurich able appeal orders end coverage case zurich made payments required indemnity orders february 8 2006 zurich filed motion set aside void november 22 2002 august 6 2004 summary adjudication indemnity payment orders motion denied zurichs appeal also denied california supreme court denied zurichs petition review company currently unable predict finality indemnity payment orders since zurich also appeal end coverage case zurich asserted amounts paid company james jones subject reimbursement deductible agreements related insurance policies zurich watts company believes agreements unenforceable armenta case viewed one occurrence deductible amount 05 million per occurrence agreements enforceable january 31 2006 federal district court chicago illinois determined disputes deductible agreements effect period zurich issued primary policies arbitrator could decide agreements would control reimbursement claims company appealed ruling october 20 2006 united states court appeals seventh circuit affirmed arbitration panel could decide deductible agreements zurich company would control zurichs reimbursement claim based managements assessment company believe ultimate outcome james jones litigation material adverse effect liquidity financial condition results operations assessment based facts currently known company litigation inherently uncertain actual liability us resolve litigation fully cannot predicted certainty exists reasonable possibility may ultimately incur losses james jones litigation excess amount accrued company intends continue contest vigorously aspects james jones litigation watts water technologies inc subsidiaries notes consolidated financial statements continued 15 contingencies environmental remediation continued environmental remediation company named potentially responsible party respect limited number identified contaminated sites levels contamination vary significantly site related levels remediation efforts environmental liabilities recorded based probable cost known estimated minimum cost remediation company accrues estimated environmental liabilities based assumptions subject number factors uncertainties circumstances affect reliability precision estimates include identification additional sites environmental regulations level cleanup required technologies available number financial condition contributors remediation time period remediation may occur company recognizes changes estimates new remediation requirements defined new information becomes available based facts currently known company believe ultimate outcome matters material adverse effect liquidity financial condition results operations environmental matters inherently uncertain exists possibility may ultimately incur losses matters excess amount accrued however company cannot currently estimate amount additional losses asbestos litigation company defending approximately 105 lawsuits different jurisdictions greatest number filed mississippi california state courts alleging injury death result exposure asbestos complaints cases typically name large number defendants identify particular watts products source asbestos exposure date company obtained dismissal every case reached trial discovery failed yield evidence substantial exposure watts products based facts currently known company believe ultimate outcome claims material adverse effect liquidity financial condition results operations litigation lawsuits proceedings claims arising ordinary course operations also pending threatened us based facts currently known company believe ultimate outcome litigation matters material adverse effect liquidity financial condition results operations 16 financial instruments fair value carrying amounts cash equivalents shortterm investments trade receivables trade payables approximate fair value short maturity financial instruments fair value companys 487 senior notes due 2010 547 senior notes due 2013 585 senior notes due 2016 based quoted market prices fair value companys watts water technologies inc subsidiaries notes consolidated financial statements continued 16 financial instruments continued variable rate debt approximates carrying value carrying amount estimated fair market value companys longterm debt including current portion follows derivative instruments company uses foreign currency forward exchange contracts economic hedge reduce impact currency fluctuations certain anticipated intercompany purchase transactions expected occur next twelve months certain foreign currency transactions realized unrealized gains losses contracts recognized incomeexpense contracts subject company significant market risk exchange movement offset gains losses related foreign currency denominated transactions december 31 2008 2007 fair value contracts immaterial time company enters swaps forwards limit volatility associated purchase metals copper company typically structures terms financial instruments coincide purchases made throughout year 2008 company entered series copper swaps fix price per pound copper october 2008 september 2009 one customer company determined copper swaps qualify hedge accounting financial instruments economic hedge therefore changes fair value copper swaps recorded immediately consolidated statement operations company believes use swap contracts fix purchase price copper allows company ability provide firm pricing one customer company enter swap forward contracts speculative purposes december 31 2008 unrealized losses copper swaps 16 million included incomeexpense consolidated statement operations watts water technologies inc subsidiaries notes consolidated financial statements continued 16 financial instruments continued measure certain financial assets liabilities fair value recurring basis including trading auction rate securities foreign currency derivatives metal derivatives fair value certain financial assets liabilities determined using following inputs december 31 2008 1included longterm investment securities companys consolidated balance sheet 2included net companys consolidated balance sheet 3included accrued expenses liabilities companys consolidated balance sheet 4included noncurrent liabilities companys consolidated balance sheet table provides summary changes fair value financial assets measured fair value recurring basis using significant unobservable inputs level 3 period december 31 2007 december 31 2008 trading securities comprise auction rate securities rights issued ubs ag ubs company holds variety interest bearing auction rate securities ars includes 48 million municipal bonds 12 million student loans december 31 2008 ars investments intended provide liquidity via auction process resets applicable interest rate predetermined calendar intervals allowing investors either roll holdings sell interests par recent uncertainties credit markets affected companys holdings ars investments auctions companys investments securities failed respective auction dates consequently investments currently liquid company able access funds future auction investments successful buyer found outside auction process maturity dates ars investments range 2027 2036 watts water technologies inc subsidiaries notes consolidated financial statements continued 16 financial instruments continued ars investments aaa rated investment grade quality compliance companys investment policy time acquisition remaining securities rated aa fourth quarter 2008 company broker elected participate settlement offer ubs outstanding ars investments terms settlement offer company broker issued rights ubs entitling holder require ubs purchase underlying ars par value period june 30 2010 july 2 2012 rights also entitle ubs purchase sell ars time settlement date case ubs would required pay par value ars typically fair value ars investments approximates par value due frequent interest rate resets auction process company continues earn interest ars investments currently trading therefore currently readily determinable market value company used discounted cash flow model determine estimated fair value investment ars investments ubs rights december 31 2008 assumptions used preparing discounted cash flow model include estimates interest rates credit quality ars issuer timing amount cash flows government guarantees related student loans expected holding periods ars based assessment fair value december 31 2008 company recorded charge approximately 24 million income expense consolidated statement operations investment ars company performed valuation ars rights ubs company determined value rights based upon difference ars without rights ars rights based assessment fair value company recorded investment rights ubs approximately 23 million income expense cash equivalents consist instruments remaining maturities three months less date purchase remaining balance cash equivalents consists primarily money market funds carrying amount reasonable estimate fair value leases company leases certain manufacturing facilities sales offices warehouses equipment generally leases carry renewal provisions require company pay maintenance costs watts water technologies inc subsidiaries notes consolidated financial statements continued 16 financial instruments continued future minimum lease payments capital leases noncancelable operating leases december 31 2008 follows carrying amounts assets capital lease include 17 segment information criteria set forth financial accounting standards board 131 disclosure segments enterprise related information company operates three geographic segments north america europe china segments sell similar products managed separately separate financial results reviewed companys chief operating decisionmaker intercompany sales transactions eliminated sales region based upon location entity recording sale accounting policies segment described summary significant accounting policies see note 2 watts water technologies inc subsidiaries notes consolidated financial statements continued 17 segment information continued following summary companys significant accounts balances segment reconciled consolidated totals corporate expenses primarily compensation expense sarbanesoxley compliance professional fees including legal audit expenses shareholder services benefit administration costs allocated geographic segments viewed corporate functions support activities watts water technologies inc subsidiaries notes consolidated financial statements continued 17 segment information continued north america segment consists us net sales 7981 million 8055 million 7627 million years ended december 31 2008 2007 2006 respectively north american segment also consists us longlived assets 866 million 927 million 931 million december 31 2008 2007 2006 respectively intersegment sales year ended december 31 2008 north america europe china 64 million 64 million 1331 million respectively intersegment sales year ended december 31 2007 north america europe china 66 million 60 million 1371 million respectively intersegment sales year ended december 31 2006 north america europe china 69 million 30 million 823 million respectively 18 quarterly financial information unaudited watts water technologies inc subsidiaries notes consolidated financial statements continued 19 subsequent events february 10 2009 plan approved board directors expand companys restructuring program consolidate companys manufacturing footprint north america china plan provides closure three plants relocation operations existing facilities either north america china new central facility united states footprint consolidation pretax charge approximately 117 million including severance charges approximately 32 million relocation costs approximately 33 million asset writedowns approximately 52 million company also expects record net gain property sales 24 million onetime tax charges approximately 70 million also expected incurred part building relocations approximately 400 positions eliminated connection consolidation net tax charge manufacturing consolidation program expected approximately 149 million 44 million non cash costs incurred december 2009 company expects spend approximately 48 million capital expenditures consolidate operations company expects entire project selffunded net proceeds sale buildings assets disposed part plan february 9 2009 company declared quarterly dividend eleven cents 011 per share outstanding share class common stock class b common stock watts water technologies inc subsidiaries schedule iivaluation qualifying accounts amounts millions three years ended december 31 exhibit index 1incorporated reference registrants current report form 8k dated february 5 2007 file 00111499 2incorporated reference registrants current report form 8k dated november 14 1991 file 00111499 3incorporated reference registrants annual report form 10k year ended december 31 2002 file 00111499 4incorporated reference registrants current report form 8k dated april 27 2006 file 00111499 5incorporated reference registrants form s1 336515 part second amendment form s1 dated august 21 1986 6incorporated reference amendment 1 registrants annual report form 10k year ended june 30 1992 file 00111499 7incorporated reference registrants current report form 8k dated may 15 2003 file 00111499 8incorporated reference registrants current report form 8k dated may 14 2008 file 00111499 9incorporated reference registrants annual report form 10k year ended june 30 1996 file 00111499 10incorporated reference registrants form s8 33332685 dated august 1 1997 11incorporated reference registrants current report form 8k dated september 4 1996 file 00111499 12incorporated reference registrants annual report form 10k year ended june 30 1997file 00111499 13incorporated reference notes consolidated financial statements note 2 report 14incorporated reference registrants quarterly report form 10q quarter ended july 3 2005 file 00111499 15incorporated reference registrants annual report form 10k year ended june 30 1999 file 00111499 16incorporated reference registrants quarterly report form 10q quarter ended september 30 2000 file 00111499 17incorporated reference registrants annual report form 10k year ended december 31 2003 file 00111499 18incorporated reference registrants current report form 8k dated april 8 2008 file 00111499 19incorporated reference registrants quarterly report form 10q quarter ended september 26 2004 file 00111499 20incorporated reference registrants quarterly report form 10q quarter ended july 1 2007 file 00111499 21incorporated reference registrants quarterly report form 10q quarter ended march 30 2008 file 00111499 22incorporated reference registrants annual report form 10k year ended december 31 2007 file 00111499 management contract compensatory plan arrangement part item 1 business item 1a risk factors item 1b unresolved staff comments item 2 properties item 3 legal proceedings item 4 submission matters vote security holders part ii item 5 market registrants common equity related stockholder matters issuer purchases equity securities item 6 selected financial data item 7 managements discussion analysis financial condition results operations item 7a quantitative qualitative disclosures market risk item 8 financial statements supplementary data item 9 changes disagreements accountants accounting financial disclosure item 9a controls procedures managements annual report internal control financial reporting report independent registered public accounting firm item 9b information part iii item 10 directors executive officers corporate governance item 11 executive compensation item 12 security ownership certain beneficial owners management related stockholder matters item 13 certain relationships related transactions director independence item 14 principal accountant fees services part iv item 15 exhibits financial statement schedules signatures report independent registered public accounting firm watts water technologies inc subsidiaries consolidated statements operations amounts millions except per share information watts water technologies inc subsidiaries consolidated balance sheets amounts millions except share information watts water technologies inc subsidiaries consolidated statements stockholders equity amounts millions except share information watts water technologies inc subsidiaries consolidated statements cash flows amounts millions watts water technologies inc subsidiaries notes consolidated financial statements watts water technologies inc subsidiaries schedule iivaluation qualifying accounts amounts millions exhibit indexitem 15 exhibits financial statement schedules a1 financial statements following financial statements included separate section report commencing page numbers specified report independent registered public accounting firm consolidated statements operations years ended december 31 2013 2012 2011 consolidated statements comprehensive income years ended december 31 2013 2012 2011 consolidated balance sheets december 31 2013 2012 consolidated statements stockholders equity years ended december 31 2013 2012 2011 consolidated statements cash flows years ended december 31 2013 2012 2011 notes consolidated financial statements a2 schedules schedule iivaluation qualifying accounts years ended december 31 2013 2012 required schedules provision made applicable accounting regulations securities exchange commission included notes consolidated financial statements a3 exhibits listed exhibit index immediately preceding exhibits filed part annual report form 10k signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized watts water technologies inc dean p freeman dean p freeman chief executive officer president chief financial officer dated february 27 2014 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated report independent registered public accounting firm board directors stockholders watts water technologies inc audited accompanying consolidated balance sheets watts water technologies inc subsidiaries december 31 2013 2012 related consolidated statements operations comprehensive income stockholders equity cash flows years threeyear period ended december 31 2013 connection audits consolidated financial statements also audited financial statement schedule iivaluation qualifying accounts consolidated financial statements financial statement schedule responsibility companys management responsibility express opinion consolidated financial statements financial statement schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position watts water technologies inc subsidiaries december 31 2013 2012 results operations cash flows years threeyear period ended december 31 2013 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states watts water technologies incs internal control financial reporting december 31 2013 based criteria established internal controlintegrated framework 1992 issued committee sponsoring organizations treadway commission coso report dated february 27 2014 expressed unqualified opinion effectiveness companys internal control financial reporting kpmg llp boston massachusetts february 27 2014 watts water technologies inc subsidiaries consolidated statements operations amounts millions except per share information accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated statements comprehensive income amounts millions accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated balance sheets amounts millions except share information accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated statements stockholders equity amounts millions except share information accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated statements cash flows amounts millions accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries notes consolidated financial statements 1 description business watts water technologies inc company subsidiaries designs manufactures sells extensive line water safety flow control products primarily water quality water conservation water safety water flow control markets located predominantly americas europe middle east africa emea presence asia pacific 2 accounting policies principles consolidation consolidated financial statements include accounts company majority wholly owned subsidiaries upon consolidation significant intercompany accounts transactions eliminated cash equivalents cash equivalents consist instruments remaining maturities three months less date purchase consist primarily certificates deposit money market funds carrying amount reasonable estimate fair value investment securities investment securities december 31 2012 consisted certificates deposit original maturities greater three months company hold investment securities december 31 2013 trading securities recorded fair value company determines fair value obtaining market value available quoted prices active markets absence quoted prices company uses inputs determine fair value investments changes fair value well realized gains losses sale securities recorded incurred consolidated statements operations income expense allowance doubtful accounts allowance doubtful accounts includes reserves bad debts sales returns allowances cash discounts company analyzes aging accounts receivable individual accounts receivable historical bad debts concentration receivables customer credit worthiness current economic trends changes customer payment terms company specifically analyzes individual accounts receivable establishes specific reserves financially troubled customers addition factors developed certain regions utilizing historical trends sales returns allowances cash discount activities derive reserve returns allowances cash discounts concentration credit company sells products diversified customer base therefore significant concentrations credit risk 2013 2012 customer accounted 10 companys total sales watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued inventories stated lower cost using primarily firstin firstout method market value determined replacement cost net realizable value historical usage used basis determining reserve excess obsolete inventories goodwill intangible assets goodwill recorded consideration paid acquisitions exceeds fair value net tangible intangible assets acquired goodwill intangible assets indefinite useful lives amortized rather tested least annually impairment test 2013 performed october 27 2013 impairment goodwill longlived assets changes carrying amount goodwill geographic segment follows goodwill tested impairment least annually frequently events circumstances indicate likely goodwill might impaired change business conditions company performs annual goodwill impairment assessment fourth quarter year company determined future prospects blue ridge atlantic enterprises inc brae reporting unit americas lower originally estimated future sales growth expectations reduced number times since 2010 acquisition brae company recorded pretax goodwill impairment charges 03 million 10 million 12 million 2013 watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued 2011 respectively reporting unit brae goodwill balance fully impaired 2013 goodwill impairment charges offset reduction anticipated earnout payments equal amounts remaining earnout liability december 31 2013 company estimated fair value reporting unit using expected present value future cash flows october 28 2012 previous annual impairment analysis date fair value emea reporting unit exceeded carrying value approximately 40 emea reporting unit represents emea geographic segment excluding blücher reporting unit six months ended june 30 2013 operating results emea reporting unit hindered downturn economic environment europe continued fall expected operating results growth rates used calculation present value future cash flow projections triggering decision update impairment analysis result fair value assessment determined fair value emea reporting unit decreased prior year continued exceed carrying value june 30 2013 updated fair value assessment performed annual impairment date october 27 2013 updated fair value assessment determined fair value emea reporting continued exceed carrying value approximately 20 2013 january 31 2012 company completed acquisition tekmar control systems tekmar share purchase transaction initial purchase price paid cad 180 million postclosing adjustments related working capital earnout based attainment certain future earnings levels initial purchase price paid equal approximately 178 million based exchange rate canadian dollar us dollar january 31 2012 total purchase price exceed cad 262 million company accounted transaction business combination january 2013 company completed purchase price allocation resulted recognition 117 million goodwill 101 million intangible assets see note 5 indefinitelived intangibles tested impairment least annually frequently events circumstances change business conditions indicate likely intangible asset might impaired company performs annual indefinitelived intangibles impairment assessment fourth quarter year 2013 2012 2011 impairment assessments company performed quantitative assessments indefinitelived intangible assets methodology employed relief royalty method subset income approach based results assessment company recognized noncash pretax impairment charges 2013 2012 2011 approximately 07 million 04 million 14 million respectively impairment charge 07 million 2013 consists 03 million impairment charge trade name americas segment 04 million impairment charge two trade names emea segment gross carrying amount table reflects impairment charges intangible assets estimable lives longlived assets reviewed impairment whenever events changes circumstances indicate carrying amount asset group may recoverable recoverability intangible assets estimable lives longlived assets measured comparison carrying amount asset group future net undiscounted pretax cash flows expected generated asset group comparisons indicate asset recoverable impairment loss recognized amount carrying amount asset group exceeds related estimated fair value estimated fair value based either discounted future pretax operating cash flows appraised values depending nature asset company determines discount rate analysis based weighted average cost capital based market guideline public watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued companies related businesses allocate interest charges asset group measured judgment required estimate future operating cash flows intangible assets include following aggregate amortization expense amortized intangible assets 2013 2012 2011 147 million 154 million 158 million respectively additionally future amortization expense amortizable intangible assets expected 149 million 2014 147 million 2015 142 million 2016 138 million 2017 100 million 2018 amortization expense provided straightline basis estimated useful lives intangible assets weightedaverage remaining life total amortizable intangible assets 84 years patents customer relationships technology trade names amortizable intangibles weightedaverage remaining lives 56 years 56 years 114 years 109 years 402 years respectively indefinitelived intangible assets primarily include trade names trademarks property plant equipment property plant equipment recorded cost depreciation provided straightline basis estimated useful lives assets range 10 40 years buildings improvements 3 15 years machinery equipment taxes income taxes assessed governmental authorities sale transactions recorded net basis excluded sales companys consolidated statements operations income taxes income taxes accounted asset liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases operating loss tax credit carry forwards deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued expected recovered settled effect deferred tax assets liabilities change tax rates recognized income period includes enactment date company recognizes tax benefits item question meets morelikelythannot greater 50 likelihood sustained upon examination taxing authorities threshold 2013 due completion federal audit unrecognized tax benefits decreased approximately 37 million related adjustment temporary differences impact overall income tax expense december 31 2013 company gross unrecognized tax benefits approximately 08 million approximately 02 million recognized would affect effective tax rate difference amount unrecognized tax benefits amount would affect effective tax rate consists federal tax benefit state income tax items well liability related 2011 acquisition danfoss socla sas socla france recoverable terms acquisition agreement reconciliation beginning ending amount unrecognized tax benefits follows february 2013 united states internal revenue service concluded audit companys 2009 2010 2011 tax years company conducts business variety locations throughout world resulting tax filings numerous domestic foreign jurisdictions company subject tax examinations regularly part normal course business companys major jurisdictions us canada china netherlands uk germany italy france exceptions company longer subject us federal state local nonus income tax examinations years 2007 statute limitations major jurisdictions open us year 2010 later canada 2009 later netherlands 2012 later company accounts interest penalties related uncertain tax positions component income tax expense foreign currency translation financial statements subsidiaries located outside united states generally measured using local currency functional currency balance sheet accounts including goodwill foreign subsidiaries translated united states dollars yearend exchange rates income expense items translated weighted average exchange rates period net translation gains losses included comprehensive income separate component stockholders equity company provide us income taxes foreign currency translation adjustments since provide taxes undistributed earnings foreign subsidiaries gains losses foreign currency transactions subsidiaries included net earnings watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued stockbased compensation former chief executive officer separation costs former chief financial officer retention costs company records compensation expense financial statements sharebased awards based grant date fair value awards stockbased compensation expense includes estimate prevesting forfeitures recognized requisite service periods awards straightline basis generally commensurate vesting term benefits associated tax deductions excess recognized compensation cost reported financing cash flow december 31 2013 company two stockbased compensation plans total unrecognized compensation costs related unvested stockbased compensation arrangements approximately 208 million total weighted average remaining term 25 years included 208 million unrecognized compensation costs 45 million related equity awards previously granted david j coghlan companys former chief executive officer recognized refer note 18 details mr coghlans resignation january 9 2014 2013 2012 2011 company recognized compensation costs related stockbased programs approximately 96 million 58 million 53 million respectively selling general administrative expenses company recorded approximately 12 million tax benefits 2013 07 million 2012 2011 compensation expense relating stock options 2013 2012 2011 company recorded approximately 19 million 14 million 15 million respectively tax benefit stockbased plans 2013 2012 2011 recognition total stockbased compensation expense impacted basic diluted net income per common share 014 010 009 respectively may 23 2012 william c mccartney resigned position chief financial officer company pursuant retention agreement entered mr mccartney company recorded charge 15 million retention period consisting cash payments 07 million noncash charge 08 million modification stock options restricted stock awards january 26 2011 patrick okeefe resigned positions chief executive officer president director pursuant separation agreement company recorded charge 63 million consisting 33 million expected cash severance noncash charge 30 million modification stock options restricted stock awards net income per common share basic net income per common share calculated dividing net income weighted average number common shares outstanding calculation diluted income per share assumes conversion dilutive securities see note 12 watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued net income number shares used compute net income per share basic assuming full dilution reconciled computation diluted net income per share years ended december 31 2013 2012 2011 excludes effect potential exercise options purchase approximately 02 million 02 million 07 million shares respectively exercise price option greater average market price class common stock effect would antidilutive april 30 2013 board directors authorized repurchase 900 million companys class common stock time open market privately negotiated transactions timing number shares repurchased determined companys management based evaluation market conditions repurchases may also made rule 10b51 plan would permit shares repurchased company might otherwise precluded insider trading laws repurchase program may suspended discontinued time subject terms rule 10b51 plan company may enter respect repurchase program year ended december 31 2013 company repurchased approximately 454000 shares class common stock cost approximately 230 million may 16 2012 board directors authorized stock repurchase program two million shares companys class common stock repurchase program completed july 2012 company repurchased entire two million shares class common stock cost approximately 658 million august 2 2011 board directors authorized stock repurchase program company authorized repurchase one million shares class common stock three months ended october 2 2011 company repurchased entire one million shares cost 272 million financial instruments normal course business company manages risks associated commodity prices foreign exchange rates interest rates variety strategies including use hedging transactions executed accordance companys policies companys hedging transactions include limited use various derivative financial commodity instruments matter policy company use derivative instruments unless underlying exposure change value derivative instruments would substantially offset watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued opposite change value underlying hedged items company use derivative instruments trading speculative purposes derivative instruments may designated accounted either hedge recognized asset liability fair value hedge forecasted transaction cash flow hedge fair value hedge effective ineffective portions change fair value derivative instrument along adjustment carrying amount hedged item fair value changes attributable hedged risk recognized earnings cash flow hedge changes fair value derivative instrument highly effective deferred accumulated comprehensive income loss underlying hedged item recognized earnings cash flow hedges december 31 2013 december 31 2012 fair value cash flow hedge cease qualify hedge accounting terminated would continue carried balance sheet fair value settled hedge accounting would discontinued prospectively forecasted transaction longer probable occurring amounts previously deferred accumulated comprehensive income would recognized immediately earnings occasion company may enter derivative instrument qualify hedge accounting entered offset changes fair value underlying transaction required recognized earnings natural hedge instruments reflected consolidated balance sheets fair value changes fair value recognized earnings foreign currency derivatives include forward foreign exchange contracts primarily canadian dollars metal derivatives include commodity swaps copper portions companys outstanding debt exposed interest rate risks company monitors interest rate exposures ongoing basis maximize overall effectiveness interest rates fair value measurements fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date entity required maximize use observable inputs available minimize use unobservable inputs measuring fair value company certain financial assets liabilities measured fair value recurring basis certain nonfinancial assets liabilities may measured fair value nonrecurring basis fair value disclosures assets liabilities based threelevel hierarchy defined follows level 1 quoted prices active markets identical assets liabilities entity ability access measurement date level 2 observable inputs level 1 prices quoted prices similar assets liabilities quoted prices markets active inputs observable corroborated observable market data substantially full term assets liabilities level 3 unobservable inputs supported little market activity significant fair value assets liabilities watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued assets liabilities subject hierarchy classified entirety based lowest level input significant fair value measurement companys assessment significance particular input fair value measurement entirety requires judgment considers factors specific asset liability shipping handling shipping handling costs included selling general administrative expense amounted 384 million 370 million 369 million years ended december 31 2013 2012 2011 respectively research development research development costs included selling general administrative expense amounted 215 million 204 million 205 million years ended december 31 2013 2012 2011 respectively revenue recognition company recognizes revenue following criteria met company entered binding agreement product shipped title passes sales price customer fixed determinable collectability reasonably assured provisions estimated returns allowances made time sale recorded reduction sales included allowance doubtful accounts consolidated balance sheets company records provisions sales incentives primarily volume rebates adjustment net sales time sale based estimated purchase targets basis presentation certain amounts 2012 2011 consolidated financial statements reclassified permit comparison 2013 presentation reclassifications effect reported results operations stockholders equity estimates preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates new accounting standards july 2013 financial accounting standards board fasb issued accounting standards update asu 201311 presentation unrecognized tax benefit net operating loss carryforward similar tax loss tax credit carryforward exists intended eliminate diversity practice presentation unrecognized tax benefits instances asu 201311 effective fiscal years interim periods beginning december 15 2013 early adoption permitted adoption guidance expected material impact companys financial statements watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued march 2013 fasb issued asu 201305 parents accounting cumulative translation adjustment upon derecognition certain subsidiaries groups assets within foreign entity investment foreign entity asu intended eliminate diversity practice release cumulative translation adjustment net income parent either sells part investment foreign entity longer holds controlling financial interest addition amendments asu resolve diversity practice treatment business combinations achieved stages sometimes also referred step acquisitions involving foreign entity provisions asu effective interim annual periods beginning december 15 2013 early adoption permitted must applied prospectively company early adopted asu 2013 adoption guidance material impact companys financial statements february 2013 fasb issued asu 201302 reporting amounts reclassified accumulated comprehensive income requires additional disclosures amounts reclassified oci component either face income statement separate footnote financial statements asu 201302 effective fiscal years interim periods within years beginning december 15 2012 adoption guidance material impact companys financial statements 3 discontinued operations august 1 2013 company completed sale outstanding shares indirect whollyowned subsidiary watts insulation gmbh austroflex receiving net cash proceeds 79 million austroflex austrianbased manufacturer preinsulated flexible pipe systems district heating solar applications underfloor radiant heating systems austroflex meet performance expectations since purchase approximately three years ago june 28 2010 loss tax disposal business approximately 22 million year ended december 31 2011 company wrote austroflexs longlived assets 148 million company substantial continuing involvement austroflexs operations cash flows therefore austroflexs results operations presented discontinued operations periods presented december 21 2012 company completed sale outstanding shares subsidiary flomatic corporation flomatic sale excluded backflow product line flomatic retained company flomatic corporation located glens falls new york specializes manufacturing selling check valves foot valves automatic hydraulic control valves well water industry company acquired flomatic part acquisition socla april 2011 company determined would substantial continuing involvement flomatics operations cash flows therefore flomatics results operations presented discontinued operations periods presented first quarter 2010 company recorded estimated reserve 53 million discontinued operations connection investigation potential violations foreign corrupt practices act fcpa watts valve changsha co ltd cwv former indirect whollyowned subsidiary company china october 13 2011 company entered settlement 38 million securities exchange commission resolve allegations concerning potential violations fcpa cwv connection matter 2012 company received 11 million payment service provider related issues concerning former divested operation watts water technologies inc subsidiaries notes consolidated financial statements continued 3 discontinued operations continued condensed operating statements discontinued operations summarized company recognize tax benefit loss disposal flomatic austroflex shares company believe likely tax benefit would realized revenues reported discontinued operations follows 4 restructuring charges net companys board directors approves major restructuring programs involve discontinuance significant product lines shutdown significant facilities time company takes additional restructuring actions including involuntary terminations part major program company accounts costs period individual employees notified liability incurred costs included restructuring charges companys consolidated statements operations 2013 actions july 30 2013 board directors authorized restructuring program respect companys emea segment reduce european manufacturing footprint approximately 10 improve organizational operational efficiency better align costs expected revenues response changing market conditions restructuring program expected include pretax charge earnings totaling approximately 140 million approximately 100 million expected recorded fiscal 2014 remainder recorded fiscal 2015 total charge include costs severance benefits relocation site cleanup professional fees certain watts water technologies inc subsidiaries notes consolidated financial statements continued 4 restructuring charges net continued asset writedowns total net aftertax charge restructuring program expected approximately 100 million restructuring program expected completed end fourth quarter fiscal 2015 certain aspects restructuring program subject analysis determinations local management consultation negotiation various workers councils net aftertax charge incurred fiscal 2013 29 million 2011 actions april 2011 board approved integration program association acquisition socla program designed integrate certain operations management structures socla total estimated pretax cost 64 million costs incurred 2012 company revised forecast 42 million primarily reflect reduced severance costs total net aftertax charge 28 million costs fully incurred 2012 december 31 2013 restructuring reserve zero 2010 actions february 8 2010 board approved restructuring program respect companys operating facilities france restructuring program included consolidation five facilities two facilities program originally expected include pretax charges totaling approximately 125 million including costs severance relocation site cleanup certain asset writedowns prior 2013 company revised forecast 171 million primarily reflect additional severance legal costs 2013 company recorded additional severance costs 07 million total costs 178 million 2010 restructuring program substantially complete december 31 2013 restructuring reserve 23 million related severance costs september 13 2010 board approved restructuring program respect certain companys operating facilities united states restructuring program included shutdown two manufacturing facilities north carolina operations facilities consolidated companys manufacturing facilities new hampshire missouri locations program originally included pretax charges totaling approximately 49 million including costs severance shutdown costs equipment writedowns pretax training preproduction setup costs approximately 20 million company revised forecast 25 million due reduced shutdown costs total net aftertax charge restructuring program approximately 15 million restructuring program completed 2012 actions company also periodically initiates actions part major program total actions pretax restructuring expense 52 million 35 million 36 million 2013 2012 2011 respectively 2013 company initiated restructuring activities respect companys operating facilities emea included relocation closure manufacturing facility italy relocation initiatives europe 2012 company initiated restructuring activities north america europe continued 2013 restructuring activities americas included relocation certain production activities included closure manufacturing site severance shutdown costs north america restructuring activities included costs watts water technologies inc subsidiaries notes consolidated financial statements continued 4 restructuring charges net continued severance fixed asset impairment shutdown costs additional expected pretax costs 2015 04 million 2011 company initiated several actions part major program september 2011 company announced plan termination would result reduction approximately 10 north american nondirect payroll costs company recorded charge 11 million severance connection plan year ended december 31 2011 also 2011 company initiated restructuring activities respect companys operating facilities europe included closure facility europe restructuring activities included pretax costs approximately 40 million including costs severance shutdown costs incurred december 31 2012 2013 2012 2011 company recorded credit restructuring charges net related reduction contingent liability anticipated earnout payment connection brae acquisition 02 million 10 million 12 million respectively summary pretax cost restructuring program follows company recorded pretax restructuring charges business segments follows watts water technologies inc subsidiaries notes consolidated financial statements continued 4 restructuring charges net continued 2013 actions details companys 2013 european footprint program reserve year ended december 31 2013 relates severance follows following table summarizes total expected incurred remaining pretax costs 2013 european footprint program actions type attributable emea reportable segment 5 business acquisitions disposition tekmar january 31 2012 company completed acquisition tekmar share purchase transaction designer manufacturer control systems used heating ventilation air conditioning applications tekmar enhances companys hydronic systems product offerings us canada part americas segment initial purchase price paid cad 180 million earnout based future earnings levels achieved initial purchase price paid equal approximately 178 million based exchange rate canadian dollar us dollars january 31 2012 total purchase price exceed cad 262 million sales tekmar 2011 approximated 110 million company accounted transaction business combination company completed purchase price allocation resulted recognition 117 million goodwill 101 million intangible assets intangible assets consist primarily acquired technology estimated life 10 years distributor relationships estimated life 7 years trade name estimated life 20 years goodwill expected deductible tax purposes results tekmar material companys consolidated financial statements results operations tekmar included companys americas segment since acquisition date 2012 contingent liability 51 million recognized estimate acquisition date fair value contingent consideration portion contingent consideration paid 2013 amount 12 million based performance metrics achieved 2012 contingent liability increased 10 million year ended 2013 based performance metrics achieved expected achieved watts water technologies inc subsidiaries notes consolidated financial statements continued 5 business acquisitions disposition continued socla april 29 2011 company completed acquisition socla related water controls business certain entities controlled danfoss share asset purchase transaction final consideration paid euro 1163 million purchase price financed cash hand eurobased borrowings prior credit agreement purchase price equal approximately 1724 million based exchange rate euro us dollars april 29 2011 company accounted transaction business combination company completed purchase price allocation resulted recognition 831 million goodwill 399 million intangible assets intangible assets consist primarily customer relationships estimated lives 10 years trade names either 20 year lives indefinite lives consolidated statement operations year ended december 31 2011 includes results socla since acquisition date includes 948 million revenues 16 million operating income includes acquisition accounting charges 47 million restructuring charges 27 million twvc march 2010 connection companys manufacturing footprint consolidation company closed operations tianjin watts valve company ltd twvc relocated manufacturing facilities april 12 2010 company signed definitive equity transfer agreement third party sell companys equity ownership remaining assets twvc sale finalized fourth quarter 2011 company received net proceeds approximately 61 million sale recorded receivable remaining proceeds company recognized net pretax gain 77 million aftertax gain approximately 114 million relating mainly recognition cumulative translation adjustment tax benefit related reversal tax claw back china 2013 company recorded adjustments decrease gain disposal 16 million increase gain disposal 06 million respectively 6 inventories net inventories consist following raw materials workinprocess finished goods net valuation reserves 299 million 277 million december 31 2013 2012 respectively finished goods 167 million 135 million december 31 2013 2012 respectively consigned watts water technologies inc subsidiaries notes consolidated financial statements continued 7 property plant equipment property plant equipment consist following 8 income taxes significant components companys deferred income tax liabilities assets follows watts water technologies inc subsidiaries notes consolidated financial statements continued 8 income taxes continued provision income taxes continuing operations based following pretax income provision income taxes continuing operations consists following actual income taxes reported continuing operations different would computed applying federal statutory tax rate income continuing operations income taxes reasons difference follows december 31 2013 company foreign net operating loss carry forwards 435 million income tax purposes considering valuation allowances 320 million losses carried forward indefinitely 115 million expire 2020 net operating losses consist watts water technologies inc subsidiaries notes consolidated financial statements continued 8 income taxes continued 298 million related austrian operations 22 million italian operations 115 million dutch operations december 31 2013 december 31 2012 company valuation allowances 131 million 101 million respectively december 31 2013 61 million relates us capital losses 70 million relates austrian net operating losses december 31 2012 entire 101 million related us capital losses management believes ability company use losses within applicable carry forward period rise level likely threshold company valuation allowance respect deferred tax assets management believes likely company recover deferred tax assets changes enacted income tax laws material effect company 2013 2012 2011 undistributed earnings companys foreign subsidiaries amounted approximately 3972 million december 31 2013 3297 million december 31 2012 2822 million december 31 2011 earnings considered indefinitely reinvested accordingly provision us federal state income taxes recorded thereon upon distribution earnings form dividends otherwise company subject withholding taxes payable various foreign countries determination amount us income tax liability would incurred practicable complexities associated hypothetical calculation however unrecognized foreign tax credits may available reduce portion us income tax liability withholding taxes approximately 113 million would payable upon remittance previously unremitted earnings december 31 2013 9 accrued expenses liabilities accrued expenses liabilities consist following watts water technologies inc subsidiaries notes consolidated financial statements continued 10 financing arrangements longterm debt consists following principal payments next five years thereafter due follows millions 201422 201523 20162265 201717 201800 thereafter750 company maintains letters credit guarantee performance payment third parties accordance specified terms conditions amounts outstanding approximately 236 million december 31 2013 348 million december 31 2012 companys letters credit primarily associated insurance coverage lesser extent foreign purchases companys letters credit generally expire within one year issuance drawn revolving credit facility instruments may exist expire without drawn therefore necessarily represent future cash flow obligations june 18 2010 company entered note purchase agreement certain institutional investors 2010 note purchase agreement pursuant 2010 note purchase agreement company issued senior notes 750 million principal due june 18 2020 company pay interest outstanding balance notes rate 505 per annum payable semiannually june 18 december 18 principal notes shall become due payable company may option upon notice subject terms 2010 note purchase agreement prepay time part notes amount less 1 million paying principal amount plus makewhole amount dependent upon yield respective us treasury securities 2010 note purchase agreement includes operational financial covenants company required comply including among others maintenance certain financial ratios restrictions additional indebtedness liens dispositions december 31 2013 company compliance covenants related 2010 note purchase agreement june 18 2010 company entered credit agreement prior credit agreement among company certain subsidiaries company become borrowers prior credit agreement bank america na administrative agent swing line lender letter credit issuer lenders referred therein prior credit agreement provided 300 million fiveyear senior unsecured revolving credit facility could increased additional 150 million certain circumstances subject terms prior credit agreement prior credit agreement sublimit 750 million letters credit borrowings outstanding prior credit agreement bore interest fluctuating rate per annum equal case eurocurrency rate loans british bankers association libor rate watts water technologies inc subsidiaries notes consolidated financial statements continued 10 financing arrangements continued plus applicable percentage ranging 170 230 determined reference companys consolidated leverage ratio plus case certain lenders mandatory cost calculated accordance terms prior credit agreement ii case base rate loans swing line loans highest federal funds rate plus 05 b rate interest effect day announced bank america na prime rate c british bankers association libor rate plus 10 plus applicable percentage ranging 070 130 determined reference companys consolidated leverage ratio addition paying interest prior credit agreement company also required pay certain fees connection credit facility including limited facility fee letter credit fees prior credit agreement company required satisfy maintain specified financial ratios financial condition tests december 31 2013 company compliance covenants related prior credit agreement 2764 million unused available credit prior credit agreement 236 million standby letters credit outstanding prior credit agreement borrowings outstanding prior credit agreement february 18 2014 company terminated prior credit agreement entered new credit agreement new credit agreement among company certain subsidiaries company become borrowers credit agreement jpmorgan chase bank na administrative agent swing line lender letter credit issuer lenders referred therein new credit agreement provides 500 million fiveyear senior unsecured revolving credit facility may increased additional 500 million certain circumstances subject terms new credit agreement new credit agreement sublimit 100 million letters credit borrowings outstanding new credit agreement bear interest fluctuating rate per annum equal applicable percentage equal case eurocurrency rate loans british bankers association libor rate plus applicable percentage ranging 0975 145 determined reference companys consolidated leverage ratio plus case certain lenders mandatory cost calculated accordance terms new credit agreement ii case base rate loans swing line loans highest federal funds rate plus 05 b rate interest effect day announced jpmorgan chase bank na prime rate c british bankers association libor rate plus 10 plus applicable percentage ranging 000 045 determined reference companys consolidated leverage ratio addition paying interest new credit agreement company also required pay certain fees connection credit facility including limited unused facility fee letter credit fees credit agreement matures february 18 2019 subject extension certain circumstances subject terms new credit agreement company may repay loans outstanding new credit agreement time without premium penalty customary breakage costs subject terms new credit agreement new credit agreement imposes various restrictions company subsidiaries including restrictions pertaining incurrence additional indebtedness ii limitations liens iii making distributions dividends payments iv mergers consolidations acquisitions v dispositions assets vi maintenance minimum consolidated net worth certain consolidated leverage ratios consolidated interest coverage ratios vii transactions affiliates viii changes governing documents ix changes control watts water technologies inc subsidiaries notes consolidated financial statements continued 10 financing arrangements continued april 27 2006 company completed private placement 2250 million 585 senior unsecured notes due april 2016 2006 note purchase agreement 2006 note purchase agreement includes operational financial covenants company required comply including among others maintenance certain financial ratios restrictions additional indebtedness liens dispositions events default 2006 note purchase agreement include failure comply financial operational covenants well bankruptcy insolvency events company may option upon notice note holders prepay time part notes amount less 10 million paying principal amount plus makewhole amount dependent upon yield respective us treasury securities december 31 2013 company compliance covenants related 2006 note purchase agreement payment interest senior unsecured notes due semiannually april 30th october 30th year may 15 2003 company completed private placement 1250 million senior unsecured notes consisting 500 million principal amount 487 senior notes due 2010 750 million principal amount 547 senior notes due may 2013 may 2010 company repaid 500 million principal 487 senior notes due upon maturity company repaid 750 million unsecured senior notes matured may 15 2013 period ended june 30 2013 available cash 11 common stock class common stock class b common stock equal dividend liquidation rights share companys class common stock entitled one vote matters submitted stockholders share class b common stock entitled ten votes matters shares class b common stock convertible shares class common stock onetoone basis option holder december 31 2013 company reserved total 3719322 class common stock issuance stockbased compensation plans 6489290 shares conversion class b common stock class common stock april 30 2013 board directors authorized repurchase 90 million companys class common stock time open market privately negotiated transactions timing number shares repurchased determined companys management based evaluation market conditions repurchases may also made rule 10b51 plan would permit shares repurchased company might otherwise precluded insider trading laws repurchase program may suspended discontinued time subject terms rule 10b51 plan company may enter respect repurchase program 2013 company repurchased approximately 454000 shares class common stock cost approximately 230 million may 16 2012 board directors authorized stock repurchase program two million shares companys class common stock repurchase program completed july 2012 company repurchased entire two million shares class common stock cost approximately 658 million august 2 2011 board directors authorized stock repurchase program company authorized repurchase one million shares class common stock three months ended october 2 2011 company repurchased entire one million shares cost 272 million watts water technologies inc subsidiaries notes consolidated financial statements continued 12 stockbased compensation december 31 2013 company maintains two stock incentive plans key employees granted incentive stock options isos nonqualified stock options nsos purchase companys class common stock one plan second amended restated 2004 stock incentive plan currently available grant new stock options currently granted employees 2004 stock incentive plan options become exercisable fouryear period rate 25 per year expire ten years grant date isos nsos granted plans may exercise prices less 100 fair market value class common stock date grant companys current practice grant options fair market value grant date december 31 2013 1650400 shares class common stock authorized future grants new equity awards companys 2004 stock incentive plan company grants shares restricted stock deferred shares key employees stock awards nonemployee members companys board directors 2004 stock incentive plan stock awards nonemployee members companys board directors vest immediately employees restricted stock awards deferred shares vest threeyear period rate onethird per year restricted stock awards deferred shares amortized expense straightline basis vesting period company also management stock purchase plan allows granting restricted stock units rsus key employees annual basis key employees may elect receive portion annual incentive compensation rsus instead cash rsu provides key employee right purchase share class common stock 67 fair market value date grant rsus vest either annually threeyear period grant date upon third anniversary grant date receipt shares underlying rsus deferred minimum three years greater number years chosen employee aggregate 2000000 shares class common stock may issued management stock purchase plan december 31 2013 897029 shares class common stock authorized future grants companys management stock purchase plan 2004 stock incentive plan december 31 2013 total unrecognized compensation cost related unvested stock options approximately 106 million total weighted average remaining term 29 years 2013 2012 2011 company recognized compensation cost 38 million 21 million 16 million respectively selling general administrative expenses company recognized additional stock compensation expense 2012 approximately 06 million connection modification former chief financial officers options related retention agreement company recognized additional stock compensation expense 2011 approximately 22 million connection modification former chief executive officers options related separation agreement watts water technologies inc subsidiaries notes consolidated financial statements continued 12 stockbased compensation continued following summary stock option activity related information december 31 2013 aggregate intrinsic value exercisable options approximately 73 million representing total pretax intrinsic value based companys closing class common stock price 6187 december 31 2013 would received option holders option holders exercised options date total intrinsic value options exercised 2013 2012 2011 approximately 74 million 57 million 39 million respectively upon exercise options company issues shares class common stock following table summarizes information options outstanding december 31 2013 fair value option granted 2004 stock incentive plan estimated date grant using blackscholesmerton model based following weighted average assumptions watts water technologies inc subsidiaries notes consolidated financial statements continued 12 stockbased compensation continued riskfree interest rate based upon us treasury yield curve time grant respective expected life option expected life estimated period time outstanding options volatility calculated using historical data expected dividend yield stock companys best estimate expected future dividend yield company applied estimated forfeiture rate 675 2013 2012 2011 stock options rate calculated based upon historical activity estimate granted shares expected vest actual forfeitures differ expected rates company may required make additional adjustments compensation expense future periods assumptions used determine weighted average grantdate fair value stock options 2030 1349 1019 years ended december 31 2013 2012 2011 respectively following summary unvested restricted stock deferred shares activity related information total fair value shares vested 2013 2012 2011 56 million 25 million 25 million respectively december 31 2013 total unrecognized compensation cost related unvested restricted stock deferred shares approximately 94 million total weighted average remaining term 21 years 2013 2012 2011 company recognized compensation costs 51 million 29 million 24 million respectively selling general administrative expenses company recognized additional stock compensation expense 2012 approximately 02 million connection modification former chief financial officers restricted stock awards related retention agreement company recognized additional stock compensation expense 2011 related restricted stock approximately 08 million connection modification former chief executive officers stock awards related separation agreement company applied estimated forfeiture rate 90 2013 2012 2011 restricted stock deferred shares issued key employees aggregate intrinsic value restricted stock deferred shares granted outstanding approximated 161 million representing total pretax intrinsic value based companys closing class common stock price 6187 december 31 2013 management stock purchase plan total unrecognized compensation cost related unvested rsus approximately 08 million december 31 2013 total weighted average remaining term 14 years 2013 2012 2011 watts water technologies inc subsidiaries notes consolidated financial statements continued 12 stockbased compensation continued company recognized compensation cost 07 million 08 million 13 million respectively selling general administrative expenses dividends declared rsus paid individuals remain unpaid december 31 2013 total approximately 01 million summary companys rsu activity related information shown following table december 31 2013 aggregate intrinsic values outstanding vested rsus approximately 45 million 15 million respectively representing total pretax intrinsic value based companys closing class common stock price 6187 december 31 2013 would received rsus holders rsus settled date total intrinsic value rsus settled 2013 2012 2011 approximately 28 million 38 million 12 million respectively upon settlement rsus company issues shares class common stock following table summarizes information rsus outstanding december 31 2013 watts water technologies inc subsidiaries notes consolidated financial statements continued 12 stockbased compensation continued fair value share issued management stock purchase plan estimated date grant using blackscholesmerton model based following weighted average assumptions riskfree interest rate based upon us treasury yield curve time grant respective expected life rsus expected life estimated period time outstanding rsus volatility calculated using historical data expected dividend yield stock companys best estimate expected future dividend yield company applied estimated forfeiture rate 63 2013 2012 2011 rsus rate calculated based upon historical activity estimate granted shares expected vest actual forfeitures differ expected rates company may required make additional adjustments compensation expense future periods assumptions used determine weighted average grantdate fair value rsus granted 1805 1568 1625 2013 2012 2011 respectively company distributed dividends 050 per share 2013 044 per share 2012 2011 respectively companys class common stock class b common stock 13 employee benefit plans company sponsors funded unfunded noncontributing defined benefit pension plans together cover substantially domestic employees benefits based primarily years service employees compensation funding policy company plans contribute annual amount exceed maximum amount deducted federal income tax purposes october 31 2011 companys board directors voted cease accruals effective december 31 2011 companys pension plan supplemental employees retirement plan company recorded curtailment charge approximately 15 million writeoff previously unrecognized prior service costs reduced projected benefit obligation 125 million board directors also voted enhance companys existing 401k savings plan watts water technologies inc subsidiaries notes consolidated financial statements continued 13 employee benefit plans continued funded status defined benefit plans amounts recognized consolidated balance sheets follows amounts recognized consolidated balance sheets follows amounts recognized accumulated comprehensive income consist watts water technologies inc subsidiaries notes consolidated financial statements continued 13 employee benefit plans continued information pension plans accumulated benefit obligation excess plan assets follows components net periodic benefit cost follows fiscal year 2014 estimated net actuarial loss defined benefit pension plans amortized accumulated comprehensive income net periodic benefit cost 11 million assumptions weightedaverage assumptions used determine benefit obligations weightedaverage assumptions used determine net periodic benefit costs discount rates selected based upon rates return measurement date utilizing bond matching approach match expected benefit cash flows selecting expected longterm rate return assets company considers average rate earnings expected funds invested provide benefits plan includes considering trusts asset allocation expected returns likely earned life plan basis consistent watts water technologies inc subsidiaries notes consolidated financial statements continued 13 employee benefit plans continued prior year original 2011 discount rate 55 revised 470 october 31 2011 curtailment date plans plan assets companys written retirement plan investment policy sets forth investment policy objectives constraints watts water technologies inc pension plan retirement plan investment policy set forth pension plan committee defines general investment principles directs investment management policy addressing preservation capital risk aversion adherence investment discipline investment managers make reasonable effort control risk evaluated quarterly commonly accepted benchmarks ensure risk assumed commensurate given investment style objectives portfolio designed achieve balanced return current income modest growth capital achieving returns excess rate inflation investment horizon order preserve purchasing power plan assets plan assets required invested liquid securities derivative investments allowed prohibited investments include limited following futures contracts private placements options limited partnerships venturecapital investments interestonly io principalonly po residual tranche collateralized mortgage obligation cmos watts water technologies inc stock prohibited transactions include limited following short selling margin transactions allowable assets include cash equivalents fixed income securities equity securities mutual funds guaranteed investment contracts specific guidelines regarding allocation assets followed using liability driven investment ldi strategy ldi strategy investments made based expected cash flows required fund pension plans liabilities cash flow matching technique requires plans asset allocation heavily weighted toward fixed income securities companys current allocation target 85 fixed income 15 equities investments plan curtailment allocation target may increase 90 fixed income future investment performance monitored regular basis investments reallocated stay within specific guidelines securities one company government agency exceed 10 total fund 20 total fund invested one industry individual treasury securities may represent 50 total fund total allocation treasury bonds notes may represent 100 plans aggregate bond position weighted average asset allocations asset category follows watts water technologies inc subsidiaries notes consolidated financial statements continued 13 employee benefit plans continued following table presents investments pension plan measured fair value december 31 2013 2012 aincludes investments common stock diverse industries bincludes investments index exchangetraded funds cincludes investment grade bonds diverse industries dincludes investments real estate investment funds exchangetraded funds commodity mutual funds accrued interest cash flows information related companys pension funds cash flow follows company expects contribute approximately 08 million 2014 expected benefit payments paid pension plans follows watts water technologies inc subsidiaries notes consolidated financial statements continued 13 employee benefit plans continued additionally companys domestic employees eligible participate companys 401k savings plan effective january 1 2012 company provides base contribution 2 employees salary regardless whether employee participates plan company matches contribution 100 first 4 employees contribution companys match contribution years ended december 31 2013 2012 42 million 40 million respectively 2011 company matched specified percentage employee contributions subject certain limitations companys match contributions year ended december 31 2011 05 million charges emea pension plans approximated 58 million 60 million 62 million years ended december 31 2013 2012 2011 respectively costs relate plans administered certain european subsidiaries benefits calculated according government requirements paid employees upon retirement change employment company entered supplemental compensation agreement timothy p horne september 1 1996 per agreement upon ceasing employee company mr horne must make available requested board work minimum 300 500 hours per year consultant return certain annual compensation long physically able mr horne retired effective december 31 2002 therefore supplemental compensation period began january 1 2003 mr horne complies consulting provisions agreement shall receive supplemental compensation annual basis subject cost living increases year exchange services performed long physically able payment consulting services provided mr horne expensed incurred company years ended 2013 2012 2011 mr horne received payments 06 million 06 million 05 million respectively event physical disability mr horne continue receive payment annually accordance generally accepted accounting principles gaap company accrues future postretirement disability benefits period january 1 2003 time mr horne becomes physically unable perform consulting services period disability benefits earned mr horne still active consultant accordance terms agreement 14 contingencies environmental remediation accrual disclosure policy company defendant numerous legal matters arising ordinary course operations including involving product liability environmental matters commercial disputes company reviews lawsuits legal proceedings ongoing basis follows appropriate accounting guidance making accrual disclosure decisions company establishes accruals matters company assesses probable loss incurred amount loss reasonably estimated net applicable insurance proceeds company establish accruals matters company believe probable loss incurred amount loss reasonably estimated companys assessment whether loss probable based assessment ultimate outcome matter following appeals fasb issued asc 450 contingencies event reasonably possible chance future event events occurring remote less likely event remote chance future event events occurring slight thus references upper watts water technologies inc subsidiaries notes consolidated financial statements continued 14 contingencies environmental remediation continued end range reasonable possible loss cases company able estimate range reasonably possible loss mean upper end range loss cases company believes risk loss slight may continue exposure loss excess amount accrued possible estimate reasonably possible loss range loss amount accrued matters disclosed estimate aggregated disclosed company records legal costs associated legal contingencies incurred except legal costs associated product liability claims included actuarial estimates used determining product liability accrual december 31 2013 company estimates aggregate amount reasonably possible loss excess amount accrued legal contingencies approximately 112 million pretax respect estimate reasonably possible loss management estimated upper end range reasonably possible loss based amount money damages claimed applicable ii allegations factual development date iii available defenses based allegations andor iv potentially liable parties estimate based upon currently available information subject significant judgment variety assumptions known unknown uncertainties matters underlying estimate change time actual results may vary significantly current estimate event unfavorable outcome one matters described ultimate liability may excess amounts currently accrued may material companys operating results cash flows particular quarterly annual period however based information currently known management believes ultimate outcome matters resolved time likely material adverse effect financial condition company though outcome could material companys operating results particular period depending part upon operating results period trabakoolas et al v watts water technologies inc et al march 8 2012 watts water technologies inc watts regulator co watts plumbing technologies co ltd among companies named defendants putative nationwide class action complaint filed us district court northern district california seeking recover damages relief based alleged failure toilet connectors complaint seeks among items damages unspecified amount replacement costs injunctive relief attorneys fees costs class certification hearing scheduled matter currently discovery phase august 22 2013 court stayed action 45 days allow parties explore possibility settlement october 8 2013 stay extended november 7 2013 order allow parties additional time explore settlement november 7 2013 court extended stay december 12 2013 order allow parties additional time explore settlement december 12 2013 company reached agreement principle settle claims total settlement amount 230 million company would responsible 140 million insurance proceeds 90 million settlement subject review court preliminary approval hearing held february 12 2014 court granted preliminary approval february 14 2014 settlement subject final court approval fairness hearing currently scheduled july 16 2014 accordingly assurance proposed settlement approved current form settlement approved company intends continue vigorously contest allegations case watts water technologies inc subsidiaries notes consolidated financial statements continued 14 contingencies environmental remediation continued fourth quarter 2013 company recorded liability 226 million related trabakoolas matter 127 million included current liabilities 99 million noncurrent liabilities addition 90 million receivable recorded current assets related insurance proceeds due separate settlement agreement class action settlement approved product liability company subject variety potential liabilities connection product liability cases company maintains product liability insurance coverage company believes generally accordance industry practices product liability cases us management establishes product liability accrual includes legal costs associated accrued claims utilizing thirdparty actuarial valuations incorporate historical trend factors companys specific claims experience derived loss reports provided thirdparty administrators countries company maintains insurance coverage relatively high deductible payments product liability claims tend smaller experienced us changes nature claims actual settlement amounts could affect adequacy estimate require changes provisions liability estimate ultimate liability may less reported foreign corrupt practices act settlement october 13 2011 company entered settlement sec resolve allegations concerning potential violations us foreign corrupt practices act fcpa watts valve changsha co ltd cwv former indirect whollyowned subsidiary watts water china terms settlement without admitting denying secs allegations company consented entry administrative ceaseanddesist order books records internal controls provisions fcpa company also agreed pay sec 36 million disgorgement prejudgment interest 02 million penalties amounts paid us connection settlement fully accrued december 31 2010 settlement resolves government investigations respect company concerning cwvs sales practices potential fcpa violations environmental remediation company named potentially responsible party respect limited number identified contaminated sites levels contamination vary significantly site related levels remediation efforts environmental liabilities recorded based probable cost known estimated minimum cost remediation accruals discounted present value unless amount timing expenditures fixed reliably determinable company accrues estimated environmental liabilities based assumptions subject number factors uncertainties circumstances affect reliability precision estimates include identification additional sites environmental regulations level cleanup required technologies available number financial condition contributors remediation time period remediation may occur company recognizes changes estimates new remediation requirements defined new information becomes available watts water technologies inc subsidiaries notes consolidated financial statements continued 14 contingencies environmental remediation continued asbestos litigation company defending 44 lawsuits different jurisdictions alleging injury death result exposure asbestos complaints cases typically name large number defendants identify particular company products source asbestos exposure date company obtained dismissal every case reached trial discovery failed yield evidence substantial exposure company products litigation lawsuits proceedings claims arising ordinary course operations also pending threatened company 15 financial instruments fair value carrying amounts cash equivalents shortterm investments trade receivables trade payables approximate fair value short maturity financial instruments fair value companys 585 senior notes due 2016 505 senior notes due 2020 based quoted market prices similar notes level 2 fair value companys variable rate debt approximates carrying value carrying amount estimated fair market value companys longterm debt including current portion follows financial instruments company measures certain financial assets liabilities fair value recurring basis including foreign currency derivatives deferred compensation plan assets related liability watts water technologies inc subsidiaries notes consolidated financial statements continued 15 financial instruments continued cash flow hedges december 31 2013 fair value certain financial assets liabilities determined using following inputs december 31 2013 2012 1included net companys consolidated balance sheet 2included noncurrent liabilities companys consolidated balance sheet table provides summary changes fair value financial assets liabilities measured fair value recurring basis using significant unobservable inputs level 3 period december 31 2012 december 31 2013 watts water technologies inc subsidiaries notes consolidated financial statements continued 15 financial instruments continued 2010 contingent liability 19 million recognized estimate acquisition date fair value contingent consideration brae acquisition liability classified level 3 fair value hierarchy based weighted probability achievement future performance metric date acquisition observable market year ended december 31 2011 year ended december 31 2012 estimate fair value contingent consideration reduced 11 million subsequently 02 million based revised probability achievement future performance metric year ended december 31 2013 remaining liability reduced zero connection tekmar control systems acquisition 2012 contingent liability 51 million recognized estimate acquisition date fair value contingent consideration liability classified level 3 fair value hierarchy based probability achievement future performance metric date acquisition observable market failure meet performance metrics would reduce liability zero complete achievement would increase liability full remaining purchase price 82 million portion contingent consideration paid 2013 amount 12 million based performance metrics achieved 2012 contingent liability increased 10 million year ended 2013 based performance metrics achieved date shortterm investment securities december 31 2012 consist certificate deposit remaining maturity greater three months date purchase carrying amount reasonable estimate fair value cash equivalents consist instruments remaining maturities three months less date purchase consist primarily certificates deposit money market funds carrying amount reasonable estimate fair value company uses financial instruments time enhance ability manage risk including foreign currency commodity pricing exposures exist part ongoing business operations use derivatives exposes company counterparty credit risk nonperformance market risk related changes currency exchange rates commodity prices company manages exposure counterparty credit risk diversification counterparties companys counterparties derivative transactions substantial commercial banks significant experience using derivative instruments impact market risk fair value cash flows companys derivative instruments monitored company restricts use derivative financial instruments hedging activities company enter contracts trading purposes company enter contracts speculative purposes use derivative instruments approved senior management written guidelines company exposure number foreign currency rates including canadian dollar euro chinese yuan british pound manage risk company generally uses layering methodology whereby end quarter company generally entered forward exchange contracts hedge approximately 50 projected intercompany purchase transactions next twelve months company primarily uses strategy purchases canada us average volume contracts vary generally approximates 10 100 million open contracts end given quarter december 31 2013 company contracts notional amounts aggregating approximately 10 million company accounts forward exchange contracts economic hedge realized unrealized gains losses contracts recognized income expense consolidated statement watts water technologies inc subsidiaries notes consolidated financial statements continued 15 financial instruments continued operations contracts subject company significant market risk exchange movement offset gains losses related foreign currency denominated transactions december 31 2013 2012 company outstanding swaps company recorded income loss approximately 01 million 01 million 06 million 2013 2012 2011 respectively expense income net consolidated statement operations impact derivative instruments leases company leases certain manufacturing facilities sales offices warehouses equipment generally leases carry renewal provisions require company pay maintenance costs future minimum lease payments capital leases noncancelable operating leases december 31 2013 follows carrying amounts assets capital lease include 16 segment information company operates three geographic segments americas emea asia pacific segments sells similar products managed separately separate financial results reviewed companys chief operating decisionmaker intercompany sales transactions eliminated sales region based upon location entity recording sale accounting policies segment described summary significant accounting policies see note 2 watts water technologies inc subsidiaries notes consolidated financial statements continued 16 segment information continued following summary companys significant accounts balances segment reconciled consolidated totals corporate expenses primarily administrative compensation expense internal controls costs professional fees including legal audit expenses shareholder services benefit administration costs allocated geographic segments viewed corporate functions support activities watts water technologies inc subsidiaries notes consolidated financial statements continued 16 segment information continued following includes us net sales us property plant equipment companys americas segment following includes intersegment sales americas emea asia pacific company sells products various end markets around world groups net sales third parties four product categories result emea transformation program company reallocated revenues approximately 900 million 1000 million 2012 2011 respectively hvac gas residential commercial flow control previously reported reallocation based alignment certain subsidiaries within product groupings adjustment disclosure effect consolidated financial statements net sales third parties four product categories follows watts water technologies inc subsidiaries notes consolidated financial statements continued 17 quarterly financial information unaudited fourth quarter 2013 company recorded legal costs related agreement principle settle claims trabakoolas et al v watts water technologies inc et al matter pending united states district court northern district california net settlement expense recorded income continuing operations 136 million please see note 14 additional information also fourth quarter 2013 company recorded customer rebate expense approximately 30 million related accrual adjustments 2013 18 subsequent events january 9 2014 david j coghlan resigned positions chief executive officer president director company board directors appointed dean p freeman executive vice president chief financial officer serve interim chief executive officer president company companys board directors initiated search companys next chief executive officer president february 18 2014 company declared quarterly dividend thirteen cents 013 per share outstanding share class common stock class b common stock watts water technologies inc subsidiaries schedule iivaluation qualifying accounts amounts millions three years ended december 31 exhibit index 1incorporated reference registrants current report form 8k dated april 29 2013 file 00111499 2incorporated reference registrants current report form 8k dated november 14 1991 file 00111499 3incorporated reference registrants annual report form 10k year ended december 31 2002 file 00111499 4incorporated reference registrants current report form 8k dated april 27 2006 file 00111499 5incorporated reference registrants form s1 336515 part second amendment form s1 dated august 21 1986 6incorporated reference registrants quarterly report form 10q quarter ended september 29 2013 file 00111499 7incorporated reference registrants annual report form 10k year ended december 31 2012 file 00111499 8incorporated reference registrants current report form 8k dated may 15 2013 file 00111499 9incorporated reference registrants annual report form 10k year ended june 30 1996 file 00111499 10incorporated reference registrants quarterly report form 10q quarter ended june 30 2013 file 00111499 11incorporated reference registrants annual report form 10k year ended december 31 2011 file 00111499 12incorporated reference registrants annual report form 10k year ended june 30 1997 file 00111499 13incorporated reference notes consolidated financial statements note 2 report 14incorporated reference registrants quarterly report form 10q quarter ended july 3 2005 file 00111499 15incorporated reference registrants annual report form 10k year ended june 30 1999 file 00111499 16incorporated reference registrants quarterly report form 10q quarter ended september 30 2000 file 00111499 17incorporated reference registrants annual report form 10k year ended december 31 2007 file 00111499 18incorporated reference registrants current report form 8k dated june 18 2010 file 00111499 19incorporated reference registrants current report form 8k dated february 24 2014 file 00111499 20incorporated reference registrants current report form 8k dated june 14 2012 file 00111499 management contract compensatory plan arrangement attached exhibit 101 report following formatted xbrl extensible business reporting language consolidated statements operations years ended december 31 2013 2012 2011 ii consolidated statements comprehensive income years ended december 31 2013 2012 2011 iii consolidated balance sheets december 31 2013 december 31 2012 iv consolidated statements stockholders equity years ended december 31 2013 2012 2011 v consolidated statements cash flows years ended december 31 2013 2012 2011 vi notes consolidated financial statementsitem 15 exhibits financial statement schedules a1 financial statements following financial statements included separate section report commencing page numbers specified report independent registered public accounting firm consolidated statements operations years ended december 31 2015 2014 2013 consolidated statements comprehensive loss income years ended december 31 2015 2014 consolidated balance sheets december 31 2015 2014 consolidated statements stockholders equity years ended december 31 2015 2014 2013 consolidated statements cash flows years ended december 31 2015 2014 2013 notes consolidated financial statements a2 schedules schedule iivaluation qualifying accounts years ended december 31 2015 2014 required schedules provision made applicable accounting regulations securities exchange commission included notes consolidated financial statements a3 exhibits listed exhibit index immediately preceding exhibits filed part annual report form 10k signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized watts water technologies inc robert j pagano jr robert j pagano jr chief executive officer president dated february 29 2016 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated report independent registered public accounting firm board directors stockholders watts water technologies inc audited accompanying consolidated balance sheets watts water technologies inc subsidiaries december 31 2015 2014 related consolidated statements operations comprehensive loss income stockholders equity cash flows years threeyear period ended december 31 2015 connection audits consolidated financial statements also audited financial statement schedule iivaluation qualifying accounts consolidated financial statements financial statement schedule responsibility companys management responsibility express opinion consolidated financial statements financial statement schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position watts water technologies inc subsidiaries december 31 2015 2014 results operations cash flows years threeyear period ended december 31 2015 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states watts water technologies incs internal control financial reporting december 31 2015 based criteria established internal controlintegrated framework 2013 issued committee sponsoring organizations treadway commission coso report dated february 29 2016 expressed unqualified opinion effectiveness companys internal control financial reporting kpmg llp boston massachusetts february 29 2016 watts water technologies inc subsidiaries consolidated statements operations amounts millions except per share information accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated statements comprehensive loss income amounts millions accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated balance sheets amounts millions except share information accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated statements stockholders equity amounts millions except share information accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated statements cash flows amounts millions accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries notes consolidated financial statements 1 description business watts water technologies inc company subsidiaries designs manufactures sells products solutions manage conserve flow fluids energy buildings residential commercial markets predominantly americas europe middle east africa emea asiapacific 2 accounting policies principles consolidation consolidated financial statements include accounts company majority wholly owned subsidiaries upon consolidation significant intercompany accounts transactions eliminated cash equivalents cash equivalents consist instruments remaining maturities three months less date purchase consist primarily certificates deposit money market funds carrying amount reasonable estimate fair value allowance doubtful accounts allowance doubtful accounts includes reserves bad debts sales returns allowances cash discounts company analyzes aging accounts receivable individual accounts receivable historical bad debts concentration receivables customer credit worthiness current economic trends changes customer payment terms company specifically analyzes individual accounts receivable establishes specific reserves financially troubled customers addition factors developed certain regions utilizing historical trends sales returns allowances cash discount activities derive reserve returns allowances cash discounts concentration credit company sells products diversified customer base therefore significant concentrations credit risk 2015 2014 2013 customer accounted 10 companys total sales inventories stated lower cost market using primarily firstin firstout method market value determined replacement cost net realizable value historical usage used basis determining reserve excess obsolete inventories goodwill intangible assets goodwill recorded consideration paid acquisitions exceeds fair value net tangible intangible assets acquired goodwill intangible assets indefinite useful lives amortized rather tested least annually impairment watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued changes carrying amount goodwill geographic segment follows november 30 2015 company completed acquisition 80 outstanding shares apex valves limited apex new zealand company commitment purchase remaining 20 ownership within three years closing aggregate purchase price approximately 204 million company recorded liability 55 million estimate acquisition date fair value contractual call option purchase remaining 20 company accounted transaction business combination company completed purchase price allocation resulted recognition 129 million goodwill 101 million intangible assets december 1 2014 company completed acquisition aerco international inc aerco share purchase transaction aggregate purchase price recorded including estimated working capital adjustment approximately 2722 million subject final postclosing working capital adjustment company accounted transaction business combination acquisition financed borrowing companys credit agreement company completed purchase price allocation resulted recognition 1743 million goodwill 1024 million intangible assets december 31 2014 2015 working capital adjustment finalized resulting total purchase price 2715 million recognition 1733 million goodwill second quarter 2015 41 million goodwill americas segment reclassified assets held sale included net assets sold third quarter 2015 reduction goodwill included foreign currency translation category table refer note 5 sale business discussion watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued impairment goodwill longlived assets goodwill tested impairment least annually frequently events circumstances indicate likely goodwill might impaired change business conditions company performs annual goodwill impairment assessment fourth quarter year fourth quarter 2015 company performed quantitative impairment analysis emea reporting unit connection annual strategic plan due underperformance budget primarily caused continued challenging european macroeconomic environment company estimated fair value reporting unit using weighted calculation income approach market approach income approach calculated present value expected future cash flows included impact recent underperformance reporting unit due continued challenging macroeconomic environment europe lowered expectations reporting unit going forward included strategic plan guideline public company method market approach calculated estimated fair values based valuation multiples derived stock prices enterprise values publicly traded companies comparable company second step impairment test carrying value goodwill exceeded implied fair value goodwill resulting pretax impairment charge 1297 million tax benefit associated impairment 34 million resulting net impairment charge 1263 million end fourth quarter 2014 management determined likely significant portion asiapacific reporting units thirdparty intersegment net sales expected decline result initial phase americas asiapacific transformation restructuring program based factor company performed quantitative impairment analysis asiapacific reporting unit company completed fair value assessment net assets reporting unit recorded impairment 129 million fourth quarter 2014 company estimated fair value reporting unit using present value expected future cash flows reflect impact certain product line rationalization efforts associated initial phase americas asiapacific transformation restructuring program including sale certain assets second step impairment test carrying value goodwill exceeded implied fair value goodwill resulting full impairment tax benefit associated impairment 129 million charge eliminated goodwill asiapacific reporting unit indefinitelived intangibles tested impairment least annually frequently events circumstances change business conditions indicate likely intangible asset might impaired company performs annual indefinitelived intangibles impairment assessment fourth quarter year 2015 2014 2013 impairment assessments company performed quantitative assessments indefinitelived intangible assets methodology employed relief royalty method subset income approach based results assessment company recognized noncash pretax impairment charges 2015 2014 2013 approximately 06 million 13 million 07 million respectively impairment charge 06 million consists 05 million impairment charge trade name americas segment 01 million impairment charge trade name emea segment impairment charge 13 million 2014 consists 05 million impairment charge trade name americas segment 08 million impairment charge trade name emea segment gross carrying amount table reflects impairment charges watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued intangible assets estimable lives longlived assets reviewed impairment whenever events changes circumstances indicate carrying amount asset group may recoverable recoverability intangible assets estimable lives long lived assets measured comparison carrying amount asset group future net undiscounted pretax cash flows expected generated asset group comparisons indicate asset recoverable impairment loss recognized amount carrying amount asset group exceeds related estimated fair value estimated fair value based either discounted future pretax operating cash flows appraised values depending nature asset company determines discount rate analysis based weighted average cost capital using market guideline public companies related businesses allocate interest charges asset group measured judgment required estimate future operating cash flows intangible assets include following company acquired 101 million intangible assets part apex acquisition consisting primarily customer relationships valued 84 million trade name 17 million weightedaverage amortization period total asset category customer relationships trade name 13 years 10 years 15 years respectively aggregate amortization expense amortized intangible assets 2015 2014 2013 209 million 152 million 147 million respectively additionally future amortization expense amortizable intangible assets expected 201 million 2016 195 million 2017 162 million 2018 125 million 2019 122 million 2020 amortization expense provided straight line basis estimated useful lives intangible assets weightedaverage remaining life total amortizable intangible assets 119 years patents customer relationships technology trade names amortizable intangibles weightedaverage remaining lives 40 years 115 years 96 years 145 years 325 years respectively indefinitelived intangible assets primarily include trade names trademarks property plant equipment property plant equipment recorded cost depreciation provided straightline basis estimated useful lives assets range 10 40 years buildings watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued improvements 3 15 years machinery equipment leasehold improvements depreciated lesser economic useful life asset remaining lease term taxes income taxes assessed governmental authorities sale transactions recorded net basis excluded sales companys consolidated statements operations income taxes income taxes accounted asset liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases operating loss tax credit carry forwards deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized income period includes enactment date company recognizes tax benefits item question meets morelikelythannot greater 50 likelihood sustained upon examination taxing authorities threshold 2015 unrecognized tax benefits company increased net amount 24 million unrecognized tax benefits increased approximately 36 million mainly related european tax positions unrecognized tax benefits decreased 12 million whereby approximately 08 million primarily related settlement completion european audit december 31 2015 company gross unrecognized tax benefits approximately 42 million approximately 18 million recognized would affect effective tax rate difference amount unrecognized tax benefits amount would affect effective tax rate consists federal tax benefit state income tax items allowable correlative adjustments available certain jurisdictions reconciliation beginning ending amount unrecognized tax follows company estimates reasonably possible balance unrecognized tax benefits december 31 2015 may decrease approximately 07 million next twelve months result settlements tax authorities company conducts business variety locations throughout world resulting tax filings numerous domestic foreign jurisdictions company subject tax examinations regularly part normal course business companys major jurisdictions us watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued france germany canada netherlands statute limitations us subject tax examination 2012 later france germany canada netherlands subject tax examination 20112013 later jurisdictions exceptions longer subject tax examinations state local international jurisdictions tax years 2011 company accounts interest penalties related uncertain tax positions component income tax expense foreign currency translation financial statements subsidiaries located outside united states generally measured using local currency functional currency balance sheet accounts including goodwill foreign subsidiaries translated united states dollars yearend exchange rates income expense items translated weighted average exchange rates period net translation gains losses included comprehensive income separate component stockholders equity company provide us income taxes foreign currency translation adjustments since provide taxes undistributed earnings foreign subsidiaries gains losses foreign currency transactions subsidiaries included net earnings stockbased compensation company records compensation expense financial statements sharebased awards based grant date fair value awards stockbased compensation expense includes estimate prevesting forfeitures recognized requisite service periods awards straightline basis generally commensurate vesting term benefits associated tax deductions excess recognized compensation cost reported financing cash flow december 31 2015 company one stockbased compensation plan total unrecognized compensation costs related unvested stockbased compensation arrangements approximately 211 million total weighted average remaining term 16 years 2015 2014 2013 company recognized compensation costs related stockbased programs approximately 109 million 86 million 96 million respectively 2014 company began recognizing certain stock compensation costs cost goods sold based allocation costs three operating segments 2015 2014 stock compensation expense 04 million 06 million respectively recorded cost goods sold 105 million 80 million respectively recorded selling general administrative expenses 2013 compensation costs recognized selling general administrative expenses 2015 2014 2013 company recorded approximately 03 million 07 million 12 million respectively tax benefits compensation expense relating stock options 2015 2014 2013 company recorded approximately 20 million 16 million 19 million respectively tax benefit stockbased plans 2015 2014 2013 recognition total stockbased compensation expense impacted basic diluted net income per common share 025 010 014 respectively net income per common share basic net income per common share calculated dividing net income weighted average number common shares outstanding calculation diluted loss income per share assumes conversion dilutive securities see note 12 watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued net loss income number shares used compute net loss income per share basic assuming full dilution reconciled computation diluted net loss income per share years ended december 31 2015 2014 2013 excludes effect potential exercise options purchase approximately 03 million 03 million 02 million shares respectively exercise price option greater average market price class common stock effect would antidilutive financial instruments normal course business company manages risks associated commodity prices foreign exchange rates interest rates variety strategies including use hedging transactions executed accordance companys policies companys hedging transactions include limited use various derivative financial commodity instruments matter policy company use derivative instruments unless underlying exposure change value derivative instruments would substantially offset opposite change value underlying hedged items company use derivative instruments trading speculative purposes derivative instruments may designated accounted either hedge recognized asset liability fair value hedge forecasted transaction cash flow hedge fair value hedge effective ineffective portions change fair value derivative instrument along adjustment carrying amount hedged item fair value changes attributable hedged risk recognized earnings cash flow hedge changes fair value derivative instrument highly effective deferred accumulated comprehensive income loss underlying hedged item recognized earnings cash flow hedges december 31 2015 december 31 2014 fair value cash flow hedge cease qualify hedge accounting terminated would continue carried balance sheet fair value settled hedge accounting would discontinued prospectively forecasted transaction longer probable occurring amounts previously deferred accumulated comprehensive income would recognized immediately earnings occasion company may enter derivative instrument qualify hedge accounting entered offset changes fair value underlying transaction required recognized earnings natural hedge instruments reflected consolidated balance sheets fair value changes fair value recognized earnings watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued foreign currency derivatives include forward foreign exchange contracts primarily canadian dollars metal derivatives include commodity swaps copper portions companys outstanding debt exposed interest rate risks company monitors interest rate exposures ongoing basis maximize overall effectiveness interest rates fair value measurements fair value defined exchange price would received asset paid transfer liability exit price principal advantageous market asset liability orderly transaction market participants measurement date entity required maximize use observable inputs available minimize use unobservable inputs measuring fair value company certain financial assets liabilities measured fair value recurring basis certain nonfinancial assets liabilities may measured fair value nonrecurring basis fair value disclosures assets liabilities based threelevel hierarchy defined follows level 1 quoted prices active markets identical assets liabilities entity ability access measurement date level 2 observable inputs level 1 prices quoted prices similar assets liabilities quoted prices markets active inputs observable corroborated observable market data substantially full term assets liabilities level 3 unobservable inputs supported little market activity significant fair value assets liabilities assets liabilities subject hierarchy classified entirety based lowest level input significant fair value measurement companys assessment significance particular input fair value measurement entirety requires judgment considers factors specific asset liability shipping handling shipping handling costs included selling general administrative expense amounted 535 million 618 million 613 million years ended december 31 2015 2014 2013 respectively research development research development costs included selling general administrative expense amounted 235 million 225 million 215 million years ended december 31 2015 2014 2013 respectively revenue recognition company recognizes revenue following criteria met company entered binding agreement product shipped title passes sales price watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued customer fixed determinable collectability reasonably assured provisions estimated returns allowances made time sale recorded reduction sales included allowance doubtful accounts consolidated balance sheets company records provisions sales incentives primarily volume rebates adjustment net sales time sale based estimated purchase targets estimates preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates new accounting standards november 2015 financial accounting standards board fasb issued accounting standards update asu 201517 income taxes balance sheet classification deferred taxes asu 201517 requires deferred tax liabilities assets classified noncurrent classified statement financial position asu 201517 effective financial statements issued annual periods beginning december 15 2016 interim periods thereafter earlier application permitted entities beginning interim annual reporting period applied either prospectively retrospectively periods presented adoption guidance expected material impact companys financial statements september 2015 fasb issued asu 201516 business combinations simplifying accounting measurementperiod adjustments asu 201516 eliminates requirement retrospectively adjust financial statements measurementperiod adjustments occur periods business combination consummated asu 201516 effective first quarter 2016 public companies calendar year ends applied prospectively early adoption permitted adoption guidance expected material impact companys financial statements july 2015 fasb issued asu 201511 inventory simplifying measurement inventory new standard changes inventory measurement lower cost market lower cost net realizable value standard eliminates requirement consider replacement cost net realizable value less normal profit margin measuring inventory asu 201511 effective first quarter 2017 public companies calendar year ends applied prospectively early adoption permitted adoption guidance expected material impact companys financial statements april 2015 fasb issued asu 201503 interestimputation interest simplifying presentation debt issuance costs asu 201503 debt issuance costs related recognized debt liability presented balance sheet direct deduction debt liability similar presentation debt discounts cost issuing debt longer recorded separate asset except incurred receipt funding associated debt liability asu 201503 effective first quarter 2016 public companies calendar year ends early adoption permitted asu requires retrospective application prior periods presented financial statements adoption guidance expected material impact companys financial statements watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued january 2015 fasb issued asu 201501 income statementextraordinary unusual items simplifying income statement presentation eliminating concept extraordinary items asu 201501 eliminates us gaap concept extraordinary items part initiative reduce complexity accounting standards asu 201501 effective first quarter 2016 public companies calendar year ends early adoption permitted provided guidance applied beginning fiscal year adoption asu may applied prospectively retrospectively prior periods presented adoption guidance expected material impact companys financial statements 3 discontinued operations august 1 2013 company completed sale outstanding shares indirect whollyowned subsidiary watts insulation gmbh austroflex receiving net cash proceeds 79 million loss tax disposal business approximately 22 million company substantial continuing involvement austroflexs operations cash flows therefore austroflexs results operations presented discontinued operations year ended december 31 2013 condensed operating statements discontinued operations year ended december 31 2013 summarized company recognize tax benefit loss disposal austroflex shares company believe likely tax benefit would realized year ended december 31 2013 95 million revenues related austroflex reported discontinued operations 4 restructuring charges net companys board directors approves major restructuring programs may involve discontinuance significant product lines shutdown significant facilities time company takes additional restructuring actions including involuntary terminations part major program company accounts costs period liability incurred costs included restructuring charges companys consolidated statements operations watts water technologies inc subsidiaries notes consolidated financial statements continued 4 restructuring charges net continued summary pretax cost restructuring program follows company recorded pretax restructuring business segments follows 2015 actions february 17 2015 board directors company approved initial phase transformation program relating companys americas asiapacific businesses primarily involved exit lowmargin noncore product lines phase one company eliminated approximately 175 million combined americas asiapacific net sales primarily within companys doityourself diy distribution channel december 31 2015 total expected costs relating phase one program complete total pretax cost incurred date 315 million including restructuring 96 million goodwill intangible asset impairments 134 million transformation deployment costs 85 million total pretax cost incurred included noncash charges 171 million total net aftertax charges 262 million october 26 2015 board directors company completed approval second phase companys transformation program related americas asiapacific businesses phase two phase two involves reducing square footage companys north american facilities together phase one expected reduce americas net operating footprint approximately 30 phase two designed improve utilization companys remaining facilities better leverage companys cost structure reduce working capital improve execution customer delivery requirements total estimated pretax cost phase two 315 million 365 million including restructuring 116 million transformation deployment costs 199 million 249 million total phase two program costs 83 million watts water technologies inc subsidiaries notes consolidated financial statements continued 4 restructuring charges net continued incurred date total phase two noncash charges estimated 9 million aftertax charges estimated 194 million 224 million combined basis total estimated pretax cost companys transformation program related americas asiapacific businesses 63 million 68 million including restructuring costs 212 million goodwill intangible asset impairments 134 million transformation deployment costs 28 million 33 million transformation deployment costs include consulting project management fees associated costs program expected incurred 2017 following table summarizes type total expected incurred remaining pretax restructuring costs companys transformation program related americas asiapacific businesses phase one phase two combined following table summarizes total incurred year ended december 31 2015 incurred program date expected pretax restructuring costs business segment companys americas asiapacific 2015 transformation program details restructuring reserve activity companys americas asiapacific 2015 transformation program year ended december 31 2015 follows watts water technologies inc subsidiaries notes consolidated financial statements continued 4 restructuring charges net continued actions company also periodically initiates actions part major program fourth quarter 2015 fourth quarter 2014 management initiated certain restructuring actions strategic initiatives respect companys emea segment response ongoing economic challenges europe additional product rationalization restructuring actions primarily include expected severance benefits limited costs relating asset write offs professional fees relocation 2015 emea restructuring action subject completion statutory labor relations requirements including consultation receipt advisory opinions relevant works councils total pretax charge 2015 restructuring initiatives expected approximately 10 million approximately 69 million incurred december 31 2015 program date remaining expected costs relate severance legal relocation costs expected completed end fourth quarter fiscal 2016 total pretax charge 2014 restructuring initiatives expected approximately 8 million approximately 64 million incurred december 31 2015 program date 2015 total expected costs planned actions reduced 99 million 8 million primarily related reduced severance costs favorable foreign exchange rates weakening euro remaining costs relate severance asset writeoffs relocation costs expected completed end fourth quarter fiscal 2016 fourth quarter 2015 company initiated restructuring activities corporate reduce costs reductionsinforce total pretax restructuring expense incurred relating initiatives 11 million remaining expected costs following table summarizes total expected incurred remaining pretax restructuring costs emea 2015 restructuring actions details companys emea 2015 restructuring reserve activity year ended december 31 2015 follows watts water technologies inc subsidiaries notes consolidated financial statements continued 4 restructuring charges net continued following table summarizes total expected incurred remaining pretax restructuring costs emea 2014 restructuring actions details companys emea 2014 restructuring reserve activity year ended december 31 2015 follows 5 sale business sale certain americas product lines september 15 2015 company completed sale certain assets related companys fittings brass tubular vinyl tubing product lines third party allcash transaction company received net cash proceeds approximately 331 million inventory adjustments transaction fees total net assets sold 334 million resulting immaterial loss carrying amounts net assets sold follows agreement sell china manufacturing facility september 22 2015 company signed agreement sell manufacturing facility china dedicated production noncore products december 31 2015 facility still operation meet requirements held sale classification balance watts water technologies inc subsidiaries notes consolidated financial statements continued 5 sale business continued sheet company expects complete sale facility first half 2016 sales price exceed carrying value assets 6 business acquisitions apex november 30 2015 company completed acquisition 80 outstanding shares apex specializes design manufacture control valves low high pressure hot water filtration systems apex also produces extensive range float reservoir valves agricultural industry aggregate purchase price approximately 204 million company recorded longterm liability 55 million estimate acquisition date fair value contractual call option purchase remaining 20 within three years closing company accounted transaction business combination company completed purchase price allocation resulted recognition 129 million goodwill 101 million intangible assets intangible assets consist primarily customer relationships estimated life 10 years trade name estimated life 15 years goodwill deductible tax purposes results apex material companys consolidated financial statements results operations apex included companys asiapacific segment since acquisition date aerco december 1 2014 company completed acquisition aerco share purchase transaction aggregate purchase price 2715 million financed borrowing companys credit agreement results operations aerco included companys americas segment since acquisition date aerco leading provider commercial highefficiency boilers water heaters heating solutions north america based new york products distributed commercial municipal use primarily north america aerco strengthens watts strategic vision expand heat source products strengthens companys solutions system offerings company accounted transaction business combination company completed purchase price allocation resulted recognition 1733 million goodwill 1024 million intangible assets intangible assets consist primarily customer relationships valued 785 million estimated lives 16 years developed technology valued 158 million estimated lives 10 years trade name valued 74 million 20 year life goodwill attributable workforce aerco strategic platform adjacency allow watts extend product offerings result acquisition approximately 194 million goodwill watts water technologies inc subsidiaries notes consolidated financial statements continued 6 business acquisitions continued deductible tax purposes following table summarizes value assets liabilities acquired millions consolidated statement operations year ended december 31 2014 includes results aerco since acquisition date includes 53 million revenues 14 million operating loss includes acquisition accounting charges 08 million supplemental proforma information unaudited company completed acquisition aerco beginning 2013 net sales net income continuing operations earnings per share continuing operations would follows net income continuing operations years ended december 31 2014 december 31 2013 adjusted include 31 million 33 million respectively net interest expense related financing 39 million 43 million respectively net amortization expense resulting estimated allocation purchase price amortizable tangible intangible assets net income continuing operations year ended december 31 2014 also adjusted exclude 33 million net acquisitionrelated charges thirdparty costs 7 inventories net inventories consist following watts water technologies inc subsidiaries notes consolidated financial statements continued 7 inventories net continued raw materials workinprocess finished goods net valuation reserves 286 million 273 million december 31 2015 2014 respectively finished goods 148 million 164 million december 31 2015 2014 respectively consigned 8 property plant equipment property plant equipment consist following 9 income taxes significant components companys deferred income tax liabilities assets follows watts water technologies inc subsidiaries notes consolidated financial statements continued 9 income taxes continued provision income taxes continuing operations based following pretax income provision income taxes continuing operations consists following actual income taxes reported continuing operations different would computed applying federal statutory tax rate income continuing operations income taxes reasons differences follows december 31 2015 company foreign net operating loss carry forwards 342 million income tax purposes considering valuation allowances 236 million losses carried forward indefinitely 57 million expire 2020 49 million expire 2023 net watts water technologies inc subsidiaries notes consolidated financial statements continued 9 income taxes continued operating losses consist 236 million related austrian operations 106 million dutch operations december 31 2015 company us capital loss carry forwards 36 million income tax purposes considering valuation allowances 21 million expire 2016 10 million expire 2017 05 million expire 2018 december 31 2015 december 31 2014 company valuation allowances 95 million 125 million respectively december 31 2015 36 million relates us capital losses 59 million relates austrian net operating losses december 31 2014 62 million related us capital losses 63 million related austrian net operating losses management believes ability company use losses within applicable carry forward period rise level likely threshold company valuation allowance deferred tax assets management believes likely company recover net deferred tax assets management believes likely future reversals deferred tax liabilities together forecasted income sufficient fully recover deferred tax assets changes enacted income tax laws material effect company 2015 2014 2013 undistributed earnings companys foreign subsidiaries amounted approximately 3661 million december 31 2015 3860 million december 31 2014 3972 million december 31 2013 earnings considered indefinitely reinvested accordingly provision us federal state income taxes recorded thereon upon distribution earnings form dividends otherwise company subject withholding taxes payable various foreign countries determination amount us income tax liability would incurred practicable complexities associated hypothetical calculation however unrecognized foreign tax credits may available reduce portion us income tax liability 10 accrued expenses liabilities accrued expenses liabilities consist following watts water technologies inc subsidiaries notes consolidated financial statements continued 11 financing arrangements longterm debt consists following principal payments next five years thereafter due follows millions 20162261 2017237 2018225 2019300 20201050 thereafter1700 retirement 225 million senior unsecured note reflected principal payments due 2016 classified noncurrent liability balance sheet december 31 2015 refer discussion payments due 2017 thereafter reflective new credit facility entered february 12 2016 company maintains letters credit guarantee performance payment third parties accordance specified terms conditions amounts outstanding approximately 248 million december 31 2015 236 million december 31 2014 companys letters credit primarily associated insurance coverage lesser extent foreign purchases companys letters credit generally expire within one year issuance drawn revolving credit facility instruments may exist expire without drawn therefore necessarily represent future cash flow obligations 2015 2014 company party credit agreement prior credit agreement among company certain subsidiaries company become borrowers prior credit agreement jpmorgan chase bank na administrative agent swing line lender letter credit issuer lenders referred therein prior credit agreement provided 500 million fiveyear senior unsecured revolving credit facility could increased additional 500 million certain circumstances subject terms prior credit agreement prior credit agreement sublimit 100 million letters credit borrowings outstanding prior credit agreement bore interest fluctuating rate per annum equal applicable percentage equal case eurocurrency rate loans british bankers association libor rate plus applicable percentage ranging 0975 145 determined reference companys consolidated leverage ratio plus case certain lenders mandatory cost calculated accordance terms prior credit agreement ii case base rate loans swing line loans highest federal funds rate plus 05 b rate interest effect day announced jpmorgan chase bank na prime rate c british bankers association libor rate plus 10 plus applicable percentage ranging 000 045 determined reference companys consolidated leverage ratio addition paying interest prior credit agreement company also required pay certain fees connection credit facility including limited watts water technologies inc subsidiaries notes consolidated financial statements continued 11 financing arrangements continued unused facility fee letter credit fees prior credit agreement would matured february 18 2019 company entitled repay loans outstanding prior credit agreement time without premium penalty customary breakage costs subject terms prior credit agreement december 31 2015 company compliance covenants related prior credit agreement 2002 million unused available credit prior credit agreement 248 million standby letters credit outstanding prior credit agreement company 275 million borrowings outstanding prior credit agreement december 31 2015 prior credit agreement imposed various restrictions company subsidiaries including restrictions pertaining incurrence additional indebtedness ii limitations liens iii making distributions dividends payments iv mergers consolidations acquisitions v dispositions assets vi maintenance certain consolidated leverage ratios consolidated interest coverage ratios vii transactions affiliates viii changes governing documents ix changes control february 12 2016 company terminated prior credit agreement entered new credit agreement new credit agreement among company certain subsidiaries company become borrowers credit agreement jpmorgan chase bank na administrative agent swing line lender letter credit issuer lenders referred therein new credit agreement provides 500 million fiveyear senior unsecured revolving credit facility revolving credit facility sublimit 100 million letters credit new credit agreement also provides 300 million fiveyear term loan facility term loan facility available company single draw borrowings outstanding revolving credit facility bear interest fluctuating rate per annum equal applicable percentage defined case eurocurrency rate loans british bankers association libor rate plus applicable percentage ranging 0975 145 determined reference companys consolidated leverage ratio plus ii case base rate loans swing line loans highest federal funds rate plus 05 b rate interest effect day announced jpmorgan chase bank na prime rate c british bankers association libor rate plus 10 plus applicable percentage ranging 000 045 determined reference companys consolidated leverage ratio borrowings outstanding term loan facility bear interest fluctuating rate per annum equal applicable percentage defined british bankers association libor rate plus applicable percentage ranging 1125 175 determined reference companys consolidated leverage ratio loan term loan facility amortizes follows 0 per annum first year 75 second third years 10 fourth fifth years payments due made ratably year quarterly installments addition paying interest new credit agreement company also required pay certain fees connection credit facility including limited unused facility fee letter credit fees new credit agreement matures february 12 2021 subject extension certain circumstances subject terms new credit agreement company may repay loans outstanding new credit agreement time without premium penalty customary breakage costs subject terms new credit agreement repaid amounts borrowed term loan facility may borrowed watts water technologies inc subsidiaries notes consolidated financial statements continued 11 financing arrangements continued new credit agreement imposes various restrictions company subsidiaries including restrictions pertaining incurrence additional indebtedness ii limitations liens iii making distributions dividends payments iv mergers consolidations acquisitions v dispositions assets vi certain consolidated leverage ratios consolidated interest coverage ratios vii transactions affiliates viii changes governing documents ix changes control june 18 2010 company entered note purchase agreement certain institutional investors 2010 note purchase agreement pursuant 2010 note purchase agreement company issued senior notes 750 million principal due june 18 2020 company pay interest outstanding balance notes rate 505 per annum payable semiannually june 18th december 18th principal notes shall become due payable company may option upon notice subject terms 2010 note purchase agreement prepay time part notes amount less 10 million paying principal amount plus makewhole amount dependent upon yield respective us treasury securities 2010 note purchase agreement includes operational financial covenants company required comply including among others maintenance certain financial ratios restrictions additional indebtedness liens dispositions december 31 2015 company compliance covenants related 2010 note purchase agreement april 27 2006 company completed private placement 2250 million 585 senior unsecured notes due april 2016 2006 note purchase agreement 2006 note purchase agreement includes operational financial covenants company required comply including among others maintenance certain financial ratios restrictions additional indebtedness liens dispositions events default 2006 note purchase agreement include failure comply financial operational covenants well bankruptcy insolvency events company may option upon notice note holders prepay time part notes amount less 10 million paying principal amount plus makewhole amount dependent upon yield respective us treasury securities payment interest senior unsecured notes due semiannually april 30th october 30th year december 31 2015 company compliance covenants related 2006 note purchase agreement company intends use borrowings revolving credit facility retire 2006 note purchase agreement upon maturity result 225 million senior unsecured note classified noncurrent liability balance sheet december 31 2015 may 2013 company repaid available cash 750 million 547 unsecured senior notes originally completed part 2003 private placement 12 common stock class common stock class b common stock equal dividend liquidation rights share companys class common stock entitled one vote matters submitted stockholders share class b common stock entitled ten votes matters shares class b common stock convertible shares class common stock onetoone basis option holder december 31 2015 company reserved total 3122011 class common stock issuance stockbased compensation plans 6379290 shares conversion class b common stock class common stock watts water technologies inc subsidiaries notes consolidated financial statements continued 12 common stock continued july 27 2015 companys board directors authorized repurchase 100 million companys class common stock time open market privately negotiated transactions connection stock repurchase program company entered rule 10b51 plan permits shares repurchased company might otherwise precluded insider trading laws repurchase program may suspended discontinued time subject terms rule 10b51 plan company entered respect repurchase program april 30 2013 companys board directors authorized repurchase 90 million companys class common stock time open market privately negotiated transactions stock repurchase program completed september 2015 company repurchased remaining class common stock authorized program following table summarizes cost number class common stock repurchased april 30 2013 july 27 2015 programs year ended 2015 2014 13 stockbased compensation december 31 2015 company maintains one stock incentive plan second amended restated 2004 stock incentive plan 2004 stock incentive plan key employees granted nonqualified stock options purchase companys class common stock options typically become exercisable fouryear period rate 25 per year expire ten years grant date however options granted 2014 become exercisable threeyear period rate onethird per year options granted plan may exercise prices less 100 fair market value class common stock date grant companys current practice grant options fair market value grant date december 31 2015 1559167 shares class common stock authorized future grants new equity awards companys 2004 stock incentive plan company grants shares restricted stock deferred shares key employees stock awards nonemployee members companys board directors 2004 stock incentive plan stock awards nonemployee members companys board directors vest immediately employees restricted stock awards deferred shares typically vest threeyear period rate onethird per year except restricted stock awards deferred shares granted 2014 vest twoyear period rate 50 per year watts water technologies inc subsidiaries notes consolidated financial statements continued 13 stockbased compensation continued company grants performance stock units key employees 2004 stock incentive plan performance stock units cliff vest end threeyear performance period upon vesting number shares companys class common stock awarded performance stock unit recipient determined based companys attainment certain performance goals set time performance stock units granted company granted performance stock units 2014 2015 performance goals performance stock units based compound annual growth rate companys revenue threeyear performance period companys return invested capital roic third year performance period performance period 2014 performance stock units january 1 2014 december 31 2016 performance period 2015 performance stock units january 1 2015 december 31 2017 performance stock units also provide overall minimum roic threshold company must exceed order shares earned number shares class common stock may earned performance stock unit recipient ranges 0 200 target number shares designated recipient time grant performance stock units amortized expense vesting period based companys expected performance relative performance goals met awards earned previously recognized compensation expense reversed company also management stock purchase plan allows granting restricted stock units rsus key employees annual basis key employees may elect receive portion annual incentive compensation rsus instead cash rsu provides key employee right purchase share class common stock 67 fair market value date grant beginning annual incentive compensation 2016 purchase price rsus increased 80 fair market value companys class common stock rsus vest either annually threeyear period grant date upon third anniversary grant date receipt shares underlying rsus deferred minimum three years greater number years chosen employee aggregate 2000000 shares class common stock may issued management stock purchase plan december 31 2015 871719 shares class common stock authorized future grants companys management stock purchase plan 2004 stock incentive plan december 31 2015 total unrecognized compensation cost related unvested stock options approximately 25 million total weighted average remaining term 14 years 2015 2014 2013 company recognized compensation cost 19 million 26 million 38 million respectively watts water technologies inc subsidiaries notes consolidated financial statements continued 13 stockbased compensation continued following summary stock option activity related information december 31 2015 aggregate intrinsic value exercisable options approximately 15 million representing total pretax intrinsic value based companys closing class common stock price 4967 december 31 2015 would received option holders option holders exercised options date total intrinsic value options exercised 2015 2014 2013 approximately 12 million 82 million 74 million respectively upon exercise options company issues shares class common stock following table summarizes information options outstanding december 31 2015 fair value option granted 2004 stock incentive plan estimated date grant using blackscholesmerton model based following weighted average assumptions watts water technologies inc subsidiaries notes consolidated financial statements continued 13 stockbased compensation continued riskfree interest rate based upon us treasury yield curve time grant respective expected life option expected life estimated period time outstanding options volatility calculated using historical data expected dividend yield stock companys best estimate expected future dividend yield assumptions used determine weighted average grantdate fair value stock options 2004 2030 years ended december 31 2014 2013 respectively following summary unvested restricted stock deferred shares activity related information total fair value shares vested 2015 2014 2013 66 million 59 million 56 million respectively december 31 2015 total unrecognized compensation cost related unvested restricted stock deferred shares approximately 98 million total weighted average remaining term 18 years 2015 2014 2013 company recognized compensation costs 67 million 48 million 51 million respectively aggregate intrinsic value restricted stock deferred shares granted outstanding approximated 109 million representing total pretax intrinsic value based companys closing class common stock price 4967 december 31 2015 following summary unvested performance share award activity related information watts water technologies inc subsidiaries notes consolidated financial statements continued 13 stockbased compensation continued december 31 2015 total unrecognized compensation cost related unvested performance shares approximately 79 million total weighted average remaining term 152 years 2015 company recognized compensation costs 17 million aggregate intrinsic value performance shares granted outstanding approximated 00 million representing total pretax intrinsic value based companys closing class common stock price 4967 december 31 2015 management stock purchase plan total unrecognized compensation cost related unvested rsus approximately 09 million december 31 2015 total weighted average remaining term 18 years 2015 2014 2013 company recognized compensation cost 06 million 05 million 07 million respectively dividends declared rsus paid individuals remain unpaid december 31 2015 total approximately 01 million summary companys rsu activity related information shown following table december 31 2015 aggregate intrinsic values outstanding vested rsus approximately 14 million 04 million respectively representing total pretax intrinsic value based companys closing class common stock price 4967 december 31 2015 would received rsus holders rsus settled date total intrinsic value rsus settled 2015 2014 2013 approximately 08 million 17 million 28 million respectively upon settlement rsus company issues shares class common stock watts water technologies inc subsidiaries notes consolidated financial statements continued 13 stockbased compensation continued following table summarizes information rsus outstanding december 31 2015 fair value share issued management stock purchase plan estimated date grant using blackscholesmerton model based following weighted average assumptions riskfree interest rate based upon us treasury yield curve time grant respective expected life rsus expected life estimated period time outstanding rsus volatility calculated using historical data expected dividend yield stock companys best estimate expected future dividend yield assumptions used determine weighted average grantdate fair value rsus granted 1904 2257 1805 2015 2014 2013 respectively company distributed dividends 066 per share 2015 058 per share 2014 050 per share 2013 respectively companys class common stock class b common stock 14 employee benefit plans majority us employees company sponsored funded noncontributory defined benefit pension plan watts water technologies inc pension plan pension plan unfunded noncontributory defined benefit pension plan watts water technologies inc supplemental employees retirement plan serp benefits based primarily years service employees compensation funding policy company plans contribute annual amount met pension plans minimum funding requirements exceed maximum amount deducted federal income tax purposes october 31 2011 companys board directors voted cease accruals effective december 31 2011 companys pension plan serp april 28 2014 companys board directors voted terminate companys pension plan serp board directors authorized company make contributions pension plan serp may necessary make plans sufficient settle plan liabilities watts water technologies inc subsidiaries notes consolidated financial statements continued 14 employee benefit plans continued pension plan terminated effective july 31 2014 june 4 2015 company received internal revenue services favorable determination letter terminating pension plan serp terminated effective may 15 2014 september 2015 company settled pension plan serp benefit obligations included following actions • company settled liabilities serp accordance section 409a internal revenue code paying lump sums plan participants • company transferred pension plan assets benefit obligations annuity provider distributed lump sum payments participants based elections • company made cash contributions 432 million fully fund settlement actions cumulative actuarial losses 597 million previously recorded accumulated comprehensive income recognized selling general administrative expenses quarter ended september 27 2015 associated deferred tax asset 230 million previously recorded accumulated comprehensive income netted within longterm deferred tax liabilities reversed quarter ended september 27 2015 funded status defined benefit plans amounts recognized consolidated balance sheets follows 400 million unfunded balance december 31 2014 recorded current liabilities consolidated balance sheets watts water technologies inc subsidiaries notes consolidated financial statements continued 14 employee benefit plans continued amounts recognized accumulated comprehensive income consist information pension plans accumulated benefit obligation excess plan assets follows components net periodic benefit cost follows assumptions weightedaverage assumptions used determine benefit obligations weightedaverage assumptions used determine net periodic benefit costs prior settlement 2015 balance sheet dates 2014 2013 discount rates selected based upon rates return measurement date utilizing bond matching approach match expected benefit cash flows selecting expected longterm rate watts water technologies inc subsidiaries notes consolidated financial statements continued 14 employee benefit plans continued return assets company considers average rate earnings expected funds invested provide benefits plan includes considering trusts asset allocation expected returns likely earned life plan longterm rate return assets decreased 60 40 2015 reflect changes made asset allocation anticipation plan termination plan assets companys written retirement plan investment policy set forth investment policy objectives constraints watts water technologies inc pension plan retirement plan investment policy set forth pension plan committee defined general investment principles directed investment management policy addressing preservation capital risk aversion adherence investment discipline investment managers make reasonable effort control risk evaluated twice year commonly accepted benchmarks ensure risk assumed commensurate given investment style objectives portfolio designed achieve balanced return current income modest growth capital achieving returns excess rate inflation investment horizon order preserve purchasing power plan assets plan assets required invested liquid securities derivative investments allowed prohibited investments included limited following futures contracts private placements options limited partnerships venturecapital investments interestonly io principalonly po residual tranche collateralized mortgage obligation cmos watts water technologies inc stock prohibited transactions included limited following short selling margin transactions allowable assets included cash equivalents fixed income securities equity securities mutual funds guaranteed investment contracts specific guidelines regarding allocation assets followed using liability driven investment ldi strategy ldi strategy investments made based expected cash flows required fund pension plans liabilities cash flow matching technique required plans asset allocation heavily weighted toward fixed income securities companys allocation target end 2014 95 fixed income 5 equities investments anticipation expected termination plan 2015 investment performance monitored regular basis investments reallocated stay within specific guidelines securities one company government agency exceeded 10 total fund 20 total fund invested one industry individual treasury securities may represented 50 total fund total allocation treasury bonds notes may represented 100 plans aggregate bond position watts water technologies inc subsidiaries notes consolidated financial statements continued 14 employee benefit plans continued plan assets outstanding december 31 2015 weighted average asset allocations asset category december 31 2014 follows following table presents investments pension plan measured fair value december 31 2014 aincluded investments common stock diverse industries bincluded investments index exchangetraded funds cincludes investment grade bonds diverse industries dincluded investments real estate investment funds exchange traded funds commodity mutual funds accrued interest cash flows information related companys pension funds cash flow follows company contributed approximately 438 million 2015 pension plan serp 438 million contribution 2015 included 432 million cash contributions settlement 06 million contributed throughout nine months ended september 27 2015 related serp contribution based distribution date fair value plan assets watts water technologies inc subsidiaries notes consolidated financial statements continued 14 employee benefit plans continued distribution market interest rates annuity purchase rates distribution benefit payments paid pension plans additionally companys domestic employees eligible participate companys 401k savings plan effective january 1 2012 company provides base contribution 2 employees salary regardless whether employee participates plan company matches contribution 100 first 4 employees contribution companys match contribution years ended december 31 2015 2014 2013 43 million 44 million 42 million respectively charges emea pension plans approximated 49 million 55 million 58 million years ended december 31 2015 2014 2013 respectively costs relate plans administered certain european subsidiaries benefits calculated according government requirements paid employees upon retirement change employment august 18 2015 company entered amendment 3 supplemental compensation agreement amendment timothy p horne companys former chief executive officer president principal stockholder supplemental compensation agreement dated september 1 1995 amended july 25 2000 october 23 2002 compensation agreement company mr horne mr horne received payments consulting services equal greater onehalf average annual base salary employee company three years immediately prior retirement ii 400000 calendar year following retirement date death subject certain costofliving increases year mr horne paid 598562 consulting services 2014 compensation agreement mr horne also entitled receive lifetime benefits including use secretarial services use office retiree health insurance reimbursement tax financial planning expenses certain benefits amendment provides 6 million lumpsum buyout companys ongoing lifetime payment obligations benefits compensation agreement except use office administrative support amendment also provides consulting services mr horne requested company rather per year hourly requirements company paid 6 million lumpsum buyout amount mr horne september 2015 resulted 5 million pretax charge year ended december 31 2015 15 contingencies environmental remediation accrual disclosure policy company defendant numerous legal matters arising ordinary course operations including involving product liability environmental matters commercial disputes company reviews lawsuits legal proceedings ongoing basis follows appropriate accounting guidance making accrual disclosure decisions company establishes accruals matters company assesses probable loss incurred amount loss reasonably estimated company establish accruals matters company believe probable loss incurred amount loss reasonably estimated companys assessment whether loss probable based assessment ultimate outcome matter following appeals fasb issued asc 450 contingencies event reasonably possible chance future event events occurring remote less likely event watts water technologies inc subsidiaries notes consolidated financial statements continued 15 contingencies environmental remediation continued remote chance future event events occurring slight thus references upper end range reasonably possible loss cases company able estimate range reasonably possible loss mean upper end range loss cases company believes risk loss slight may continue exposure loss excess amount accrued possible estimate reasonably possible loss range loss amount accrued matters disclosed estimate aggregated disclosed company records legal costs associated legal contingencies incurred except legal costs associated product liability claims included actuarial estimates used determining product liability accrual december 31 2015 company estimates aggregate amount reasonably possible loss excess amount accrued legal contingencies approximately 37 million pretax respect estimate reasonably possible loss management estimated upper end range reasonably possible loss based amount money damages claimed applicable ii allegations factual development date iii available defenses based allegations andor iv potentially liable parties estimate based upon currently available information subject significant judgment variety assumptions known unknown uncertainties matters underlying estimate change time actual results may vary significantly current estimate event unfavorable outcome one matters described ultimate liability may excess amounts currently accrued may material companys operating results cash flows particular quarterly annual period however based information currently known management believes ultimate outcome matters resolved time likely material adverse effect financial condition company though outcome could material companys operating results particular period depending part upon operating results period connector class actions november december 2014 watts water technologies inc watts regulator co named defendants three separate putative nationwide class action complaints meyers v watts water technologies inc united states district court southern district ohio ponzo v watts regulator co united states district court district massachusetts sharp v watts regulator co united states district court district massachusetts seeking recover damages relief based alleged failure water heater connectors june 26 2015 plaintiffs three actions filed consolidated amended complaint case captioned ponzo v watts regulator co united states district court district massachusetts hereinafter ponzo wwt voluntarily dismissed ponzo case complaint seeks among items damages unspecified amount replacement costs injunctive relief declaratory relief attorneys fees costs august 7 2015 company filed motion dismiss complaint motion still pending february 2015 watts regulator co named defendant putative nationwide class action complaint klug v watts water technologies inc et al united states district court district nebraska seeking recover damages relief based alleged failure companys floodsafe connectors hereinafter klug june 26 2015 company filed partial motion dismiss complaint response july 17 2015 plaintiff filed amended complaint added additional named plaintiffs sought correct deficiencies original complaint klug v watts regulator co united states district court district nebraska complaint watts water technologies inc subsidiaries notes consolidated financial statements continued 15 contingencies environmental remediation continued seeks among items damages unspecified amount injunctive relief declaratory relief attorneys fees costs july 31 2015 company filed partial motion dismiss complaint granted part denied part december 29 2015 company answered amended complaint february 2 2016 formal discovery yet conducted company participated mediation sessions ponzo klug cases december 2015 january 2016 february 16 2016 company reached agreement principle settle claims proposed total settlement amount 14 million company expected pay approximately 41 million insurance proceeds 99 million receipt also subject completion final written settlement agreement settlement subject completion final written settlement agreement preliminary court approval final court approval fairness hearing accordingly assurance proposed settlement approved current form settlement approved company intends continue vigorously contest allegations case fourth quarter 2015 company recorded liability 14 million related ponzo klug matters 78 million included current liabilities 62 million noncurrent liabilities addition 95 million receivable recorded current assets related insurance proceeds due based costs incurred december 31 2015 subject completion separate final written settlement agreement class action settlement approved company recorded pretax charge 35 million fourth quarter related settlement adjusting existing product liability accrual trabakoolas et al v watts water technologies inc et al march 8 2012 watts water technologies inc watts regulator co watts plumbing technologies co ltd among companies named defendants putative nationwide class action complaint filed us district court northern district california seeking recover damages relief based alleged failure toilet connectors december 12 2013 company reached agreement principle became final september 4 2014 settle claims total settlement amount 230 million responsible 140 million insurance proceeds 90 million litigation terminated fourth quarter 2013 company recorded liability 226 million related trabakoolas matter 127 million included current liabilities 99 million noncurrent liabilities addition 90 million receivable recorded current assets related insurance proceeds due separate settlement agreement liability reduced 138 million payments related notice claims administration plaintiff attorneys fees partial funding settlement amount made twelve months ended december 31 2014 90 million receivable insurance proceeds received september 28 2014 liability reduced 23 million annual funding installment year ended december 31 2015 remaining liability 65 million december 31 2015 paid equal annual installments next three years product liability company subject variety potential liabilities connection product liability cases company maintains high selfinsured retention limit within product liability watts water technologies inc subsidiaries notes consolidated financial statements continued 15 contingencies environmental remediation continued general liability coverage company believes generally accordance industry practices product liability cases us management establishes product liability accrual includes legal costs associated accrued claims utilizing thirdparty actuarial valuations incorporate historical trend factors companys specific claims experience derived loss reports provided thirdparty administrators product liability accrual established considering applicable insurance coverage changes nature product liability claims actual settlement amounts could affect adequacy estimates require changes provisions liability estimate ultimate liability may less reported environmental remediation company named potentially responsible party respect limited number identified contaminated sites levels contamination vary significantly site related levels remediation efforts environmental liabilities recorded based probable cost known estimated minimum cost remediation accruals discounted present value unless amount timing expenditures fixed reliably determinable company accrues estimated environmental liabilities based assumptions subject number factors uncertainties circumstances affect reliability precision estimates include identification additional sites environmental regulations level cleanup required technologies available number financial condition contributors remediation time period remediation may occur company recognizes changes estimates new remediation requirements defined new information becomes available asbestos litigation company defending approximately 310 lawsuits different jurisdictions alleging injury death result exposure asbestos complaints cases typically name large number defendants identify particular company products source asbestos exposure date discovery failed yield evidence substantial exposure company products judgments entered company litigation lawsuits proceedings claims arising ordinary course operations also pending threatened company 16 financial instruments fair value carrying amounts cash equivalents shortterm investments trade receivables trade payables approximate fair value short maturity financial instruments fair value companys 585 senior notes due 2016 505 senior notes due 2020 based quoted market prices similar notes level 2 fair value companys borrowings outstanding credit agreement companys variable rate debt approximates watts water technologies inc subsidiaries notes consolidated financial statements continued 16 financial instruments continued carrying value carrying amount estimated fair market value companys longterm debt including current portion follows financial instruments company measures certain financial assets liabilities fair value recurring basis including foreign currency derivatives deferred compensation plan assets related liability cash flow hedges december 31 2015 fair value certain financial assets liabilities determined using following inputs december 31 2015 2014 1included companys consolidated balance sheet assets net 2included companys consolidated balance sheet accrued compensation benefits watts water technologies inc subsidiaries notes consolidated financial statements continued 16 financial instruments continued 3included companys consolidated balance sheet noncurrent liabilities december 31 2015 relates mandatorily redeemable equity instrument part apex acquisition 2015 4included companys consolidated balance sheet accrued expenses liabilities december 31 2014 relates contingent consideration remaining tekmar acquisition table provides summary changes fair value financial assets liabilities measured fair value recurring basis using significant unobservable inputs level 3 period december 31 2014 december 31 2015 connection acquisition apex liability 55 million recognized estimate acquisition date fair value mandatorily redeemable equity instrument liability classified level 3 fair value hierarchy based commitment purchase remaining 20 apex shares within next three years observable market 25 million contingent consideration liability balance december 31 2014 related tekmar control systems acquisition 2012 liability classified level 3 fair value hierarchy based probability achievement future performance metric date acquisition observable market final contingent consideration payment 23 million made second quarter 2015 cash equivalents consist instruments remaining maturities three months less date purchase consist primarily certificates deposit money market funds carrying amount reasonable estimate fair value company uses financial instruments time enhance ability manage risk including foreign currency commodity pricing exposures exist part ongoing business operations use derivatives exposes company counterparty credit risk nonperformance market risk related changes currency exchange rates commodity prices company manages exposure counterparty credit risk diversification counterparties companys counterparties derivative transactions substantial commercial banks significant experience using derivative instruments impact market risk fair value cash flows companys derivative instruments monitored company restricts use derivative financial instruments hedging activities company enter contracts trading purposes company enter contracts speculative purposes use derivative instruments approved senior management written guidelines company exposure number foreign currency rates including canadian dollar euro chinese yuan british pound manage risk company generally uses layering methodology whereby end quarter company generally entered watts water technologies inc subsidiaries notes consolidated financial statements continued 16 financial instruments continued forward exchange contracts hedge approximately 50 projected intercompany purchase transactions next twelve months company primarily uses strategy purchases canada us average volume contracts vary generally approximates 0 100 million open contracts end given quarter december 31 2015 2014 company open forward exchange contracts december 31 2013 company contracts notional amounts aggregating approximately 10 million company accounts forward exchange contracts economic hedge elected designate derivative instruments hedging instruments realized unrealized gains losses contracts recognized income expense consolidated statement operations contracts subject company significant market risk exchange movement primarily offset gains losses related foreign currency denominated transactions impact derivative instruments consolidated statements operations immaterial 2015 2014 2013 leases company leases certain manufacturing facilities sales offices warehouses equipment generally leases carry renewal provisions require company pay maintenance costs future minimum lease payments capital leases noncancelable operating leases december 31 2015 follows carrying amounts assets capital lease include watts water technologies inc subsidiaries notes consolidated financial statements continued 17 segment information company operates three geographic segments americas emea asiapacific segments sells similar products managed separately separate financial results reviewed companys chief operating decisionmaker intercompany sales transactions eliminated sales region based upon location entity recording sale accounting policies segment described summary significant accounting policies see note 2 watts water technologies inc subsidiaries notes consolidated financial statements continued 17 segment information continued following summary companys significant accounts balances segment reconciled consolidated totals corporate expenses primarily administrative compensation expense compliance costs professional fees including corporaterelated legal audit expenses shareholder services benefit administration costs included corporates operating loss 2015 597 million charge related companys settlement pension plan serp benefit obligations refer note 14 defined benefit plans discussion watts water technologies inc subsidiaries notes consolidated financial statements continued 17 segment information continued following includes us net sales us property plant equipment companys americas segment following includes intersegment sales americas emea asiapacific company sells products various end markets around world groups net sales third parties four product categories net sales third parties four product categories follows watts water technologies inc subsidiaries notes consolidated financial statements continued 18 accumulated comprehensive income loss accumulated comprehensive income loss consists following watts water technologies inc subsidiaries notes consolidated financial statements continued 19 quarterly financial information unaudited fourth quarter 2015 company recorded aftertax goodwill impairment charge 1263 million relating emea reporting unit impairment charges 04 million relating indefinitelived trade names 56 million restructuring charges 40 million deployment costs relating emea americas asiapacific transformation programs fourth quarter 2015 company recorded aftertax charge 22 million settlement principle relating two class action lawsuits regarding legacy products 20 subsequent events february 11 2016 company declared quarterly dividend seventeen cents 017 per share outstanding share class common stock class b common stock watts water technologies inc subsidiaries schedule iivaluation qualifying accounts amounts millions exhibit index 1incorporated reference registrants current report form 8k dated july 27 2015 file 00111499 2incorporated reference registrants current report form 8k dated november 14 1991 file 00111499 3incorporated reference registrants annual report form 10k year ended december 31 2002 file 001 11499 4incorporated reference registrants current report form 8k dated april 27 2006 file 00111499 5incorporated reference registrants form s1 336515 part second amendment form s1 dated august 21 1986 6incorporated reference registrants current report form 8k dated october 26 2015 file 001 11499 7incorporated reference registrants current report form 8k dated august 18 2015 file 001 11499 8incorporated reference registrants current report form 8k dated may 15 2013 file 00111499 9incorporated reference registrants annual report form 10k year ended june 30 1996 file 00111499 10incorporated reference registrants quarterly report form 10q quarter ended june 30 2013 file 001 11499 11incorporated reference registrants annual report form 10k year ended december 31 2011 file 001 11499 12incorporated reference registrants annual report form 10k year ended june 30 1997 file 00111499 13incorporated reference notes consolidated financial statements note 2 report 14incorporated reference registrants quarterly report form 10q quarter ended july 3 2005 file 001 11499 15incorporated reference registrants annual report form 10k year ended june 30 1999 file 00111499 16incorporated reference registrants quarterly report form 10q quarter ended september 30 2000 file 001 11499 17incorporated reference registrants annual report form 10k year ended december 31 2007 file 001 11499 18incorporated reference registrants current report form 8k dated june 18 2010 file 00111499 19incorporated reference registrants current report form 8k dated february 9 2016 file 00111499 20incorporated reference registrants quarterly report form 10q quarter ended september 27 2015 file 00111499 21incorporated reference registrants current report form 8k dated may 4 2014 file 00111499 22incorporated reference registrants quarterly report form 10q quarter ended march 30 2014 file 001 11499 23incorporated reference registrants quarterly report form 10q quarter ended june 29 2014 file 001 11499 24incorporated reference registrants annual report form 10k year ended december 31 2014 file 001 11499 25incorporated reference registrants current report form 8k dated november 6 2014 file 001 11499 management contract compensatory plan arrangement attached exhibit 101 report following formatted xbrl extensible business reporting language consolidated statements operations years ended december 31 2015 2014 2013 ii consolidated statements comprehensive loss income years ended december 31 2015 2014 2013 iii consolidated balance sheets december 31 2015 december 31 2014 iv consolidated statements stockholders equity years ended december 31 2015 2014 2013 v consolidated statements cash flows years ended december 31 2015 2014 2013 vi notes consolidated financial statements watts water technologies inc hereby agrees furnish supplemental copy omitted schedule similar attachment agreement securities exchange commission upon requestnanitem 15 exhibits financial statement schedules a1 financial statements following financial statements included separate section report commencing page numbers specified a2 schedules required schedules provision made applicable accounting regulations securities exchange commission included notes consolidated financial statements a3 exhibits listed exhibit index immediately preceding exhibits filed part annual report form 10k signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized watts water technologies inc patrick okeefe patrick okeefe chief executive officer president director dated february 29 2008 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated signature title date patrick okeefe patrick okeefe chief executive officer president director february 29 2008 william c mccartney william c mccartney chief financial officer treasurer principal financial accounting officer february 29 2008 timothy p horne timothy p horne director february 29 2008 robert l ayers robert l ayers director february 29 2008 richard j cathcart richard j cathcart director february 29 2008 ralph e jackson jr ralph e jackson jr director february 29 2008 kenneth j mcavoy kenneth j mcavoy director february 29 2008 john k mcgillicuddy john k mcgillicuddy director february 29 2008 gordon w moran gordon w moran chairman board february 29 2008 daniel j murphy iii daniel j murphy iii director february 29 2008 report independent registered public accounting firm board directors stockholders watts water technologies inc audited accompanying consolidated balance sheets watts water technologies inc subsidiaries december 31 2007 2006 related consolidated statements operations stockholders equity cash flows years threeyear period ended december 31 2007 connection audits consolidated financial statements also audited financial statement schedule consolidated financial statements financial statement schedule responsibility companys management responsibility express opinion consolidated financial statements financial statement schedule based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position watts water technologies inc subsidiaries december 31 2007 2006 results operations cash flows years threeyear period ended december 31 2007 conformity us generally accepted accounting principles also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein discussed note 2 consolidated financial statements watts water technologies inc adopted statement financial accounting standard 123r share based payment effective january 1 2006 utilizing modified prospective application transition method also discussed note 2 consolidated financial statements watts water technologies inc adopted recognition disclosure provisions statement financial accounting standard 158 employers accounting defined benefit pension post retirement plansan amendment fasb statements 87 88 106 132r effective december 31 2006 measurement date provisions january 1 2007 also discussed note 2 consolidated financial statements watts water technologies inc adopted financial interpretation 48 accounting uncertainty income taxes effective january 1 2007 also audited accordance standards public company accounting oversight board united states effectiveness watts water technologies incs internal control financial reporting december 31 2007 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso report dated february 29 2008 expressed unqualified opinion effective operation internal control financial reporting boston massachusetts february 29 2008 watts water technologies inc subsidiaries consolidated statements operations amounts millions except per share information accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated balance sheets amounts millions except share information accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated statements stockholders equity amounts millions except share information accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries consolidated statements cash flows amounts millions accompanying notes integral part consolidated financial statements watts water technologies inc subsidiaries notes consolidated financial statements 1 description business watts water technologies inc company designs manufactures sells extensive line water safety flow control products primarily water quality water safety water flow control water conservation markets located predominantly north america europe china 2 accounting policies principles consolidation consolidated financial statements include accounts company majority wholly owned subsidiaries upon consolidation significant intercompany accounts transactions eliminated cash equivalents cash equivalents consist highly liquid investments maturities three months less date original issuance investment securities investment securities december 31 2007 2006 consisted auction rate certificates whose underlying investments aaa rated municipal bonds certificates bought sold auction reset dates 35 days certificates purchased par value approximates market value december 31 2007 2006 company classifies debt securities available sale availableforsale securities recorded fair value unrealized holding gains losses net related tax effect availableforsale securities excluded earnings reported separate component comprehensive income realized gains losses sale availableforsale securities determined specificidentification basis decline market value availableforsale security cost deemed otherthantemporary results reduction carrying amount fair value impairment charged earnings new cost basis security established determine whether impairment otherthantemporary company considers whether ability intent hold investment market price recovery considers whether evidence indicating cost investment recoverable outweighs evidence contrary evidence considered assessment includes reasons impairment severity duration impairment changes value subsequent yearend forecasted performance investee premiums discounts amortized accreted life related availableforsale security adjustment yield using effectiveinterest method dividend interest income recognized earned allowance doubtful accounts allowance doubtful accounts includes reserves bad debts sales returns allowances company analyzes aging accounts receivable individual accounts receivable historical bad debts concentration receivables customer credit worthiness current economic trends changes customer payment terms company specifically analyzes individual accounts receivable establishes specific reserves financially troubled customers addition factors watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued developed certain regions utilizing historical trends sales returns allowances derive reserve returns allowances concentration credit company sells products diversified customer base therefore significant concentrations credit risk except approximately 100 107 companys total sales 2006 2005 respectively one customer sales transacted within north america geographic segment 2007 one customer accounted 100 companys total sales inventories stated lower cost using primarily firstin firstout method market value determined replacement cost net realizable value historical experience used basis determining reserve excess obsolete inventories goodwill intangible assets goodwill recorded consideration paid acquisitions exceeds fair value net tangible intangible assets acquired goodwill intangible assets indefinite useful lives amortized rather tested annually impairment test performed october 28 2007 impairment goodwill longlived assets goodwill intangible assets indefinite lives tested annually impairment accordance provisions financial accounting standards board statement 142 goodwill intangible assets fas 142 companys impairment review based discounted cash flow approach reporting unit level requires management judgment respect revenue expense growth rates changes working capital selection use appropriate discount rate company uses judgment assessing whether assets may become impaired annual impairment tests indicators unexpected adverse business conditions economic factors unanticipated technological change competitive activities loss key personnel acts governments courts may signal asset become impaired intangible assets estimable lives longlived assets reviewed impairment whenever events changes circumstances indicate carrying amount asset group may recoverable accordance financial accounting standards board statement 144 accounting impairment disposal longlived assets fas 144 recoverability intangible assets estimable lives longlived assets measured comparison carrying amount asset group future net undiscounted pretax cash flows expected generated asset group comparisons indicate asset recoverable impairment loss recognized amount carrying amount asset group exceeds related estimated fair value estimated fair value based either discounted future pretax operating cash flows appraised values depending nature asset company determines discount rate analysis based expected internal rate return related business allocate interest charges asset group measured judgment required estimate future operating cash flows watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued changes carrying amount goodwill follows adjustments north american goodwill year ended december 31 2007 relate accrual approximately 38 million earnout provisions adjustment european goodwill year ended december 31 2007 includes finalization ats expansion group purchase price allocation ats expansion group acquired may 2006 adjustment china goodwill year ended december 31 2007 includes finalization changsha valve works purchase price allocation changsha valve works acquired april 2006 adjustments north american goodwill year ended december 31 2006 relate accrual approximately 40 million earnout provisions 2006 includes finalization dormont manufacturing company core industries inc purchase price allocations dormont manufacturing company core industries inc acquired december 2005 intangible assets include following presented assets net consolidated balance sheets aggregate amortization expense amortized intangible assets years ended december 31 2007 2006 2005 105 million 86 million 26 million respectively additionally future amortization expense amortizable intangible assets approximates 93 million 2008 90 million 2009 89 million 2010 83 million 2011 69 million 2012 watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued amortization expense provided straightline basis estimated useful lives intangible assets weightedaverage remaining life total amortizable intangible assets 108 years patents customer relationships technology amortizable intangibles weightedaverage remaining lives 92 years 94 years 64 years 192 years respectively intangible assets subject amortization primarily include trademarks unpatented technology property plant equipment property plant equipment recorded cost depreciation provided straightline basis estimated useful lives assets range 10 40 years buildings improvements 3 15 years machinery equipment taxes income taxes assessed governmental authorities sale transactions recorded net basis excluded sales companys consolidated statements operations income taxes income taxes accounted asset liability method deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases operating loss tax credit carry forwards deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized income period includes enactment date january 1 2007 company adopted provisions financial accounting standards board interpretation 48 accounting uncertainty income taxes fin 48 purpose fin 48 increase comparability financial reporting income taxes fin 48 requires order tax benefit booked income statement item question must meet morelikelythannot greater 50 likelihood sustained upon examination taxing authorities threshold adoption fin 48 material effect companys financial statements cumulative effect booked beginning retained earnings adoption date company gross unrecognized tax benefits approximately 48 million approximately 42 million recognized would affect effective tax rate difference amount unrecognized tax benefits amount would impact effective tax rate consists federal tax benefit state income tax items 2007 company reduced unrecognized tax benefits approximately 06 million tax issue italy result conclusion state income tax audits reasonably possible total amount unrecognized tax benefits change next twelve months company estimates reasonably possible approximately 05 million currently remaining unrecognized tax benefit may recognized end 2008 result conclusion state income tax audits notwithstanding company expect significant changes amounts unrecognized tax benefits within next twelve months december 31 2007 company gross unrecognized tax benefits approximately 37 million approximately 32 million recognized would affect effective tax rate difference amount unrecognized tax benefits amount would impact watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued effective tax rate consists federal tax benefit state income tax items reconciliation beginning ending amount unrecognized tax benefits separate analysis accrued interest related unrecognized tax benefits follows accrued interest related unrecognized tax benefits company audit internal revenue service 2003 2004 tax years audit completed february 2008 resulted significant adjustments company conducts business variety locations throughout world resulting tax filings numerous domestic foreign jurisdictions company subject tax examinations regularly part normal course business companys major jurisdictions us canada china netherlands uk germany italy france exceptions company longer subject us federal state local nonus income tax examinations years 2002 company accounts interest penalties related uncertain tax positions component income tax expense several tax years remain subject examination major jurisdictions years remain open examination respect us federal taxes 20052006 company currently audit commonwealth massachusetts 20012003 upon conclusion audit 20042006 remain open years remain open examination canada 20032006 years remain open examination major european countries include united kingdom 20022006 germany 20052006 italy 20022006 france 20052006 netherlands 20022006 foreign currency translation financial statements subsidiaries located outside united states generally measured using local currency functional currency balance sheet accounts including goodwill foreign subsidiaries translated united states dollars yearend exchange rates income expense items translated weighted average exchange rates period net translation gains losses included comprehensive income separate component stockholders equity company provide us income taxes foreign currency translation adjustments since watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued provide taxes undistributed earnings foreign subsidiaries gains losses foreign currency transactions subsidiaries included net earnings stockbased compensation effective january 1 2006 company adopted financial accounting standards board statement 123r sharebased payment fas 123r utilizing modified prospective method described fas 123r modified prospective method compensation cost recognized sharebased payments granted effective date unvested awards granted prior effective date accordance fas 123r prior period amounts restated fas 123r also requires excess tax benefits associated sharebased payments classified financing activities statements consolidated cash flows rather operating cash flows required previous regulations december 31 2007 company three stockbased compensation plans total unrecognized compensation costs related unvested stockbased compensation arrangements approximately 95 million total weighted average remaining term 23 years 2007 2006 company recognized compensation costs related stockbased programs approximately 60 million 30 million respectively selling general administrative expenses company recorded approximately 07 million 04 million tax benefit 2007 2006 respectively compensation expense relating stock options 2007 2006 company recorded approximately 13 million 06 million respectively tax benefit stockbased plans 2007 2006 recognition total stockbased compensation expense impacted basic net income per common share diluted net income per common share 010 006 respectively prior effective date stockbased compensation plans accounted accounting principles board opinion apb 25 accounting stock issued employees related interpretations proforma information regarding impact total stockbased compensation net income per share prior periods required fas 123r proforma information determined company accounted employee stock options restricted stock units rsus fair value method measure stockbased compensation required disclosure provisions financial accounting standards board statement 123 accounting stockbased compensation fas 123 amended financial accounting standards board statement 148 accounting stockbased compensation transition watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued disclosure fas 148 2005 illustrated following tables amounts millions except per share information net income per common share basic net income per common share calculated dividing net income weighted average number common shares outstanding calculation diluted income per share assumes conversion dilutive securities see note 13 net income number shares used compute net income per share basic assuming full dilution reconciled computation diluted net income per share year ended december 31 2007 excludes effect potential exercise options purchase approximately 05 million shares exercise price option greater average market price class common stock effect would antidilutive period january 1 2008 february 22 2008 company repurchased approximately 14 million shares class common stock watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued derivative financial instruments normal course business company manages risks associated commodity prices foreign exchange rates interest rates variety strategies including use hedging transactions executed accordance companys policies companys hedging transactions include limited use various derivative financial commodity instruments matter policy company use derivative instruments unless underlying exposure change value derivative instruments would substantially offset opposite change value underlying hedged items company use derivative instruments trading speculative purposes using qualifying criteria defined financial accounting standards board statement 133 accounting derivative instruments hedging activities fas 133 derivative instruments designated accounted either hedge recognized asset liability fair value hedge forecasted transaction cash flow hedge fair value hedge effective ineffective portions change fair value derivative instrument along adjustment carrying amount hedged item fair value changes attributable hedged risk recognized earnings cash flow hedge changes fair value derivative instrument highly effective deferred accumulated comprehensive income loss underlying hedged item recognized earnings fair value cash flow hedge cease qualify hedge accounting terminated would continue carried balance sheet fair value settled hedge accounting would discontinued prospectively forecasted transaction longer probable occurring amounts previously deferred accumulated comprehensive income would recognized immediately earnings occasion company may enter derivative instrument qualify hedge accounting entered offset changes fair value underlying transaction required recognized earnings natural hedge instruments reflected consolidated balance sheets fair value changes fair value recognized earnings certain forecasted transactions primarily intercompany sales united states canada assets exposed foreign currency risk company monitors foreign currency exposures ongoing basis maximize overall effectiveness foreign currency hedge positions 2007 2006 company used foreign currency forward contracts means hedging exposure foreign currency risks companys foreign currency forwards qualify cash flow hedge criteria fas 133 portions companys outstanding debt exposed interest rate risks company monitors interest rate exposures ongoing basis maximize overall effectiveness interest rates 2006 company used interest rate swap means hedging exposure interest rate risks see note 11 companys interest rate swap qualify cash flow hedge criteria fas 133 shipping handling shipping handling costs included selling general administrative expense amounted 391 million 373 million 281 million years ended december 31 2007 2006 2005 respectively watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued research development research development costs included selling general administrative expense amounted 151 million 127 million 116 million years ended december 31 2007 2006 2005 respectively revenue recognition company recognizes revenue following criteria met company entered binding agreement product shipped title passes sales price customer fixed determinable collectability reasonably assured provisions estimated returns allowances made time sale recorded reduction sales included allowance doubtful accounts consolidated balance sheets company records provisions sales incentives primarily volume rebates adjustment net sales accordance financial accounting standards boards emerging issues task force eitf issue 0014 accounting certain sales incentives eitf 0014 eitf issue 019 accounting consideration given vendor customer reseller vendors products basis presentation certain amounts 2006 2005 reclassified permit comparison 2007 presentation estimates preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates new accounting standards december 2007 financial accounting standards board fasb issued financial accounting standards board statement fas 141 r business combinations fas 141r requires identifiable assets liabilities noncontrolling interests goodwill acquired business combination recorded full fair value fas 141r business combinations accounted acquisition method significant changes among others current guidance resulting fas 141r includes requirement contingent assets liabilities contingent consideration shall recorded estimated fair value acquisition date subsequent changes fair value charged credited earnings acquisitionrelated costs expensed rather treated part acquisition fas 141r effective periods beginning december 15 2008 company expects adoption fas 141r increase costs charged operations december 2007 fasb issued fas 160 noncontrolling interests consolidated financial statements amendment arb 151 fas 160 requires noncontrolling interests previously referred minority interest treated separate component equity liability current practice fas 160 applies noncontrolling interests transactions noncontrolling interest holders consolidated financial statements fas 160 effective watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued periods beginning december 15 2008 company currently evaluating effect fas 160 consolidated financial statements february 2007 fasb issued fas 159 fair value option financial assets financial liabilitiesincluding amendment fas 115 fas 159 permits entities choose measure many financial instruments certain items fair value fas 159 effective financial statements issued fiscal years beginning november 15 2007 interim periods within fiscal years earlier application encouraged company expect measure financial instruments fair value therefore expect adoption fas 159 material impact consolidated financial statements september 2006 fasb issued fas 157 fair value measurements fas 157 defines fair value establishes framework measuring fair value generally accepted accounting principles expands disclosures fair value measurements financial assets liabilities fas 157 effective financial statements issued fiscal years beginning november 15 2007 interim periods within fiscal years nonfinancial assets liabilities fas 157 effective financial statements issued fiscal years beginning november 15 2008 interim periods within fiscal years earlier application encouraged provided reporting company yet issued financial statements fiscal year including financial statements interim period within fiscal year company expect adoption fas 157 material impact consolidated financial statements september 2006 securities exchange commission issued staff accounting bulletin 108 considering effects prior year misstatements quantifying misstatements current year financial statements sab 108 provides interpretive guidance effects carryover reversal prior year misstatements considered quantifying current year misstatement sab 108 effective fiscal years ending november 15 2006 company adopted provisions sab 108 fiscal year 2006 impact sab 108 material consolidated financial statements september 2006 fasb issued fas 158 employers accounting defined benefit pension postretirement plansan amendment fasb statements 87 88 106 132r fas 158 requires employer recognize statement financial position asset plans overfunded status liability plans underfunded status b measure plans assets obligations determine funded status end employers fiscal year c recognize changes funded status defined benefit postretirement plan year changes occur changes reported comprehensive income requirement recognize funded status benefit plan disclosure requirements effective end fiscal year ending december 15 2006 companies publicly traded equity securities requirement measure plan assets benefit obligations date employers fiscal yearend statement financial position effective fiscal years ending december 15 2008 although earlier adoption permitted result requirement recognize funded status company benefit plans december 31 2006 company recorded increase pension liability approximately 83 million decrease approximately 13 million assets net decrease accumulated comprehensive income approximately 58 million net tax company earlyadopted measurement date provisions fas 158 effective january 1 2007 companys pension plans previously used september 30 measurement date plans measured december 31 consistent companys fiscal year end watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued noncash effect adoption measurement date provisions fas 158 material effect companys results operations july 2006 fasb issued financial interpretation 48 accounting uncertainty income taxes fin 48 clarifies accounting uncertainty income taxes recognized financial statements accordance sfas 109 accounting income taxes fin 48 provides tax benefit uncertain tax position may recognized likely position sustained upon examination based technical merits interpretation also provides guidance measurement derecognition classification interest penalties accounting interim periods disclosure transition fin 48 effective fiscal years beginning december 15 2006 company adopted provisions fin 48 fiscal year 2007 impact material consolidated financial statements march 2006 fasb issued fas 156 accounting servicing financial assetsan amendment fasb statement 140 fas 156 fas 156 amends fas statement no140 accounting transfers servicing financial assets extinguishments liabilities respect accounting separately recognized servicing assets servicing liabilities fas 156 addresses recognition measurement separately recognized servicing assets liabilities provides approach simplify efforts obtain hedgelike offset accounting company adopted provisions fas 156 fiscal year 2007 impact material consolidated financial statements february 2006 fasb issued fas 155 accounting certain hybrid financial instrumentsan amendment fasb statements 133 140 fas 155 fas 155 amends fas 133 accounting derivatives hedging activities fas 140 accounting transfers servicing financial assets extinguishments liabilities allows entity remeasure fair value hybrid financial instrument contains embedded derivative otherwise would require bifurcation host holder irrevocably elects account whole instrument fair value basis subsequent changes fair value instrument would recognized earnings company adopted provisions fas 155 fiscal year 2007 impact material consolidated financial statements may 2005 fasb issued fas 154 accounting changes error correction replacement apb opinion 20 fasb statement 3 fas 154 fas 154 replaces apb opinion 20 accounting changes apb 20 fasb statement 3 reporting accounting changes interim financial statements changes requirements accounting reporting change accounting principle apb 20 previously required voluntary changes accounting principles recognized including net income period change cumulative effect changing new accounting principle fas 154 requires retrospective application prior periods financial statements changes accounting principle fas 154 defines retrospective application different accounting principle prior accounting periods principle always used fas 154 also requires change depreciation amortization depletion method longlived nonfinancial assets accounted change accounting estimate affected change accounting principle impact material consolidated financial statements december 2004 fasb issued fas 153 exchanges nonmonetary assets amendment apb opinion 29 accounting nonmonetary transactions fas 153 amendments made fas 153 based principle exchanges nonmonetary assets watts water technologies inc subsidiaries notes consolidated financial statements continued 2 accounting policies continued measured based fair value assets exchanged amendments eliminate narrow exception nonmonetary exchanges similar productive assets replace broader exception exchanges nonmonetary assets commercial substance previously opinion 29 required accounting exchange productive asset similar productive asset equivalent interest similar productive asset based recorded amount asset relinquished statement effective nonmonetary asset exchanges occurring fiscal periods beginning june 15 2005 earlier application permitted nonmonetary asset exchanges occurring fiscal periods beginning date issuance provisions statement applied prospectively impact material companys consolidated financial statements november 2004 fasb issued fas 151 inventory costs fas 151 fas 151 amends guidance accounting research bulletin 43 chapter 4 inventory pricing clarify accounting inventory costs provisions statement effective fiscal years beginning june 15 2005 impact material companys consolidated financial statements 3 discontinued operations september 1996 company divested municipal water group businesses included henry pratt james jones company edward barber company ltd costs expenses related municipal water group relate legal settlement costs associated james jones litigation see note 15 condensed operating statements balance sheets discontinued operations summarized watts water technologies inc subsidiaries notes consolidated financial statements continued assets liabilities 2007 2006 primarily relate reserves james jones litigation statements cash flows amounts 2007 2006 2005 relate operating activities 4 restructuring income charges 2007 company undertook review certain product lines overall manufacturing capacity based review company initiated global restructuring program approved companys board directors october 30 2007 company also discontinuing certain product lines program expected include shutdown five manufacturing facilities rightsizing sixth facility including relocation joint venture facility china previously disclosed restructuring program charges certain product line discontinuances include pretax charges totaling approximately 129 million charges primarily severance 43 million relocation costs 28 million asset writedowns expected net losses asset disposals 20 million result elimination approximately 330 positions worldwide product lines discontinued accelerated depreciation resulted pretax charge 43 million 2007 total net aftertax charges program expected approximately 94 million 44 million noncash costs incurred early 2010 company expects spend approximately 134 million capital expenditures consolidate operations fund approximately 80 million amount proceeds sale buildings assets disposed part restructuring program annual cash savings net tax estimated 45 million fully realized second half 2009 following table presents total estimated pretax charges incurred global restructuring program product line discontinuances initiated 2007 companys reportable segments 2007 company recorded pretax charges approximately 75 million pretax costs 43 million recorded costs goods sold primarily product line discontinuances pretax costs 32 million recorded restructuring charges primarily asset writedowns related companys wholly owned chinese manufacturing plants accelerated depreciation related companys relocation 60 owned chinese joint venture severance costs china north america company also recognized income 09 million minority interest representing 40 liability chinese joint venture partner restructuring plan 2006 company recorded charges 47 million costs goods sold primarily manufacturing severance costs related companys relocation plan 60 owned chinese joint venture company recorded income 56 million restructuring income charges primarily comprised gains approximately 82 million related sales buildings italy partially offset charges approximately 22 million severance costs related companys european restructuring plans approximately 04 million accelerated amortization related companys chinese restructuring plan company also recognized income 15 million minority interest representing 40 liability chinese joint venture partner twt restructuring plan watts water technologies inc subsidiaries notes consolidated financial statements continued 4 restructuring income charges continued 2005 company recorded charges net recoveries 25 million expenses incurred primarily accelerated depreciation planned closure us manufacturing plant reduction estimated useful lives certain manufacturing equipment net recoveries european severance related charges asset writedowns respect table restructuring costs consist primarily severance costs 2007 2005 severance costs recorded restructuring charges income 2006 recorded cost goods sold asset writedowns consist primarily writeoffs fixed assets accelerated depreciation product line discontinuances consist inventory writeoffs related product lines company discontinued recorded cost goods sold costs consist gains sales buildings 2006 removal shipping costs associated relocation manufacturing equipment 2007 2005 details companys manufacturing restructuring plans december 31 2007 follows 5 business acquisitions following acquisition accounted purchase method accounting accordingly results included companys consolidated results operation since date acquisition november 9 2007 company acquired assets business topway global inc topway located brea california approximately 184 million 03 million transaction costs remain paid preliminary allocations goodwill intangible assets approximately 76 million 82 million respectively amount recorded intangible assets primarily customer relationships estimated useful life 10 years trade names indefinite lives topway manufactures wide variety water softeners pointofentry filter units pointofuse drinking water systems residential commercial industrial applications purchase price allocation topway preliminary pending final determination fair values certain assumed assets liabilities certain acquisition agreements prior years contain either earnout provision put feature remaining common stock yet purchased company 2007 company watts water technologies inc subsidiaries notes consolidated financial statements continued 5 business acquisitions continued accrued approximately 38 million earnout provisions charged goodwill paid 2008 2006 company accrued approximately 40 million earnout provisions charged goodwill paid 2007 2005 company charged operations approximately 15 million earnout costs prior year acquisition also paid 2005 calculations typically based multiple future gross margins operating earnings defined agreements future earnouts payments accounted additional purchase price 6 accumulated comprehensive income loss accumulated comprehensive income loss consist following 7 inventories net inventories consist following finished goods 203 million 183 million december 31 2007 2006 respectively consigned watts water technologies inc subsidiaries notes consolidated financial statements continued 8 property plant equipment property plant equipment consists following 9 income taxes significant components companys deferred income tax liabilities assets follows provision income taxes continuing operations based following pretax income watts water technologies inc subsidiaries notes consolidated financial statements continued 9 income taxes continued provision income taxes continuing operations consists following actual income taxes reported continuing operations different would computed applying federal statutory tax rate income continuing operations income taxes reasons difference follows december 31 2007 company foreign net operating loss carry forwards 169 million income tax purposes net operating losses foreign losses 70 million losses carried forward indefinitely 48 million losses expires 2013 51 million losses expire 2016 net operating losses consist 55 million related german operations 15 million austrian operations 51 million netherlands operations 48 million related chinese operations company valuation allowance 32 million related deferred tax assets chinese joint venture company believes likely able recover net deferred tax assets undistributed earnings companys foreign subsidiaries amounted approximately 2516 million 1689 million 1631 million december 31 2007 2006 2005 respectively watts water technologies inc subsidiaries notes consolidated financial statements continued 9 income taxes continued earnings considered indefinitely reinvested accordingly provision us federal state income taxes recorded thereon upon distribution earnings form dividends otherwise company subject withholding taxes payable various foreign countries determination amount us income tax liability would incurred practicable complexities associated hypothetical calculation however unrecognized foreign tax credits would available reduce portion us income tax liability withholding taxes approximately 54 million would payable upon remittance previously unremitted earnings december 31 2007 10 accrued expenses liabilities accrued expenses liabilities consist following 11 financing arrangements longterm debt consists following watts water technologies inc subsidiaries notes consolidated financial statements continued 11 financing arrangements continued principal payments next five years thereafter due follows millions 200813 200902 2010502 2011818 20120 thereafter3000 company maintains letters credit guarantee performance payment third parties accordance specified terms conditions amounts outstanding approximately 450 million december 31 2007 496 million december 31 2006 companys letters credit primarily associated insurance coverage lesser extent foreign purchases companys letters credit generally expire within one year issuance drawn revolving credit facility instruments may exist expire without drawn therefore necessarily represent future cash flow obligations april 27 2006 company completed private placement 2250 million 585 senior unsecured notes due april 2016 2006 note purchase agreement 2006 note purchase agreement includes operational financial covenants company required comply including among others maintenance certain financial ratios restrictions additional indebtedness liens dispositions events default 2006 note purchase agreement include failure comply financial operational covenants well bankruptcy insolvency events company may option upon notice noteholders prepay time part notes amount less 1 million paying principal amount plus makewhole amount dependent upon yield respective us treasury securities company used net proceeds private placement repay 1470 million outstanding revolving credit facility balance net proceeds used finance future acquisitions general corporate purposes december 31 2007 company compliance covenants related 2006 note purchase agreement payment interest senior unsecured notes due semiannually april 30th october 30th year additionally company amended 2003 note purchase agreement reflect existence subsidiary guarantors substantially conform certain provisions 2003 note purchase agreement 2006 note purchase agreement april 27 2006 company amended restated unsecured revolving credit facility syndicate banks amended revolving credit facility revolving credit facility provides multicurrency unsecured borrowings standby letters credit 3500 million expires april 2011 borrowings outstanding revolving credit facility bear interest fluctuating rate per annum equal applicable percentage equal case eurocurrency rate loans british bankers association libor rate plus applicable percentage 0625 determined reference companys consolidated leverage ratio debt rating ii case base rate loans swing line loans higher federal funds rate plus 05 b rate interest effect day announced bank america na prime rate 2007 average interest rate revolving credit facility eurobased borrowings approximately 46 revolving credit facility includes operational financial covenants customary facilities type including among others restrictions additional indebtedness liens investments maintenance certain leverage ratios december 31 2007 company compliance covenants related revolving credit facility 2344 million unused potentially available credit revolving credit facility us dollar denominated debt 818 million eurobased borrowings outstanding revolving credit facility 338 million standby letters credit outstanding revolving credit facility closing dormont acquisition dormont longterm debt outstanding 89 million form two series taxable variable rate demand bonds 1998 series watts water technologies inc subsidiaries notes consolidated financial statements continued 11 financing arrangements continued 15 million outstanding 2000 series 74 million outstanding due provisions trust agreements could redeemed dates subsequent closing bonds secured letter credit bank maintained security interest assets dormont condition purchase gain banks consent sale dormont company dormonts former owners required establish cash collateral account bonds amount equal potential obligation dormont bank letter credit reimbursement agreements entire obligation bonds approximates 91 million represents 89 million bond principal plus interest related fees closing portion dormont purchase price placed cash collateral account guarantee payment company recorded escrow deposit prepaid expenses assets december 31 2005 1998 series bonds repaid full january 17 2006 2000 series bonds repaid full february 1 2006 former owners using cash collateral account effective july 1 2005 company entered threeyear interest rate swap counter party notional amount €250 million outstanding revolving credit facility company swapped threemonth euribor plus 06 fixed rate 302 change fair value swap 2006 approximated 07 million recorded reduction interest expense 2006 swap terminated october 3 2006 may 15 2003 company completed private placement 1250 million senior unsecured notes consisting 500 million principal amount 487 senior notes due 2010 750 million principal amount 547 senior notes due 2013 payment interest senior unsecured notes due semiannually may 15th november 15th year senior unsecured notes issued watts water technologies inc pari passu revolving credit facility subsidiary level senior unsecured notes allow company debt senior notes amount 1500 million plus 5 stockholders equity ii debt pari passu junior senior unsecured notes extent company maintains compliance 200 100 fixed charge coverage ratio notes include prepayment provision might require makewhole payment note holders payment dependent upon level respective treasuries notes include customary terms conditions including events default 12 common stock class common stock class b common stock equal dividend liquidation rights share companys class common stock entitled one vote matters submitted stockholders share class b common stock entitled ten votes matters shares class b common stock convertible shares class common stock onetoone basis option holder december 31 2007 company reserved total 4611899 class common stock issuance stockbased compensation plans 7293880 shares conversion class b common stock class common stock february 2007 companys board directors adopted amendment subsequently approved companys stockholders increase number shares class common stock available granted companys management stock purchase plan 1000000 shares 2000000 shares watts water technologies inc subsidiaries notes consolidated financial statements continued 12 common stock continued november 2007 company announced board directors authorized repurchase 3000000 shares class common stock december 31 2007 company repurchased 867451 shares stock total cost 250 million 13 stockbased compensation company maintains three stock incentive plans key employees outside directors granted incentive stock options isos nonqualified stock options nsos purchase companys class common stock one plan 2004 stock incentive plan currently available grant new equity awards stock options granted prior plans became exercisable fiveyear period rate 20 per year expire ten years date grant 2004 stock incentive plan options become exercisable fouryear period rate 25 per year expire ten years grant date isos nsos granted plans may exercise prices less 100 50 fair market value class common stock date grant respectively companys current practice grant options fair market value grant date december 31 2007 3078132 shares class common stock authorized future grants new equity awards companys stock incentive plans company also grants shares restricted stock key employees nonemployee members companys board directors 2004 stock incentive plan vest either immediately threeyear period rate onethird per year restricted stock awards amortized expense straightline basis vesting period company also management stock purchase plan allows granting restricted stock units rsus key employees annual basis key employees may elect receive portion annual incentive compensation rsus instead cash rsu provides key employee right purchase share class common stock 67 fair market value date grant rsus vest annually threeyear period grant date aggregate 2000000 shares class common stock may issued management stock purchase plan 2004 stock incentive plan december 31 2007 total unrecognized compensation cost related unvested stock options approximately 44 million total weighted average remaining term 26 years 2007 2006 company recognized compensation cost 27 million 14 million respectively selling general administrative expenses watts water technologies inc subsidiaries notes consolidated financial statements continued 13 stockbased compensation continued following summary stock option activity related information december 31 2007 aggregate intrinsic values outstanding exercisable options approximately 52 million 59 million respectively representing total pretax intrinsic value based companys closing class common stock price 2980 december 31 2007 would received option holders option holders exercised options date total intrinsic value options exercised 2007 2006 approximately 14 million 22 million respectively upon exercise options company issues shares class common stock following table summarizes information options outstanding december 31 2007 fair value option granted 2004 stock incentive plan estimated date grant using blackscholesmerton model based following weighted average assumptions watts water technologies inc subsidiaries notes consolidated financial statements continued 13 stockbased compensation continued riskfree interest rate based upon us treasury yield curve time grant respective expected life option expected life estimated period time outstanding options volatility calculated using historical data expected dividend yield stock companys best estimate expected future dividend yield company applied estimated forfeiture rate 15 stock options rates calculated based upon historical activity estimate granted shares expected vest actual forfeitures differ expected rates company may required make additional adjustments compensation expense future periods assumptions used determine weighted average grantdate fair value stock options 1275 1350 1154 years ending december 31 2007 2006 2005 respectively following summary unvested restricted stock activity related information total fair value shares vested 2007 2006 2005 14 million 04 million 03 million respectively december 31 2007 total unrecognized compensation cost related unvested restricted stock approximately 29 million total weighted average remaining term 21 years 2007 2006 company recognized compensation costs 16 million 06 million respectively selling general administrative expenses company applied estimated forfeiture rate 10 restricted stock issued key employees aggregate intrinsic value restricted stock granted outstanding approximated 27 million representing total pretax intrinsic value based companys closing class common stock price 2980 december 31 2007 management stock purchase plan total unrecognized compensation cost related unvested rsus approximately 22 million december 31 2007 total weighted average remaining term 19 years 2007 2006 company recognized compensation cost 17 million 10 million respectively selling general administrative expenses dividends declared rsus paid individuals remain unpaid december 31 2007 total approximately 02 million watts water technologies inc subsidiaries notes consolidated financial statements continued 13 stockbased compensation continued summary companys rsus activity related information 2007 shown following table december 31 2007 aggregate intrinsic values outstanding vested rsus approximately 27 million 15 million respectively representing total pretax intrinsic value based companys closing class common stock price 2980 december 31 2007 would received rsus holders rsus settled date total intrinsic value rsus settled 2007 2006 approximately 25 million 14 million respectively upon settlement rsus company issues shares class common stock following table summarizes information rsus outstanding december 31 2007 fair value share issued management stock purchase plan estimated date grant using blackscholesmerton model based following weighted average assumptions watts water technologies inc subsidiaries notes consolidated financial statements continued 13 stockbased compensation continued riskfree interest rate based upon us treasury yield curve time grant respective expected life rsus expected life estimated period time outstanding rsus volatility calculated using historical data expected dividend yield stock companys best estimate expected future dividend yield company applied estimated forfeiture rate 10 rsus rates calculated based upon historical activity estimate granted shares expected vest actual forfeitures differ expected rates company may required make additional adjustments compensation expense future periods assumptions used determine weighted average grantdate fair value rsus granted 1679 1360 1241 2007 2006 2005 respectively company distributed dividends 040 per share 2007 036 per share 2006 032 per share 2005 companys class common stock class b common stock 14 employee benefit plans company sponsors funded unfunded noncontributing defined benefit pension plans together cover substantially domestic employees benefits based primarily years service employees compensation funding policy company plans contribute annual amount exceed maximum amount deducted federal income tax purposes beginning 2007 company uses december 31 measurement date plans prior 2007 company used september 30 measurement date plans watts water technologies inc subsidiaries notes consolidated financial statements continued 14 employee benefit plans continued funded status defined benefit plans amounts recognized balance sheet follows amounts recognized balance sheet follows amounts recognized accumulated comprehensive income consist watts water technologies inc subsidiaries notes consolidated financial statements continued 14 employee benefit plans continued information pension plans accumulated benefit obligation excess plan assets follows components net periodic benefit cost follows estimated net actuarial loss prior service cost defined benefit pension plans amortized accumulated comprehensive income net periodic benefit cost next year 04 million 02 million respectively assumptions weightedaverage assumptions used determine benefit obligations weightedaverage assumptions used determine net periodic benefit costs discount rates selected based upon rates return measurement date utilizing bond matching approach match expected benefit cash flows selecting expected longterm rate return assets company considers average rate earnings expected funds invested provide benefits plan includes considering trusts asset allocation expected returns likely earned life plan basis consistent prior year watts water technologies inc subsidiaries notes consolidated financial statements continued 14 employee benefit plans continued plan assets weighted average asset allocations asset category follows companys written retirement plan investment policy sets forth investment policy objectives constraints watts water technologies inc pension plan retirement plan investment policy set forth pension plan committee defines general investment principles directs investment management policy addressing preservation capital risk aversion adherence investment discipline investment managers make reasonable effort control risk evaluated quarterly commonly accepted benchmarks ensure risk assumed commensurate given investment style objectives portfolio designed achieve balanced return current income modest growth capital achieving returns excess rate inflation investment horizon order preserve purchasing power plan assets plan assets required invested liquid securities derivative investments allowed prohibited investments include limited following commodities futures contracts private placements options limited partnerships venturecapital investments real estate properties interestonly io principalonly po residual tranche cmos watts water technologies inc stock prohibited transactions include limited following short selling margin transactions allowable assets include cash equivalents fixed income securities equity securities mutual funds gics specific guidelines regarding allocation assets follows equities shall comprise 25 75 total portfolio fixed income shall comprise 30 65 investment performance monitored regular basis investments reallocated stay within specific guidelines equityfixed income allocation 5545 preferred securities one company government agency exceed 10 total fund 20 total fund invested one industry individual treasury securities may represent 50 total fund total allocation treasury bonds notes may represent 100 plans aggregate bond position watts water technologies inc subsidiaries notes consolidated financial statements continued 14 employee benefit plans continued cash flows information related companys pension funds cash flow follows contributions expected made 2008 expected benefit payments paid pension plans follows additionally substantially companys domestic employees eligible participate certain 401k savings plans company matches specified percentage employee contributions subject certain limitations companys match contributions included selling general administrative expense years ended december 31 2007 2006 2005 06 million 06 million 04 million respectively charges european pension plans approximated 30 million 19 million 20 million years ended december 31 2007 2006 2005 respectively costs relate plans administered certain european subsidiaries benefits calculated according government requirements paid employees upon retirement change employment company entered supplemental compensation agreement timothy p horne september 1 1996 per agreement upon ceasing employee company mr horne must make available requested board work minimum 300 500 hours per year consultant return certain annual compensation long physically able mr horne complies consulting provisions agreement shall receive supplemental compensation annual basis 400000 per year subject cost living increases year exchange services performed long physically able event physical disability subsequent commencing consulting services company mr horne continue receive 400000 annually payment consulting services provided mr horne expensed incurred company mr horne retired effective december 31 2002 therefore supplemental compensation period began january 1 2003 accordance financial accounting standards board statement 106 employers accounting post retirement benefits pensions company accrue future postretirement disability benefits period january 1 2003 time mr horne becomes physically unable perform consulting services period disability benefits earned watts water technologies inc subsidiaries notes consolidated financial statements continued 15 contingencies environmental remediation james jones litigation june 25 1997 nora armenta relator filed civil action california superior court los angeles county armenta case james jones company james jones mueller co tyco international us company formerly owned james jones relator filed qui tam provision california state false claims act cal govt code § 12650 et seq california false claims act generally alleged james jones defendants violated statute delivering defective nonconforming waterworks parts thirtyfour municipal water systems state california relator filed first amended complaint november 1998 second amended complaint december 2000 brought total number plaintiffs 161 date 11 named cities intervened attempts four named cities intervene denied june 2002 trial court excluded 47 cities december 2000 total 161 exclusion reversed august 30 2006 california court appeal ruling final august 30 2006 court appeal ruling also reversed dismissals tyco international mueller co allowed relator make successful motion removed armenta case litigation judge lichtmans court judge chaney another complex litigation judge one allegations second amended complaint complaintsinintervention purchased nonconforming james jones waterworks parts may leach public drinking water elevated amounts lead may create public health risk made 81 bronze alloy uns c8440 contain lead specified advertised 85 bronze alloy uns c83600 contention based average difference 2 lead content 81 bronze 6 8 lead 85 bronze 4to 6 lead assumption would mean increased consumable lead public drinking water could cause public health concern company believes evidence discovery available date indicates case addition 81 bronze used extensively municipal home plumbing systems approved municipal local national codes federal environmental protection agency also defines metal pipe fittings 8 lead free section 1417 federal safe drinking water act case relator seeks three times unspecified amount actual damages alleges municipalities suffered hundreds millions dollars damages also seeks civil penalties 10000 false claim alleges defendants responsible tens thousands false claims finally relator requests award costs action including attorneys fees december 1998 los angeles department water power ladwp intervened case filed complaint company settled city los angeles far significant city 73 million plus attorneys fees codefendants contributed 20 million toward settlement august 2003 additional settlement payment made 130 million 110 million company 20 million james jones settled claims three phase cities santa monica san francisco east bay municipal utility district chosen relator strongest claims tried first settlement payment included relators statutory share watts water technologies inc subsidiaries notes consolidated financial statements continued 15 contingencies environmental remediation continued claims three cities dismissed addition 130 million payment company obligated pay relators attorneys fees phase settlement court permitted defendants select five additional cities serve plaintiffs second trial phase case contra costa corona santa ana santa cruz vallejo chosen company james jones reached agreement settle claims city santa ana total 45000 amount approximates santa anas purchases james jones products relevant period santa ana settlement approved court completed june 22 2005 court dismissed claims remaining phase ii cities contra costa corona santa cruz vallejo court ruled relator cities required show cities received spec parts related specific invoices showing made although citys claim unique ruling significant claims remaining cities relator appealed however judgment appealed conclusion entire case trial court scheduled trial march 17 2009 six phase iii cities three cities selected side litigation inherently uncertain company unable predict outcome case september 15 2004 relators attorneys filed new common law fraud lawsuit california superior court city banning fortysix cities water districts james jones watts mueller co based transactions alleged armenta case fortytwo plaintiffs new lawsuit also plaintiffs armenta case statute limitations threshold issue process resolved plaintiffs litigation inherently uncertain company unable predict outcome case company reserve approximately 280 million respect james jones litigation consolidated balance sheet december 31 2007 company believes basis available information reserve adequate cover probable reasonably estimable losses resulting armenta case insurance coverage litigation zurich american insurance company zurich discussed company currently unable make estimate range additional losses february 14 2001 companys insurers denied coverage claims armenta case filed complaint coverage insurers california superior court coverage case james jones filed similar complaint cases consolidated trial court made summary adjudication rulings zurich must pay reasonable defense costs incurred company james jones armenta case since april 23 1998 well defense costs future end armenta case august 2004 california court appeal affirmed rulings december 1 2004 california supreme court denied zurichs appeal decision denial permanently established zurichs obligation pay armenta defense costs company approximately 166 million plus future costs james jones company estimates 170 million plus future costs zurich currently making payments incurred armenta defense costs however noted zurich asserts defense costs paid subject reimbursement november 22 2002 trial court entered summary adjudication order zurich must indemnify pay company james jones amounts paid settle city los angeles zurichs attempt obtain appellate review order denied zurich still able appeal order end coverage case august 6 2004 trial court made watts water technologies inc subsidiaries notes consolidated financial statements continued 15 contingencies environmental remediation continued another summary adjudication ruling zurich must indemnify pay us james jones 130 million paid settle claims phase cities described zurichs attempt obtain appellate review ruling denied december 3 2004 california court appeal zurich still able appeal order end coverage case zurich made payments required indemnity orders february 8 2006 zurich filed motion set aside void november 22 2002 august 6 2004 summary adjudication indemnity payment orders motion denied zurichs appeal also denied california supreme court denied zurichs petition review company currently unable predict finality indemnity payment orders since zurich also appeal end coverage case company recorded reimbursed indemnity settlement amounts reimbursed defense costs liability pending court resolution indemnification matter relates zurich asserted amounts company estimates 560 million defense costs indemnity amounts paid settlements paid company james jones subject reimbursement deductible agreements related insurance policies zurich watts zurich prevail argument james jones would possible indemnity claim company exposure armenta case company believes armenta case viewed one occurrence deductible amount 05 million per occurrence reimbursement claims subject arbitration wattszurich deductible agreements zurich claims reimbursement right defense costs paid arises six deductible agreements company contend two deductible agreements apply company contend final decision california supports position number deductible agreements apply defense costs january 31 2006 federal district court chicago illinois determined disputes deductible agreements effect period zurich issued primary policies arbitrator could decide agreements would control reimbursement claims company appealed ruling october 20 2006 united states court appeals seventh circuit affirmed arbitration panel could decide deductible agreements zurich company would control zurichs reimbursement claim defense costs paid james jones case result development company recorded pretax charge 50 million discontinued operations 2006 based managements assessment company believe ultimate outcome james jones litigation material adverse effect liquidity financial condition results operations assessment based available information litigation inherently uncertain actual liability company resolve litigation fully cannot predicted certainty exists reasonable possibility company may ultimately incur losses james jones litigation excess amount accrued company intends continue contest vigorously aspects james jones litigation environmental remediation company named potentially responsible party prp respect limited number identified contaminated sites levels contamination vary significantly site related levels remediation efforts environmental liabilities recorded based probable cost known estimated minimum cost remediation company accrues watts water technologies inc subsidiaries notes consolidated financial statements continued 15 contingencies environmental remediation continued estimated environmental liabilities based assumptions subject number factors uncertainties circumstances affect reliability precision estimates include identification additional sites environmental regulations level cleanup required technologies available number financial condition contributors remediation time period remediation may occur company recognizes changes estimates new remediation requirements defined new information becomes available december 31 2007 company reserve approximately 14 million environmental accrual estimates likely paid environmental remediation liabilities next five ten years based facts currently known company believe ultimate outcome matters material adverse effect liquidity financial condition results operations environmental matters inherently uncertain exists possibility may ultimately incur losses matters excess amount accrued however company cannot currently estimate amount additional losses asbestos litigation company defending approximately 100 cases filed primarily exclusively mississippi new jersey state courts alleging injury death result exposure asbestos filings typically name multiple defendants filed behalf many plaintiffs identify particular watts products source asbestos exposure date company dismissed case scheduled trial date comes near discovery fails yield evidence exposure products based facts currently known company believe ultimate outcome claims material adverse effect liquidity financial condition results operations litigation lawsuits proceedings claims arising ordinary course operations also pending threatened company based facts currently known company believe ultimate outcome litigation matters material adverse effect liquidity financial condition results operations 16 financial instruments fair value carrying amounts cash equivalents investment securities trade receivables trade payables approximate fair value short maturity financial instruments fair value companys 487 senior notes due 2010 547 senior notes due 2013 585 senior notes due 2016 based quoted market prices fair value companys variable rate debt approximates carrying value carrying amount estimated fair market value companys longterm debt including current portion follows watts water technologies inc subsidiaries notes consolidated financial statements continued 16 financial instruments continued derivative instruments company uses foreign currency forward exchange contracts economic hedge reduce impact currency fluctuations certain anticipated intercompany purchase transactions expected occur next twelve months certain foreign currency transactions realized unrealized gains losses contracts recognized incomeexpense contracts subject company significant market risk exchange movement offset gains losses related foreign currency denominated transactions december 31 2007 2006 fair value contracts approximated 01 million 02 million respectively december 31 2005 company outstanding forward contracts buy foreign currencies company occasionally uses commodity futures contracts fix price certain portion certain raw materials used manufacturing process commodity contracts utilized years ended december 31 2007 2006 2005 leases company leases certain manufacturing facilities sales offices warehouses equipment generally leases carry renewal provisions require company pay maintenance costs future minimum lease payments capital leases noncancelable operating leases december 31 2007 follows watts water technologies inc subsidiaries notes consolidated financial statements continued 16 financial instruments continued carrying amounts assets capital lease include 17 segment information criteria set forth financial accounting standards board 131 disclosure segments enterprise related information company operates three geographic segments north america europe china segments sell similar products managed separately separate financial results reviewed companys chief operating decisionmaker intercompany sales transactions eliminated sales region based upon location entity recording sale accounting policies segment described summary significant accounting policies see note 2 watts water technologies inc subsidiaries notes consolidated financial statements continued 17 segment information continued following summary companys significant accounts balances segment reconciled consolidated totals corporate expenses primarily compensation expense sarbanesoxley compliance professional fees including legal audit expenses shareholder services benefit administration costs allocated geographic segments viewed corporate functions support activities watts water technologies inc subsidiaries notes consolidated financial statements continued 17 segment information continued north america segment consists us net sales 8055 million 7627 million 5823 million years ended december 31 2007 2006 2005 respectively north american segment also consists us longlived assets 927 million 931 million 861 million december 31 2007 2006 2005 respectively intersegment sales year ended december 31 2007 north america europe china 66 million 60 million 1371 million respectively intersegment sales year ended december 31 2006 north america europe china 69 million 30 million 823 million respectively intersegment sales year ended december 31 2005 north america europe china 48 million 53 million 488 million respectively 18 quarterly financial information unaudited 19 related party transactions companys 60 owned chinese joint venture tianjin tanggu watts valve company limited twt leases land buildings joint venture partner tianjin china lease classified operating lease total rental expense 2007 2006 2005 approximated watts water technologies inc subsidiaries notes consolidated financial statements continued 19 related party transactions continued 03 million 2006 local chinese government informed company property leased twt would taken eminent domain end second quarter 2008 company therefore established plan relocate rationalize operations see note 4 december 3 2007 company entered equity transfer agreement joint venture partners purchase remaining 40 outstanding ownership interest twt already purchase price approximately 52 million payable certain closing conditions met including approval agreement local chinese authorities company expects occur end second quarter 2008 company expects record approximately 37 million goodwill acquisition 20 subsequent events february 5 2008 company declared quarterly dividend eleven cents 011 per share outstanding share class common stock class b common stock increase 001 per share compared dividend paid comparable period last year january 1 2008 february 25 2008 company liquidated approximately 220 million companys auction rate certificates par value invested proceeds money market accounts february 25 2008 company held approximately 170 million auction rate certificates whose underlying investments aaa rated municipal bonds company current indications securities holds may impaired however volatility credit markets could impact companys ability liquidate investments cause fair value securities impaired liquidity securities becomes prohibitive company may forced hold securities maturity conditions improve could long 33 years subsequent december 31 2007 february 25 2008 company experienced failed auctions 66 million auction rate certificates company present need access funds operational purposes amounts associated failed auctions accessible successful auction occurs buyer found outside auction process underlying securities matured result company classified 170 million auction rate certificates held february 25 2008 longterm assets companys december 31 2007 consolidated balance sheet watts water technologies inc subsidiaries schedule iivaluation qualifying accounts amounts millions three years ended december 31 exhibit index exhibit description 31 restated certificate incorporation amended 14 32 amended restated bylaws amended 1 91 amended restated george b horne voting trust agreement1997 dated september 14 1999 15 101 supplemental compensation agreement effective september 1 1996 registrant timothy p horne 9 amendment 1 dated july 25 2000 16 amendment 2 dated october 23 2002 3 102 form indemnification agreement registrant certain directors officers registrant 18 103 1996 stock option plan dated october 15 1996 10 first amendment dated february 28 2003 3 104 watts water technologies inc pension plan amended restated effective january 1 2006 first amendment effective january 1 2008 105 registration rights agreement dated july 25 1986 5 106 executive incentive bonus plan amended restated 8 107 amended restated stock restriction agreement dated october 30 1991 2 amendment dated august 26 1997 12 108 watts industries inc 1991 nonemployee directors nonqualified stock option plan 6 amendment 1 9 109 watts industries inc 2003 nonemployee directors stock option plan 3 1010 letter credit issued fleet national bank successor bankboston na benefit zurichamerican insurance company dated june 25 1999 amended january 22 2001 17 1011 watts water technologies inc management stock purchase plan amended restated january 1 2005 amended 20 1012 stock purchase agreement dated june 19 1996 among mueller co tyco valves limited watts investment company tyco international ltd registrant 11 1013 note purchase agreement dated may 15 2003 registrant purchasers named schedule thereto relating registrants 50000000 487 senior notes series due may 15 2010 75000000 547 senior notes series b due may 15 2013 7 1014 form 487 senior note due may 15 2010 7 1015 form 547 senior note due may 15 2013 7 1016 watts water technologies inc 2004 stock incentive plan amended 20 1017 nonemployee director compensation arrangements 1 1018 watts water technologies inc supplemental employees retirement plan amended restated effective may 4 2004 first amendment effective march 1 2005 second amendment effective january 1 1019 form incentive stock option agreement watts water technologies inc 2004 stock incentive plan 19 1020 form nonqualified stock option agreement watts water technologies inc 2004 stock incentive plan 20 1021 form restricted stock award agreement employees watts water technologies inc 2004 stock incentive plan incremental vesting 20 1022 form restricted stock award agreement employees watts water technologies inc 2004 stock incentive plan cliff vesting 19 1023 form restricted stock award agreement nonemployee directors watts water technologies inc 2004 stock incentive plan 19 1024 note purchase agreement dated april 27 2006 registrant purchasers named schedule thereto relating registrants 225000000 585 senior notes due april 30 2016 4 1025 form 585 senior note due april 30 2016 4 1026 subsidiary guaranty dated april 27 2006 connection registrants 585 senior notes due april 30 2016 executed subsidiary guarantors party thereto including form joinder subsidiary guaranty 4 1027 first amendment dated april 27 2006 note purchase agreement dated may 15 2003 among registrant purchasers named therein 4 1028 amended restated credit agreement dated april 27 2006 among registrant certain subsidiaries registrant borrowers bank america na administrative agent swing line lender lc issuer lenders referred therein 4 1029 amended restated guaranty dated april 27 2006 registrant subsidiaries registrant set forth therein watts industries europe bv favor bank america na 4 1030 resignation agreement dated october 16 2007 registrant william martino 18 statement regarding computation earnings per common share 13 subsidiaries consent kpmg llp 311 certification principal executive officer pursuant rule 13a14a rule 15d14a securities exchange act 1934 amended 312 certification principal financial officer pursuant rule 13a14a rule 15d14a securities exchange act 1934 amended 321 certification principal executive officer pursuant 18 usc section 1350 322 certification principal financial officer pursuant 18 usc section 1350 1incorporated reference registrants current report form 8k dated february 5 2007 file 00111499 2incorporated reference registrants current report form 8k dated november 14 1991 file 00111499 3incorporated reference registrants annual report form 10k year ended december 31 2002 file 00111499 4incorporated reference registrants current report form 8k dated april 27 2006 file 00111499 5incorporated reference registrants form s1 336515 part second amendment form s1 dated august 21 1986 6incorporated reference amendment 1 registrants annual report form 10k year ended june 30 1992 file 00111499 7incorporated reference registrants current report form 8k dated may 15 2003 file 00111499 8incorporated reference registrants current report form 8k dated february 8 2005 file 00111499 9incorporated reference registrants annual report form 10k year ended june 30 1996 file 00111499 10incorporated reference registrants form s8 33332685 dated august 1 1997 11incorporated reference registrants current report form 8k dated september 4 1996 file 001 11499 12incorporated reference registrants annual report form 10k year ended june 30 1997file 001 11499 13incorporated reference notes consolidated financial statements note 2 report 14incorporated reference registrants quarterly report form 10q quarter ended july 3 2005 file 00111499 15incorporated reference registrants annual report form 10k year ended june 30 1999 file 00111499 16incorporated reference registrants quarterly report form 10q quarter ended september 30 2000 file 00111499 17incorporated reference registrants annual report form 10k year ended december 31 2003 file 00111499 18incorporated reference registrants quarterly report form 10q quarter ended september 30 2007 file 00111499 19incorporated reference registrants quarterly report form 10q quarter ended september 26 2004 file 00111499 20incorporated reference registrants quarterly report form 10q quarter ended july 1 2007 file 00111499 management contract compensatory plan arrangement documents incoporated reference part item 1 business item 1a risk factors item 1b unresolved staff comments item 2 properties item 3 legal proceedings item 4 submission matters vote security holders part ii item 5 market registrants common equity related stockholder matters issuer purchases equity securities item 6 selected financial data item 7 managements discussion analysis financial condition results operations item 7a quantitative qualitative disclosures market risk item 8 financial statements supplementary data item 9 changes disagreements accountants accounting financial disclosure item 9a controls procedures managements annual report internal control financial reporting report independent registered public accounting firm item 9b information part iii item 10 directors executive officers corporate governance item 11 executive compensation item 12 security ownership certain beneficial owners management related stockholder matters item 13 certain relationships related transactions director independence item 14 principal accountant fees services part iv item 15 exhibits financial statement schedules signatures report independent registered public accounting firm watts water technologies inc subsidiaries consolidated statements operations amounts millions except per share information watts water technologies inc subsidiaries consolidated balance sheets amounts millions except share information watts water technologies inc subsidiaries consolidated statements stockholders equity amounts millions except share information watts water technologies inc subsidiaries consolidated statements cash flows amounts millions watts water technologies inc subsidiaries notes consolidated financial statements watts water technologies inc subsidiaries schedule iivaluation qualifying accounts amounts millions exhibit index