Employee Benefit Plans

12 Months Ended

Dec. 31, 2011

Employee Benefit Plans

Employee Benefit Plans

(13) Employee Benefit Plans

        The Company sponsors funded and unfunded non-contributing defined benefit pension plans that together cover substantially all of its domestic employees. Benefits are based primarily on years of service and employees' compensation. The funding policy of the Company for these plans is to contribute an annual amount that does not exceed the maximum amount that can be deducted for federal income tax purposes.

        On October 31, 2011, the Company's Board of Directors voted to cease accruals effective December 31, 2011 under both the Company's Pension Plan and Supplemental Employees Retirement Plan. The Company recorded a curtailment charge of approximately $1.5 million to write-off previously unrecognized prior service costs and reduced the projected benefit obligation by $12.5 million. The Board of Directors also voted to enhance the Company's existing 401 (k) Savings Plan. The net effect of these plan changes is expected to reduce future retirement plans expense by approximately $2.0 million annually.

        The funded status of the defined benefit plans and amounts recognized in the consolidated balance sheet are as follows:

	December 31,
	2011			2010
	(in millions)
Change in projected benefit obligation
Balance at beginning of the year	$	112.6		$	96.1
Service cost		5.3			4.6
Administration cost		(0.6	)		(1.0	)
Interest cost		6.0			5.7
Actuarial loss		13.6			10.2
Benefits paid		(3.2	)		(3.0	)
Curtailment adjustment		(12.5	)		—
Balance at end of year	$	121.2		$	112.6
Change in fair value of plan assets
Balance at beginning of the year	$	90.3		$	66.6
Actual gain on assets		14.1			7.4
Employer contributions		7.8			20.3
Administration cost		(0.6	)		(1.0	)
Benefits paid		(3.2	)		(3.0	)
Fair value of plan assets at end of the year	$	108.4		$	90.3
Funded status at end of year	$	(12.8	)	$	(22.3	)

        Amounts recognized in the consolidated balance sheet are as follows:

	December 31,
	2011			2010
	(in millions)
Current liabilities	$	(0.2	)	$	(0.1	)
Noncurrent liabilities		(12.6	)		(22.2	)
Net amount recognized	$	(12.8	)	$	(22.3	)

        Amounts recognized in accumulated other comprehensive income consist of:

	December 31,
	2011		2010
	(in millions)
Net actuarial loss	$	31.1	$	39.3
Prior service cost		—		1.7
Net amount recognized	$	31.1	$	41.0

        Information for pension plans with an accumulated benefit obligation in excess of plan assets are as follows:

	December 31,
	2011		2010
	(in millions)
Projected benefit obligation	$	13.7	$	112.6
Accumulated benefit obligation	$	13.7	$	102.8
Fair value of plan assets	$	—	$	90.3

        Information for pension plans with plan assets in excess of accumulated benefit obligation are as follows:

	December 31,
	2011		2010
	(in millions)
Projected benefit obligation	$	107.6	$	—
Accumulated benefit obligation	$	107.6	$	—
Fair value of plan assets	$	108.4	$	—

        The components of net periodic benefit cost are as follows:

	Years Ended December 31,
	2011			2010			2009
	(in millions)
Service cost—benefits earned	$	5.3		$	4.6		$	4.1
Interest costs on benefits obligation		6.0			5.7			5.2
Expected return on assets		(7.5	)		(6.0	)		(4.0	)
Prior service cost amortization		0.3			0.3			0.3
Net actuarial loss amortization		2.7			2.3			3.0
Curtailment charge		1.5			—			—
Net periodic benefit cost	$	8.3		$	6.9		$	8.6

        The estimated net actuarial loss for the defined benefit pension plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next year is $0.6 million.

        Assumptions:

        Weighted-average assumptions used to determine benefit obligations:

	December 31,
	2011			2010
Discount rate		4.80	%		5.50	%
Rate of compensation increase		N/A			4.00	%

        Weighted-average assumptions used to determine net periodic benefit costs:

	Years Ended December 31,
	2011	2010			2009
Discount rate	5.50%/4.70%		6.00	%		6.00	%
Long-term rate of return on assets	7.75%		8.50	%		8.50	%
Rate of compensation increase	N/A		4.00	%		4.00	%

        Discount rates are selected based upon rates of return at the measurement date utilizing a bond matching approach to match the expected benefit cash flows. In selecting the expected long-term rate of return on assets, the Company considers the average rate of earnings expected on the funds invested or to be invested to provide for the benefits of this plan. This includes considering the trust's asset allocation and the expected returns likely to be earned over the life of the plan. This basis is consistent with the prior year. The original 2011 discount rate of 5.5% was revised to 4.70% at October 31, 2011, the curtailment date of the plans.

Plan assets:

        The weighted average asset allocations by asset category are as follows:

	December 31,
Asset Category	2011			2010
Equity securities		13.4	%		42.5	%
Debt securities		77.4			40.2
Other		9.2			17.3
Total		100.0	%		100.0	%

        The Company's written Retirement Plan Investment Policy sets forth the investment policy, objectives and constraints of the Watts Water Technologies, Inc. Pension Plan. This Retirement Plan Investment Policy, set forth by the Pension Plan Committee, defines general investment principles and directs investment management policy, addressing preservation of capital, risk aversion and adherence to investment discipline. Investment managers are to make a reasonable effort to control risk and are evaluated quarterly against commonly accepted benchmarks to ensure that the risk assumed is commensurate with the given investment style and objectives.

        The portfolio is designed to achieve a balanced return of current income and modest growth of capital, while achieving returns in excess of the rate of inflation over the investment horizon in order to preserve purchasing power of Plan assets. All Plan assets are required to be invested in liquid securities. Derivative investments are not allowed.

        Prohibited investments include, but are not limited to the following: futures contracts, private placements, options, limited partnerships, venture-capital investments, interest-only (IO), principal-only (PO), and residual tranche CMOs, and Watts Water Technologies, Inc. stock.

        Prohibited transactions include, but are not limited to the following: short selling and margin transactions.

        Allowable assets include: cash equivalents, fixed income securities, equity securities, mutual funds, and GICs.

        Specific guidelines regarding allocation of assets are followed using a liability driven investment (LDI) strategy. Under a LDI strategy, investments are made based on the expected cash flows required to fund the pension plan's liabilities. This cash flow matching technique requires a plan's asset allocation to be heavily weighted toward fixed income securities. The Company's current allocation target is 80% fixed income, 20% equities and other investments. With the recent plan curtailment, the Company expects this allocation target to increase to 90% or more in fixed income in 2012. Investment performance is monitored on a regular basis and investments are re-allocated to stay within specific guidelines. The securities of any one company or government agency should not exceed 10% of the total fund, and no more than 20% of the total fund should be invested in any one industry. Individual treasury securities may represent 50% of the total fund, while the total allocation to treasury bonds and notes may represent up to 100% of the Plan's aggregate bond position.

        The following table presents the investments in the pension plan measured at fair value at December 31, 2011 and 2010:

	December 31, 2011								December 31, 2010
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
	(in millions)
Money market funds	$	—	$	4.9	$	—	$	4.9	$	—	$	10.1	$	—	$	10.1
Equity securities
U.S. equity securities(a)		8.0		—		—		8.0		12.5		—		—		12.5
Non-U.S. equity securities(a)		2.3		—		—		2.3		9.0		—		—		9.0
Other equity securities(b)		4.1		—		—		4.1		16.9		—		—		16.9
Debt securities
U.S. government		19.9		—		—		19.9		10.1		—		—		10.1
U.S. and non-U.S. corporate(c)		—		63.3		—		63.3		—		26.2		—		26.2
Other investments(d)		4.9		1.0		—		5.9		5.2		0.3		—		5.5
Total investments	$	39.2	$	69.2	$	—	$	108.4	$	53.7	$	36.6	$	—	$	90.3

(a)

Includes investments in common stock from diverse industries

(b)

Includes investments in index and exchange-traded funds

(c)

Includes investment grade bonds from diverse industries

(d)

Includes investments in real estate investment funds, exchange-traded funds, commodity mutual funds and accrued interest

Cash flows:

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

	December 31,
	2011		2010
	(in millions)
Employer Contributions	$	7.8	$	20.3
Benefit Payments	$	3.2	$	3.0

        The Company expects to contribute approximately $0.6 million in 2012.

        Expected benefit payments to be paid by the pension plans are as follows:

	(in millions)
During fiscal year ending December 31, 2012	$	4.2
During fiscal year ending December 31, 2013	$	4.5
During fiscal year ending December 31, 2014	$	4.9
During fiscal year ending December 31, 2015	$	5.2
During fiscal year ending December 31, 2016	$	5.5
During fiscal year ending December 31, 2017 through December 31, 2021	$	32.0

        Additionally, substantially all of the Company's domestic employees are eligible to participate in certain 401(k) savings plans. Under these plans, the Company matches a specified percentage of employee contributions, subject to certain limitations. The Company's match contributions (included in selling, general and administrative expense) for the years ended December 31, 2011, 2010 and 2009 was $0.5 million in each year. The Company's largest 401(k) plan will be enhanced beginning January 1, 2012. Under the revised plan, the Company will provide a base contribution of 2% of an employee's salary, regardless of whether the employee participates in the plan. Further, the Company will make a matching contribution of up to 100% of the first 4% of an employee's contribution. Charges for European pension plans approximated $6.2 million, $3.5 million and $2.8 million for the years ended December 31, 2011, 2010 and 2009, respectively. These costs relate to plans administered by certain European subsidiaries, with benefits calculated according to government requirements and paid out to employees upon retirement or change of employment.

        The Company entered into a Supplemental Compensation Agreement (the Agreement) with Timothy P. Horne on September 1, 1996. Per the Agreement, upon ceasing to be an employee of the Company, Mr. Horne must make himself available, as requested by the Board, to work a minimum of 300 but not more than 500 hours per year as a consultant in return for certain annual compensation as long as he is physically able to do so. If Mr. Horne complies with the consulting provisions of the agreement above, he shall receive supplemental compensation on an annual basis of $0.4 million per year, subject to cost of living increases each year, in exchange for the services performed, as long as he is physically able to do so. In the event of physical disability, subsequent to commencing consulting services for the Company, Mr. Horne will continue to receive this payment annually. The payment for consulting services provided by Mr. Horne will be expensed as incurred by the Company. Mr. Horne retired effective December 31, 2002, and therefore the Supplemental Compensation period began on January 1, 2003. In accordance with GAAP, the Company accrues for the future post-retirement disability benefits over the period from January 1, 2003, to the time in which Mr. Horne becomes physically unable to perform his consulting services (the period in which the disability benefits are earned). Mr. Horne is still active as a consultant in accordance with the terms of the Agreement.