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Employee Benefit Plans | 12 Months Ended
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Dec. 31, 2014
Employee Benefit Plans |
Employee Benefit Plans | (13) Employee Benefit Plans For the majority of its U.S. employees, the Company sponsors a funded non-contributing defined benefit pension plan, the Watts Water Technologies, Inc. Pension Plan (the "Pension Plan"), and an unfunded non-contributing defined benefit pension plan, the Watts Water Technologies, Inc. Supplemental Employees Retirement Plan (the "SERP"). 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 the SERP. On April 28, 2014, the Company's Board of Directors voted to terminate the Company's Pension Plan and the SERP. The Pension Plan was terminated effective July 31, 2014. Distribution of plan assets pursuant to the termination will not be made until the plan termination satisfies the regulatory requirements prescribed by the Internal Revenue Service (IRS) and the Pension Benefit Guaranty Corporation, which is expected to occur in late 2015. The SERP was terminated effective May 15, 2014. The Company will settle all liabilities under the SERP in accordance with Section 409A of the Internal Revenue Code by paying lump sums to plan participants at least twelve and no more than twenty four months following the termination date. The Board of Directors authorized the Company to make such contributions to the Pension Plan and SERP as may be necessary to make the plans sufficient to settle all plan liabilities. The Company expects the distributions for the two plans to be completed by December 31, 2015. Except for retirees receiving payments under the Pension Plan (or "in pay status"), participants in the Pension Plan will have the choice of receiving either a single lump sum payment or an annuity. Retirees in pay status will continue to receive payments of their pension plan benefits pursuant to their current annuity elections. The Company plans to purchase annuity contracts from an insurance company for all retirees and participants that choose annuities as a payment option under the Pension Plan. All participants under the SERP will be paid a lump sum. The lump sum payments paid to participants will represent the actuarial equivalent value of the participants' remaining accrued benefits under the Pension Plan and SERP as of the applicable distribution dates, calculated in accordance with the terms of the plans and based on the participants' ages on the distribution dates. During the third quarter ended September 28, 2014, the Company remeasured its pension liability and net loss in accumulated other comprehensive income to reflect the plan termination basis for both the Pension Plan and SERP. As a result, the pension liability increased $17.1 million and the net loss increased by $10.5 million, net of tax benefits of $6.6 million. During the fourth quarter ended December 31, 2014, the annual valuation of the plans resulted in a $0.7 million increase in the pension liability and the net loss increased by $0.4 million, net of tax benefits of $0.3 million. The funded status of the defined benefit plans and amounts recognized in the consolidated balance sheets are as follows:
|  | December 31, |
|  | 2014 |  | 2013 |
|  | (in millions) |
Change in projected benefit obligation |  |  |  |  |  |  |
Balance at beginning of the year |  | $ | 126.3 |  | $ | 138.0 |
Service cost |  |  | 0.7 |  |  | 0.5 |
Administration costs paid |  |  | (1.5 | ) |  | (0.8 | )
Interest cost |  |  | 5.9 |  |  | 5.4 |
Actuarial loss (gain) |  |  | 32.6 |  |  | (12.5 | )
Benefits paid |  |  | (5.1 | ) |  | (4.3 | )
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Balance at end of year |  | $ | 158.9 |  | $ | 126.3 |
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Change in fair value of plan assets |  |  |  |  |  |  |
Balance at beginning of the year |  | $ | 103.7 |  | $ | 115.8 |
Actual gain (loss) on assets |  |  | 21.1 |  |  | (7.7 | )
Employer contributions |  |  | 0.7 |  |  | 0.7 |
Administration costs paid |  |  | (1.5 | ) |  | (0.8 | )
Benefits paid |  |  | (5.1 | ) |  | (4.3 | )
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Fair value of plan assets at end of the year |  | $ | 118.9 |  | $ | 103.7 |
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Funded status at end of year |  | $ | (40.0 | ) | $ | (22.6 | )
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Amounts recognized in the consolidated balance sheets are as follows:
|  | December 31, |
|  | 2014 |  | 2013 |
|  | (in millions) |
Current liabilities |  | $ | (40.0 | ) | $ | (0.6 | )
Noncurrent liabilities |  |  | — |  |  | (22.0 | )
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Net amount recognized |  | $ | (40.0 | ) | $ | (22.6 | )
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Amounts recognized in accumulated other comprehensive income consist of:
|  | December 31, |
|  | 2014 |  | 2013 |
|  | (in millions) |
Net actuarial loss recognized |  | $ | 58.9 |  | $ | 42.2 |
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Information for pension plans with an accumulated benefit obligation in excess of plan assets are as follows:
|  | December 31, |
|  | 2014 |  | 2013 |
|  | (in millions) |
Projected benefit obligation |  | $ | 158.9 |  | $ | 126.3 |
Accumulated benefit obligation |  | $ | 158.9 |  | $ | 126.3 |
Fair value of plan assets |  | $ | 118.9 |  | $ | 103.7 |
The components of net periodic benefit cost are as follows:
|  | Years Ended December 31, |
|  | 2014 |  | 2013 |  | 2012 |
|  | (in millions) |
Service cost—benefits earned |  | $ | 0.7 |  | $ | 0.5 |  | $ | 0.6 |
Interest costs on benefits obligation |  |  | 5.9 |  |  | 5.4 |  |  | 5.7 |
Expected return on assets |  |  | (6.3 | ) |  | (6.8 | ) |  | (6.9 | )
Net actuarial loss amortization |  |  | 1.2 |  |  | 1.0 |  |  | 0.6 |
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Net periodic benefit cost |  | $ | 1.5 |  | $ | 0.1 |  | $ | — |
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For fiscal year 2015, 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 is $1.5 million. Assumptions: Weighted-average assumptions used to determine benefit obligations:
|  | December 31, |
|  | 2014 |  | 2013 |
Discount rate |  |  | 3.5 | % |  | 4.9 | %
Weighted-average assumptions used to determine net periodic benefit costs:
|  | Years Ended December 31, |
|  | 2014 |  | 2013 |  | 2012 |
Discount rate |  |  | 4.9 | % |  | 4.0 | % |  | 4.8 | %
Long-term rate of return on assets |  |  | 6.0 | % |  | 6.0 | % |  | 6.50 | %
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. Plan assets 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 twice a year 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 collateralized mortgage obligation (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 guaranteed investment contracts. Specific guidelines regarding allocation of assets are followed using a liability driven investment (LDI) strategy. Under an 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 95% fixed income and 5% equities and other investments in anticipation of the expected termination of the plan in 2015. 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 weighted average asset allocations by asset category are as follows:
|  | December 31, |
Asset Category |  | 2014 |  | 2013 |
Equity securities |  |  | 4.2 | % |  | 9.4 | %
Debt securities |  |  | 94.0 |  |  | 85.1 |
Other |  |  | 1.8 |  |  | 5.5 |
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Total |  |  | 100.0 | % |  | 100.0 | %
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The following table presents the investments in the pension plan measured at fair value at December 31, 2014 and 2013:
|  | December 31, 2014 |  | December 31, 2013 |
|  | Level 1 |  | Level 2 |  | Level 3 |  | Total |  | Level 1 |  | Level 2 |  | Level 3 |  | Total |
|  | (in millions) |
Money market funds |  | $ | 2.0 |  | $ | — |  | $ | — |  | $ | 2.0 |  | $ | 2.0 |  | $ | — |  | $ | — |  | $ | 2.0 |
Equity securities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. equity securities(a) |  |  | 3.2 |  |  | — |  |  | — |  |  | 3.2 |  |  | 7.6 |  |  | — |  |  | — |  |  | 7.6 |
Non-U.S. equity securities(a) |  |  | 1.2 |  |  | — |  |  | — |  |  | 1.2 |  |  | 1.3 |  |  | — |  |  | — |  |  | 1.3 |
Other equity securities(b) |  |  | 0.5 |  |  | — |  |  | — |  |  | 0.5 |  |  | 0.7 |  |  | — |  |  | — |  |  | 0.7 |
Debt securities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. government |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 16.5 |  |  | — |  |  | — |  |  | 16.5 |
U.S. and non-U.S. corporate(c) |  |  | — |  |  | 110.7 |  |  | — |  |  | 110.7 |  |  | — |  |  | 70.9 |  |  | — |  |  | 70.9 |
Other investments(d) |  |  | 1.3 |  |  | — |  |  | — |  |  | 1.3 |  |  | 4.7 |  |  | — |  |  | — |  |  | 4.7 |
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Total investments |  | $ | 8.2 |  | $ | 110.7 |  | $ | — |  | $ | 118.9 |  | $ | 32.8 |  | $ | 70.9 |  | $ | — |  | $ | 103.7 |
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(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, |
|  | 2014 |  | 2013 |
|  | (in millions) |
Employer Contributions |  | $ | 0.7 |  | $ | 0.7 |
Benefit Payments |  | $ | 5.1 |  | $ | 4.3 |
The Company expects to contribute approximately $42.6 million in 2015 for the Pension Plan and SERP in order to fully fund and settle the plans. The expected contribution considers the expected shortfall based on a plan termination basis as of December 31, 2015. The expected contribution is subject to change based on the distribution date, fair value of the plan assets at distribution, market interest rates and annuity purchase rates at distribution, demographic experience after 2014 and elected forms of payment. Expected benefit payments to be paid by the pension plans are as follows:
|  | (in millions) |
During fiscal year ending December 31, 2015 |  | $ | 164.4 | (1)
During fiscal year ending December 31, 2016 |  |  | N/A | (1)
During fiscal year ending December 31, 2017 |  |  | N/A | (1)
During fiscal year ending December 31, 2018 |  |  | N/A | (1)
During fiscal year ending December 31, 2019 |  |  | N/A | (1)
During fiscal years ending December 31, 2020 through December 31, 2021 |  |  | N/A | (1)
(1) | Benefits under the Pension Plan and the SERP are expected to be distributed by December 31, 2015.
Additionally, all of the Company's domestic employees are eligible to participate in the Company's 401(k) savings plan. Effective January 1, 2012, the Company provides a base contribution of 2% of an employee's salary, regardless of whether the employee participates in the plan. Further, the Company matches the contribution of up to 100% of the first 4% of an employee's contribution. The Company's match contribution for the years ended December 31, 2014, 2013 and 2012, were $4.4 million, $4.2 million, and $4.0 million, respectively. Charges for EMEA pension plans approximated $5.5 million, $5.8 million and $6.0 million for the years ended December 31, 2014, 2013 and 2012, 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. Mr. Horne retired effective December 31, 2002, and therefore the Supplemental Compensation period began on January 1, 2003. If Mr. Horne complies with the consulting provisions of the agreement above, he shall receive supplemental compensation on an annual basis, subject to cost of living increases each year, in exchange for the services performed, as long as he is physically able to do so. The payment for consulting services provided by Mr. Horne will be expensed as incurred by the Company. Mr. Horne received payments of $0.6 million during each of 2014, 2013 and 2012. In the event of physical disability, Mr. Horne will continue to receive this payment annually. In accordance with Generally Accepted Accounting Principles (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.

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