Summary of Significant Accounting Policies

Profile

Badger Meter is an innovator in flow measurement and control products, serving water utilities, municipalities, and commercial and industrial customers worldwide. The Company’s products measure water, oil, chemicals and other fluids, and are known for accuracy, long-lasting durability and for providing valuable and timely measurement data. The Company’s product lines fall into three categories: sales of water meters and related technologies to municipal water utilities (municipal water), sales of meters to various industries for water and other fluids (flow instrumentation), and sales of gas meter radios and concrete vibrators to unique markets (specialty products). The Company estimates that over 75% of its products are used in water applications when all categories are grouped together.

Municipal water, the largest category by sales volume, includes mechanical and electronic (static) water meters and related technologies and services used by water utilities as the basis for generating water and wastewater revenues. The key market for the Company’s water meter products is North America, primarily the United States, because most meters are designed and manufactured to conform to standards promulgated by the American Water Works Association. The majority of water meters sold continues to be mechanical in nature. In recent years, the Company has made inroads in selling electronic (static) meters. This recent development of static water meters combined with updated radio technology now provides the Company with the opportunity to sell into other geographical markets, for example Europe, Middle East and South America. In the municipal water category, sales of water meters and related technologies and services are commonly referred to as residential or commercial water meter sales, the latter referring to larger sizes of meters.

Flow instrumentation includes meters and valves sold worldwide to measure and control materials flowing through a pipe or pipeline including water, air, steam, oil, and other liquids and gases. These products are used in a variety of applications, such as water/wastewater; heating, ventilating and air conditioning (HVAC); oil and gas; chemical and petrochemical; food and beverage; and pharmaceutical production. Furthermore, the Company’s flow measurement technologies are sold to original equipment manufacturers as the primary flow measurement device within a product or system.

Specialty products include sales of radio technology to natural gas utilities for installation on their gas meters, and concrete vibrators used in the concrete construction process.

Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions have been eliminated in consolidation.

Receivables

Receivables consist primarily of trade receivables. The Company does not require collateral or other security and evaluates the collectability of its receivables based on a number of factors. An allowance for doubtful accounts is recorded for significant past due receivable balances based on a review of the past due items and the customer's ability and likelihood to pay, as well as applying a historical write-off ratio to the remaining balances. Changes in the Company's allowance for doubtful accounts are as follows:



	Balance at beginning of year		Provision and reserve adjustments		Write-offs less recoveries			Reserve acquired			Balance at end of year
	(In thousands)
2014	$	531	$	305	$	(25	)	$	—		$	811
2013	$	488	$	78	$	(35	)	$	—		$	531
2012	$	298	$	138	$	(30	)	$	82	(a)	$	488

(a) The reserve increased $82,000 in 2012 related to the acquisition of Racine Federated, Inc. Refer to Note 3 “Acquisitions” for a description of the acquisition.

Inventories

Inventories are valued at the lower of cost or market. Cost is determined using the first-in, first-out method. The Company estimates and records provisions for obsolete inventories. Changes to the Company's obsolete inventories reserve are as follows:



	Balance at beginning of year		Net additions charged to earnings		Disposals			Balance at end of year
	(In thousands)
2014	$	4,236	$	974	$	(1,896	)	$	3,314
2013	$	2,880	$	2,322	$	(966	)	$	4,236
2012	$	2,680	$	1,082	$	(882	)	$	2,880

Property, Plant and Equipment

Property, plant and equipment are stated at cost. Depreciation is provided over the estimated useful lives of the respective assets by the straight-line method. The estimated useful lives of assets are: for land improvements, 15 years; for buildings and improvements, 10 — 39 years; and for machinery and equipment, 3 — 20 years.

Capitalized Software and Hardware

Capitalized internal use software and hardware included in prepaid expenses and other current assets in the Consolidated Balance Sheets were $1.2 million and $0.8 million at December 31, 2014 and 2013, respectively. In addition, there was $4.9 million and $2.8 million at December 31, 2014 and 2013, respectively, included in other assets in the Consolidated Balance Sheets. These amounts are amortized on a straight-line basis over the software’s estimated useful lives, ranging from 1 to 5 years. Amortization expense recognized for the years ending December 31, 2014, 2013 and 2012 was $1.4 million, $1.1 million and $0.8 million, respectively.

Long-Lived Assets

Property, plant and equipment and identifiable intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected undiscounted cash flows is less than the carrying value of the related asset or group of assets, a loss is recognized for the difference between the fair value and carrying value of the asset or group of assets. No adjustments were recorded as a result of these reviews during 2014, 2013 and 2012.

Intangible Assets

Intangible assets are amortized on a straight-line basis over their estimated useful lives, ranging from 5 to 20 years. The Company does not have any intangible assets deemed to have indefinite lives. Amortization expense recognized for the years ending December 31, 2014, 2013 and 2012 was $5.5 million, $5.0 million and $4.5 million, respectively. Amortization expense expected to be recognized is $5.8 million in each of 2015, 2016 and 2017, $5.7 million in each of 2018 and 2019, and $32.9 million thereafter. The carrying value and accumulated amortization by major class of intangible assets are as follows:



	December 31, 2014				December 31, 2013
	Gross carrying amount		Accumulated amortization		Gross carrying amount		Accumulated amortization
	(In thousands)
Technologies	$	47,157	$	13,244	$	47,157	$	10,384
Non-compete agreements	2,022		1,243		1,932		1,048
Licenses	650		424		650		407
Customer lists	3,423		1,053		3,423		679
Customer relationships	20,700		3,575		11,690		2,218
Trade names	9,325		2,066		8,615		1,414
Total intangibles	$	83,277	$	21,605	$	73,467	$	16,150

Goodwill

Goodwill is tested for impairment annually during the fourth fiscal quarter or more frequently if an event indicates that the goodwill might be impaired. Potential impairment is identified by comparing the fair value of a reporting unit with its carrying value. No adjustments were recorded to goodwill as a result of these reviews during 2014, 2013 and 2012.

Goodwill was $47.7 million, $44.7 million and $35.9 million at December 31, 2014, 2013 and 2012, respectively. The increases were the result of the National Meter and Automation, Inc. of Centennial, Colorado acquisition in 2014, and the Aquacue, Inc. of Los Gatos, California acquisition in 2013. These acquisitions are further described in Note 3 “Acquisitions.”

Revenue Recognition

Revenues are generally recognized upon shipment of product, which corresponds with the transfer of title. The costs of shipping are billed to the customer upon shipment and are included in cost of sales. A small portion of the Company's sales includes shipments of products combined with services, such as meters sold with installation. The product and installation components of these multiple deliverable arrangements are considered separate units of accounting. The value of these separate units of accounting is determined based on their relative fair values determined on a stand-alone basis. Revenue is generally recognized when the last element of the multiple deliverable is delivered, which corresponds with installation and acceptance by the customer. The Company also sells a small number of extended support service agreements on certain products for the period subsequent to the normal support service provided with the original product sale. Revenue is recognized over the service agreement period, which is generally one year. In 2014, the company began offering software as a service with its BEACON AMA product. While the amounts were insignificant in 2014, revenue for this service is recognized on a monthly basis as the service is performed.

Warranty and After-Sale Costs

The Company estimates and records provisions for warranties and other after-sale costs in the period in which the sale is recorded, based on a lag factor and historical warranty claim experience. After-sale costs represent a variety of activities outside of the written warranty policy, such as investigation of unanticipated problems after the customer has installed the product, or analysis of water quality issues. Changes in the Company's warranty and after-sale costs reserve are as follows:



	Balance at beginning of year		Net additions charged to earnings		Costs incurred and adjustments			Reserve acquired			Balance at end of year
	(In thousands)
2014	$	882	$	2,512	$	(1,655	)	$	—		$	1,739
2013	$	881	$	1,005	$	(1,068	)	$	64	(a)	$	882
2012	$	1,593	$	719	$	(1,431	)	$	—		$	881


(a)	The reserve increased $64,000 in 2013 related to the acquisition of Aquacue, Inc. Refer to Note 3 “Acquisitions” for a description of the acquisition.

Research and Development

Research and development costs are charged to expense as incurred and amounted to $9.5 million, $10.5 million and $9.6 million in 2014, 2013 and 2012, respectively.

Stock-Based Compensation Plans

As of December 31, 2014, the Company has an Omnibus Incentive Plan under which 700,000 shares are reserved for restricted stock and stock options grants for employees as well as stock grants for directors as described in Note 5 “Stock Compensation.” The plan was approved in 2011 and replaced all prior stock-based plans except for shares and options previously issued under those plans.

The Company recognizes the cost of stock-based awards in net earnings for all of its stock-based compensation plans on a straight-line basis over the service period of the awards. The Company estimates the fair value of its option awards using the Black-Scholes option-pricing formula, and records compensation expense for stock options ratably over the stock option grant's vesting period. The Company values restricted stock and stock grants for directors on the closing price of the Company's stock on the day the grant was awarded. Total stock compensation expense recognized by the Company was $1.4 million for 2014 and 2013, and $1.3 million for 2012.

Healthcare

The Company estimates and records provisions for healthcare claims incurred but not reported, based on medical cost trend analyses, reviews of subsequent payments made and estimates of unbilled amounts.

Accumulated Other Comprehensive Loss

Components of accumulated other comprehensive loss at December 31, 2014 are as follows:



	Pension and postretirement benefits			Foreign currency			Total
				(In thousands)
Balance at beginning of period	$	(9,280	)	$	1,756		$	(7,524	)
Other comprehensive income before reclassifications	(4,968		)	(1,721		)	(6,689		)
Amounts reclassified from accumulated other comprehensive loss, net of tax of $(1.2) million	2,357			—			2,357
Net current period other comprehensive income, net	(2,611		)	(1,721		)	(4,332		)
Accumulated other comprehensive (loss) income	$	(11,891	)	$	35		$	(11,856	)

Details of reclassifications out of accumulated other comprehensive loss during 2014 are as follows:



	Amount reclassified from accumulated other comprehensive loss
	(In thousands)
Amortization of employee benefit plan items:
Prior service cost (1)	$	161
Settlement expense (1)	858
Amortization of actuarial loss (1)	2,547
Total before tax	3,566
Income tax benefit	(1,209		)
Amount reclassified out of accumulated other comprehensive loss	$	2,357


(1)	These accumulated other comprehensive loss components are included in the computation of benefit plan costs in Note 7 “Employee Benefit Plans.”

Components of accumulated other comprehensive loss at December 31, 2013 are as follows:



	Pension and postretirement benefits			Foreign currency		Total
	(In thousands)
Balance at beginning of period	$	(15,532	)	$	1,584	$	(13,948	)
Other comprehensive income before reclassifications	5,116			172		5,288
Amounts reclassified from accumulated other comprehensive loss, net of tax of $(0.6) million	1,136			—		1,136
Net current period other comprehensive income, net	6,252			172		6,424
Accumulated other comprehensive (loss) income	$	(9,280	)	$	1,756	$	(7,524	)

Details of reclassifications out of accumulated other comprehensive loss during 2013 are as follows:



	Amount reclassified from accumulated other comprehensive loss
	(In thousands)
Amortization of employee benefit plan items:
Prior service cost (1)	$	161
Settlement expense (1)	806
Amortization of actuarial loss (1)	786
Total before tax	1,753
Income tax benefit	(617		)
Amount reclassified out of accumulated other comprehensive loss	$	1,136


(1)	These accumulated other comprehensive loss components are included in the computation of benefit plan costs in Note 7 “Employee Benefit Plans.”

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Fair Value Measurements of Financial Instruments

The carrying amounts of cash, receivables and payables in the financial statements approximate their fair values due to the short-term nature of these financial instruments. Short-term debt is comprised of notes payable drawn against the Company's lines of credit and commercial paper. Because of its short-term nature, the carrying amount of the short-term debt also approximates fair value. Included in other assets are insurance policies on various individuals who were associated with the Company. The carrying amounts of these insurance policies approximate their fair value.

Subsequent Events

The Company evaluates subsequent events at the date of the balance sheet as well as conditions that arise after the balance sheet date but before the financial statements are issued. The effects of conditions that existed at the date of the balance sheet date are recognized in the financial statements. Events and conditions arising after the balance sheet date but before the financial statements are issued are evaluated to determine if disclosure is required to keep the financial statements from being misleading. To the extent such events and conditions exist, if any, disclosures are made regarding the nature of events and the estimated financial effects for those events and conditions. For purposes of preparing the accompanying consolidated financial statements and the notes to these financial statements, the Company evaluated subsequent events through the date the accompanying financial statements were issued.

New Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) No. 2014-09 "Revenue from Contracts with Customers." ASU 2014-09 provides a single principles-based, five-step model to be applied to all contracts with customers. The five steps are to identify the contract(s) with the customer, to identify the performance obligations in the contact, to determine the transaction price, to allocate the transaction price to the performance obligations in the contract and to recognize revenue when each performance obligation is satisfied. Revenue will be recognized when promised goods or services are transferred to the customer in an amount that reflects the consideration expected in exchange for those goods or services. ASU 2014-09 will be effective for the Company beginning on January 1, 2017 and the standard allows for either full retrospective adoption or modified retrospective adoption. The Company is continuing to evaluate the impact that the adoption of this guidance will have on its financial condition, results of operations and the presentation of its financial statements.

In November 2014, the FASB issued ASU No. 2014-17 “Business Combinations (Topic 805): Pushdown Accounting.” In addition, the staff of the Securities and Exchange Commission released Staff Accounting Bulletin (“SAB”) No. 115, which rescinds SAB Topic 5J, “New Basis of Accounting Required in Certain Circumstances.” Pushdown accounting refers to pushing down the acquirer’s accounting and reporting basis (which is recognized in conjunction with its accounting for a business combination) to the acquiree’s standalone financial statements. Under the new guidance, pushdown accounting is optional for any transaction in which another party obtains control of the reporting company. An acquired entity can make the election to apply the guidance to future change in control events or to its most recent change-in-control event if the financial statements have not been issued. ASU No. 2014-17 was effective upon issuance, which was November 18, 2014. The adoption of ASU No. 2014-17 did not have any impact on the Company’s financial condition or results of operation.