Summary of Significant Accounting Policies

Profile

Badger Meter is an innovator in flow measurement, control and communication solutions, 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 and communicating valuable and timely measurement data. The Company’s product lines fall into two categories: sales of water meters and related technologies to municipal water utilities (municipal water) and sales of meters to various industries for water and other fluids (flow instrumentation). The Company estimates that over 75% of its products are used in water applications when both categories are grouped together.

Municipal water, the largest category by sales volume, includes mechanical and ultrasonic (electronic) water meters and related technologies and services used by municipal water utilities as the basis for generating water and wastewater revenues. The key market for the Company’s municipal 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 ultrasonic water meters. The development of smaller diameter ultrasonic water meters combined with advanced radio technology now provides the Company with the opportunity to sell into other geographical markets, for example Europe, the Middle East and South America. In the municipal water category, sales of water meters and related technologies and services are also commonly referred to as residential or commercial water meter sales, the latter referring to larger sizes of water 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, primarily into the following industries: water/wastewater; heating, ventilating and air conditioning (HVAC); oil and gas; chemical and petrochemical; test and measurement; automotive aftermarket; and the concrete construction process. Furthermore, the Company’s flow instrumentation technologies are sold to original equipment manufacturers as the primary flow measurement device within a product or system.

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			Balance at end of year
	(In thousands)
2015	$	811	$	(152	)	$	(182	)	$	477
2014	$	531	$	305		$	(25	)	$	811
2013	$	488	$	78		$	(35	)	$	531

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)
2015	$	3,314	$	2,530	$	(2,008	)	$	3,836
2014	$	4,236	$	974	$	(1,896	)	$	3,314
2013	$	2,880	$	2,322	$	(966	)	$	4,236

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 $2.0 million and $1.2 million at December 31, 2015 and 2014, respectively. In addition, there was $5.0 million and $4.9 million at December 31, 2015 and 2014, respectively, included in other assets in the Consolidated Balance Sheets. These amounts are amortized on a straight-line basis over the estimated useful lives of the software and/or hardware, ranging from 1 to 5 years. Amortization expense recognized for the years ending December 31, 2015, 2014 and 2013 was $2.4 million, $1.4 million and $1.1 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 2015, 2014 and 2013.

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, 2015, 2014 and 2013 was $6.1 million, $5.5 million and $5.0 million, respectively. Amortization expense expected to be recognized is $6.1 million in each of 2016 and 2017, $5.9 million in 2018, $5.8 million in each of 2019 and 2020, and $27.7 million thereafter. The carrying value and accumulated amortization by major class of intangible assets are as follows:



	December 31, 2015				December 31, 2014
	Gross carrying amount		Accumulated amortization		Gross carrying amount		Accumulated amortization
	(In thousands)
Technologies	$	47,157	$	16,104	$	47,157	$	13,244
Non-compete agreements	2,062		1,455		2,022		1,243
Licenses	650		441		650		424
Customer lists	4,923		1,327		3,423		1,053
Customer relationships	20,690		5,494		20,700		3,575
Trade names	9,475		2,788		9,325		2,066
Total intangibles	$	84,957	$	27,609	$	83,277	$	21,605

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 2015, 2014 and 2013.

Goodwill was $48.0 million, $47.7 million and $44.7 million at December 31, 2015, 2014 and 2013, respectively. The increases were the result of the asset purchase of United Utilities Inc. of Smyrna, Tennessee in 2015, and the National Meter and Automation, Inc. of Centennial, Colorado acquisition in 2014. 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 generally 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 and 2015, 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			Balance at end of year
	(In thousands)
2015	$	1,739	$	2,837	$	(1,443	)	$	3,133
2014	$	882	$	2,512	$	(1,655	)	$	1,739
2013	$	881	$	1,069	$	(1,068	)	$	882

Research and Development

Research and development costs are charged to expense as incurred and amounted to $10.6 million, $9.5 million and $10.5 million in 2015, 2014 and 2013, respectively.

Stock-Based Compensation Plans

As of December 31, 2015, the Company has an Omnibus Incentive Plan under which 700,000 shares are reserved for restricted stock and stock option 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 $1.5 million for 2015 and $1.4 million for each of 2014 and 2013.

Healthcare

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

Accumulated Other Comprehensive Loss

Components of accumulated other comprehensive loss at December 31, 2015 are as follows:



	Pension and postretirement benefits			Foreign currency			Total
				(In thousands)
Balance at beginning of period	$	(11,891	)	$	35		$	(11,856	)
Other comprehensive income before reclassifications	(1,317		)	(847		)	(2,164		)
Amounts reclassified from accumulated other comprehensive loss, net of tax of $(0.7) million	1,240			—			1,240
Net current period other comprehensive loss, net	(77		)	(847		)	(924		)
Accumulated other comprehensive loss	$	(11,968	)	$	(812	)	$	(12,780	)

Details of reclassifications out of accumulated other comprehensive loss during 2015 are as follows:



	Amount reclassified from accumulated other comprehensive loss
	(In thousands)
Amortization of employee benefit plan items:
Prior service cost (1)	$	53
Settlement expense (1)	762
Amortization of actuarial loss (1)	1,153
Total before tax	1,968
Income tax benefit	(728		)
Amount reclassified out of accumulated other comprehensive loss	$	1,240


(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, 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 loss, 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.”

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 November 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-17, Balance Sheet Classification of Deferred Taxes, requiring all deferred tax assets and liabilities, and any related valuation allowance, to be classified as non-current on the balance sheet. The classification change for all deferred taxes as non-current simplifies entities' processes as it eliminates the need to separately identify the net current and net non-current deferred tax asset or liability in each jurisdiction and allocate valuation allowances. The standard will be effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for financial statements that have not been previously issued, and the ASU may be applied either prospectively to all deferred tax assets and liabilities or retrospectively to all periods presented. The guidance was adopted in the fourth quarter of 2015 on a prospective basis. The adoption did not have a material impact on the Company's financial condition or results of operations other than the presentation of deferred taxes on the Consolidated Balance Sheets.

In May 2014, the FASB issued 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 contract, 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.

In April 2015, the FASB tentatively agreed to delay the effective date of ASU 2014-09 for one year and to permit early adoption by entities as of the original effective dates. In July 2015, the FASB affirmed its proposal to defer the effective date of the ASU, which has since been issued in August 2015. Considering the one year deferral, ASU 2014-09 will be effective for the Company beginning on January 1, 2018 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.