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Basis of Presentation and Accounting Policies

12 Months Ended

Dec. 31, 2023

Basis of Presentation and Accounting Policies

Note 1 Basis of Presentation and Accounting Policies

Profile

With more than a century of water technology innovation, Badger Meter is a global provider of industry leading water management solutions, with nearly 95% of net sales derived from water-related applications. These tailorable solutions encompass smart measurement hardware, reliable communications, data and analytics software as well as ongoing support and expertise essential to optimize customers' operations and contribute to the sustainable use and protection of the world’s most precious resource. The Company's smart measurement hardware is primarily comprised of the following product families:

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Meters that measure the flow of water and other fluids and are known for accuracy, long-lasting durability and for providing valuable and timely flow measurement data.

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Water quality monitoring solutions, including optical sensing and electrochemical instruments that provide real-time, on demand data parameters.

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High frequency pressure and acoustic leak detection hardware that provides real-time monitoring data.

The Company’s broad range of communication solutions include the ORION® branded family of radio endpoints, providing customers with a choice of industry-leading options for communicating data from hardware into usable applications. The Company’s hardware-enabled software provides the insights and analytics critical to the holistic management of our customers’ water systems. These digital solutions increase visibility, empowering customers to monitor system performance and make decisions aiding efficiency, resiliency, and sustainability. The Company also provides training, project management, technical support and other collaborative services for customers. The Company’s solutions fall into two product lines: sales of meters, water quality sensors and other hardware, communication, and software and related technologies, to water utilities (utility water) and sales of meters, other sensing instruments, valves, software and other solutions to commercial and industrial customers, including water related applications (flow instrumentation).

Utility water smart metering solutions are comprised of water meters along with the related radio and software technologies and services used by water utilities as the basis for generating their water and wastewater revenues, enabling operating efficiencies and engaging with their end consumers. This product line further comprises other instruments and sensors used in the water distribution system to ensure the safe and efficient delivery of clean water. These sensors are used to detect leaks and to monitor various water quality parameters throughout the distribution system. The largest geographic market in which the Company operates is North America, primarily the United States. The majority of water meters sold are mechanical in nature, with increasing adoption over time of ultrasonic (static) metering technology due to a variety of attributes, including their ability to maintain measurement accuracy over their useful life.

The flow instrumentation product line primarily serves water applications throughout the broader industrial market, with both standard and customized solutions. This product line includes meters, valves and other sensing instruments sold worldwide to measure and control the quantity of fluids including water, air, steam, and other liquids and gases. These products, oftentimes leveraging the same technologies used in utility water, are used in a variety of industries and applications, with the Company’s primary market focus being water/wastewater, heating, ventilating and air conditioning (HVAC) and corporate sustainability. Flow instrumentation products are generally sold through manufacturers’ representatives and original equipment manufacturers as the primary flow measurement device within a product or system. Specialized communication protocols that control the entire flow measurement process and mandatory certifications drive these markets.

Consolidation

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

Cash Equivalents

The Company considers all highly liquid investments with original maturities of ninety days or less to be cash equivalents.

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)
2023	$	1,179	$	1,862	$	(137	)	$	2,904
2022		697		515		(33	)		1,179
2021		552		191		(46	)		697

Inventories

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


	Balance at beginning of year		Net additions charged to earnings		Disposals			Balance at end of year
	(In thousands)
2023	$	6,681	$	2,135	$	(1,942	)	$	6,874
2022		6,078		1,498		(895	)		6,681
2021		6,400		1,329		(1,651	)		6,078

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 to 39 years; and for machinery and equipment, 3 to 20 years.

Capitalized Software and Hardware

Capitalized internal use software and hardware included in other assets in the Consolidated Balance Sheets were $3.7 million and $4.8 million at December 31, 2023 and 2022, respectively. 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, 2023, 2022 and 2021 was $3.3 million, $3.8 million and $4.5 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.

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 was $8.6 million in 2023, $8.6 million in 2022 and $10.0 million in 2021. Amortization expense expected to be recognized is $8.6 million in 2024,

$8.2 in 2025, $7.4 million in 2026, $5.7 million in 2027, $4.3 million in 2028 and $19.5 million thereafter. The carrying value and accumulated amortization by major class of intangible assets are as follows:


	December 31, 2023				December 31, 2022
	Gross carrying amount		Accumulated amortization		Gross carrying amount		Accumulated amortization
	(In thousands)
Technologies	$	66,157	$	41,845	$	58,504	$	37,857
Intellectual property		7,086		1,301		6,857		840
Non-compete agreements		627		610		691		661
Licenses		650		578		650		560
Customer lists		8,235		5,863		8,058		5,097
Customer relationships		27,884		12,936		38,602		22,023
Trade names		15,424		9,193		15,880		8,597
Total intangibles	$	126,063	$	72,326	$	129,242	$	75,635

Goodwill

Goodwill is tested for impairment annually during the fourth 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 tests during 2023, 2022 and 2021. Goodwill was $113.2 million at December 31, 2023 and $101.3 million at December 31, 2022. The increase in goodwill from 2022 to 2023 resulted from the acquisition of Syrinix Ltd, headquartered in Norwich, United Kingdom in 2023, as well as currency translation adjustments of $1.6 million. This acquisition is further described in Note 3 “Acquisitions”.

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 issues 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		Provision of acquired business		Net additions charged to earnings		Costs incurred			Balance at end of year
	(In thousands)
2023	$	9,606	$	93	$	9,759	$	(8,356	)	$	11,102
2022		12,868		-		5,624		(8,886	)		9,606
2021		11,617		-		5,856		(4,605	)		12,868

Research and Development

Research and development costs are charged to expense as incurred and amounted to $19.0 million in 2023, $15.8 million in 2022 and $14.7 million in 2021.

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, 2023 are as follows:


(In thousands)	Unrecognized pension and postretirement benefits			Foreign currency			Total
Balance at beginning of period	$	994		$	(6,977	)	$	(5,983	)
Other comprehensive income before reclassifications		-			4,411			4,411
Amounts reclassified from accumulated other comprehensive income, net of tax of ($26)		(74	)		-			(74	)
Net current period other comprehensive loss, net of tax		(74	)		4,411			4,337
Accumulated other comprehensive loss	$	920		$	(2,566	)	$	(1,646	)

Reclassifications out of accumulated other comprehensive income during 2023 were immaterial.

Components of accumulated other comprehensive income at December 31, 2022 are as follows:


(In thousands)	Unrecognized pension and postretirement benefits		Foreign currency			Total
Balance at beginning of period	$	394	$	(258	)	$	136
Other comprehensive loss before reclassifications		-		(6,719	)		(6,719	)
Amounts reclassified from accumulated other comprehensive income, net of tax of ($197)		600		-			600
Net current period other comprehensive loss, net of tax		600		(6,719	)		(6,119	)
Accumulated other comprehensive loss	$	994	$	(6,977	)	$	(5,983	)

Reclassifications out of accumulated other comprehensive income during 2022 were immaterial.

Use of Estimates

The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) 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 and cash equivalents, receivables and payables in the financial statements approximate their fair values due to the short-term nature of these financial instruments. 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 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.

Recently Adopted Accounting Pronouncements

In October 2021, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2021-08, "Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities with Customers," which requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the

acquirer on the acquisition date in accordance with ASC 606, "Revenue from Contracts with Customers." The guidance is effective for fiscal years beginning after December 15, 2022. The Company adopted ASU No. 2021-08 on January 1, 2023, the impact of which was not significant to the Company.

In November 2023, the FASB issued ASU No. 2023-07, "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures," which requires enhanced disclosures on segment expenses, interim segment disclosures, and requirements for entities operating under a single segment. The guidance is effective on a retrospective basis for fiscal years beginning after December 15, 2023 and interim periods beginning after January 1, 2025, early adoption is permitted. The Company is currently assessing the impact of this proposed change on its consolidated financial statements.

In December 2023, the FASB issued ASU No. 2023-09, "Income Taxes (Topic 740): Improvements to Income Tax Disclosures," which requires additional disclosure associated with the effective tax rate reconciliation and payment of income taxes. The guidance is effective for fiscal years beginning after December 15, 2025 and will be applied on a prospective basis with the option to apply the standard retrospectively. The Company is currently assessing the impact of this proposed change on its consolidated financial statements.