Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2011

Summary of Significant Accounting Policies [Abstract]

Summary of Significant Accounting Policies

Note 1    Summary of Significant Accounting Policies

Profile

The core competency of the Company is flow measurement solutions. The Company is a leading innovator, manufacturer and marketer of flow measurement and control products, serving water and gas utilities, municipalities and industrial customers worldwide. The Company’s products are used in a wide variety of applications, including water, oil and lubricants, and are known for their high degree of accuracy, long-lasting durability and ability to provide valuable and timely measurement information to customers. The Company’s product lines fall into two categories: water applications and specialty applications.

Water applications, the largest category by sales volume, include 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 the meters are designed and manufactured to conform to standards promulgated by the American Water Works Association. The Company’s products are also sold for other water-based purposes, including irrigation, water reclamation and industrial process applications.

Specialty applications include the sale of meters and related technologies and services for measuring a wide variety of fluids in industries such as food and beverage, pharmaceutical production, petroleum, heating, ventilating and air conditioning (HVAC), and measuring and dispensing automotive fluids. It also includes the sale of radio technology to natural gas utilities for installation on their gas meters.

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)
2011	$	441	$	91		$	(274	)	$	40	(a)	$	298
2010	$	291	$	227		$	(77	)	$	—		$	441
2009	$	560	$	(212	)	$	(57	)	$	—		$	291

(a) The reserve increased $40,000 in 2011 related to the acquisition of Remag AG. Refer to Note 3 “Acquisitions and Investments” 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			Reserve acquired			Balance at end of year
	(In thousands)
2011	$	2,775	$	288	$	(423	)	$	40	(a)	$	2,680
2010	$	2,042	$	1,345	$	(612	)	$	—		$	2,775
2009	$	1,746	$	705	$	(409	)	$	—		$	2,042

(a) The reserve increased $40,000 in 2011 related to the acquisition of Remag AG. Refer to Note 3 “Acquisitions and Investments” for a description of the acquisition.

Property, Plant and Equipment

Property, plant and equipment are stated at cost. Depreciation is provided over the estimated useful lives of the respective assets, principally 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.

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 10 to 20 years. The Company does not have any intangible assets deemed to have indefinite lives. Amortization expense expected to be recognized is $2.3 million in each of the subsequent five years beginning with 2012. The carrying value and accumulated amortization by major class of intangible assets are as follows:

	December 31, 2011				December 31, 2010
	Gross carrying amount		Accumulated amortization		Gross carrying amount		Accumulated amortization
	(In thousands)
Technologies	$	31,928	$	5,150	$	32,228	$	3,720
Non-compete agreement		1,932		675		1,900		489
Licenses		650		373		650		356
Trademarks		150		145		150		130
Customer list		3,423		291		1,663		83
Trade name		2,523		292		2,481		124
Total intangibles	$	40,606	$	6,926	$	39,072	$	4,902

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 2011, 2010 and 2009.

Goodwill was $9.4 million, $9.2 million and $7.0 million at December 31, 2011, 2010 and 2009, respectively. The increases were the result of the Remag, AG of Bern, Switzerland acquisition in 2011, and the Cox Instruments, LLC of Scottsdale, Arizona acquisition in 2010. Both acquisitions are further described in Note 3 “Acquisitions and Investments.”

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.

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)
2011	$	889	$	1,592	(a)	$	(888	)	$	—		$	1,593
2010	$	907	$	552		$	(668	)	$	98	(b)	$	889
2009	$	1,327	$	409		$	(829	)	$	—		$	907

(a) Included in the 2011 increase in the reserve was $0.6 million related to a specific product issue.

(b) The reserve increased $98,000 in 2010 related to the acquisition of Cox Flow Measurement. Refer to Note 3 “Acquisitions and Investments” for a description of the acquisition.

Research and Development

Research and development costs are charged to expense as incurred and amounted to $8.1 million, $7.2 million and $6.9 million in 2011, 2010 and 2009, respectively.

Stock-Based Compensation Plans

As of December 31, 2011, 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 $1.5 million for 2011, $1.4 million for 2010 and $1.2 million for 2009.

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 Income (Loss)

Components of accumulated other comprehensive income (loss) at December 31 are as follows:

	2011			2010
	(In thousands)
Cumulative foreign currency translation adjustment	$	1,190		$	1,457
Unrecognized pension and postretirement benefit plan liabilities, net of tax		(15,756	)		(14,594	)
Accumulated other comprehensive loss	$	(14,566	)	$	(13,137	)

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 is insurance policies on various individuals that were associated with the Company. The carrying amounts of these insurance policies approximates 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.

On February 1, 2012, the Company acquired 100% of the outstanding common stock of Racine Federated, Inc. of Racine, Wisconsin and its subsidiary Premier Control Technologies, Ltd. located in Thetford, England for approximately $57.0 million of cash. Racine Federated manufactures and markets flow meters for the water industry, as well as various industrial metering and specialty products. These products complement and expand the Company’s existing lines of water application and specialty application products for the global flow measurement business.

Since the acquisition closed subsequent to December 31, 2011, the accompanying consolidated financial statements do not reflect any adjustments related to the acquisition, although transaction costs of approximately $1.1 million are included in selling, engineering and administration in the Company’s Consolidated Statements of Operations for 2011.

The most recently audited financial statements of Racine Federated, Inc. reported $33.4 million of net sales for the calendar year ended December 31, 2010.

The allocation of the purchase price to the fair value of assets acquired and liabilities assumed is incomplete because the acquisition was only recently consummated and the Company has just begun the valuation process. Therefore, all asset and liability related disclosures have been omitted and the impact of any amortization on the expected step up in historical asset values has been excluded.

In February 2012, the Company expanded its principal line of credit from $65.0 million to $90.0 million from February 16, 2012 to June 16, 2012 with interest calculated using 30-day LIBOR plus 150 percentage points over the index. This increase is intended to meet short-term cash needs, if any, that may arise as the result of funding the acquisition of Racine Federated with approximately $57.0 million of cash, as well as any cash needs resulting from a $30.0 million stock buyback program that began in the first quarter of 2012. The entire credit facility may be used for the issuance of commercial paper. This facility is unsecured, but there is a minimum tangible net worth covenant in effect for the period.