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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-K

 

 

ANNUAL REPORT

PURSUANT TO SECTIONS 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 2010

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 333-113658

 

 

 

Sensus (Bermuda 2) Ltd.   Sensus USA Inc.
(Exact name of registrant as specified in its charter)   (Exact name of registrant as specified in its charter)

 

 

 

Bermuda   98-0413362   Delaware    51-0338883

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

  (State or other jurisdiction of incorporation or organization)    (I.R.S. Employer

Identification No.)

8601 Six Forks Road, Suite 700, Raleigh, North Carolina 27615

(Address of principal executive offices) (Zip Code)

(919) 845-4000

(Registrants’ telephone number, including area code)

 

 

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

    Large accelerated filer  ¨            Accelerated filer  ¨            Non-accelerated filer  x    Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of May 7, 2010, Sensus (Bermuda 2) Ltd. had 12,000 common shares outstanding, all of which were owned by Sensus (Bermuda 1) Ltd., and Sensus USA Inc. had 283.603994 shares of common stock outstanding, all of which were owned by Sensus (Bermuda 2) Ltd.

 

 

 


Table of Contents

FORM 10-K

FOR THE FISCAL YEAR ENDED MARCH 31, 2010

TABLE OF CONTENTS

 

          Page

Part I

     

Item 1.

  

Business

   2

Item 1A.

  

Risk Factors

   9

Item 1B.

  

Unresolved Staff Comments

   19

Item 2.

  

Properties

   19

Item 3.

  

Legal Proceedings

   20

Item 4.

  

Reserved

   21

Part II

     

Item 5.

  

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

   22

Item 6.

  

Selected Financial Data

   22

Item 7.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   22

Item 7A.

  

Quantitative and Qualitative Disclosures About Market Risk

   34

Item 8.

  

Financial Statements and Supplementary Data

   36
  

Consolidated Balance Sheets

   37
  

Consolidated Statements of Operations

   38
  

Consolidated Statements of Stockholder’s Equity

   39
  

Consolidated Statements of Cash Flows

   40
  

Notes to Consolidated Financial Statements

   41

Item 9.

  

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

   91

Item 9A.

  

Controls and Procedures

   91

Item 9B.

  

Other Information

   92

Part III

     

Item 10.

  

Directors, Executive Officers and Corporate Governance

   93

Item 11.

  

Executive Compensation

   97

Item 12.

  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

   120

Item 13.

  

Certain Relationships and Related Transactions, and Director Independence

   122

Item 14.

  

Principal Accountant Fees and Services

   124

Part IV

     

Item 15.

  

Exhibits and Financial Statement Schedules

   125

 

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PART I

 

ITEM 1. BUSINESS

Unless the context otherwise indicates or requires, the use in this Annual Report on Form 10-K of the terms “we,” “us,” “our” or the “Company” refers to Sensus (Bermuda 2) Ltd. and its consolidated subsidiaries, and in a historical context, includes the operations of Invensys Metering Systems. Our fiscal year ends on March 31 and references herein to a fiscal year refer to the twelve-month period ended as of that date.

Available Information

Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports are available free of charge on our internet web site at http://www.sensus.com as soon as reasonably practicable after such reports are electronically filed with or furnished to the Securities and Exchange Commission (the “SEC”). The SEC makes available on the website http://www.sec.gov free of charge, reports and other information regarding issuers, such as us, that file electronically with the SEC. Information on our website or the SEC website is not part of this Annual Report on Form 10-K.

General

We are a leading provider of advanced utility infrastructure systems, metering technologies and related communication systems to the worldwide utility industry. We have over a century of experience in providing support to utilities. Our technologies, products and systems enable our utility customers to measure, manage and control electricity, water and natural gas more efficiently thereby enabling conservation of those limited resources. Our products and technologies provide key functionality that will be required for the development of the “Smart Grid” in the United States and other countries. We are a leading provider of advanced metering infrastructure (“AMI”) fixed network radio frequency (“RF”) systems and solutions with a wide range of product offerings to meet the evolving demands of the electric, water, and gas utility sectors. We believe that we are the fastest growing participant in the North American electric metering systems market and the largest global manufacturer of water meters, a leading supplier of automatic meter reading (“AMR”) devices to the North American water utilities market and a leading global developer and manufacturer of gas and heat metering systems. We are recognized throughout the utility industry for developing and manufacturing metering products with long-term accuracy and robust product features, innovative metering communications systems, as well as for providing comprehensive customer service for all of our products and services. In addition to our advanced utility infrastructure and metering business, we believe that we are the leading North American producer of pipe joining and repair products for water and natural gas utilities and we are a premier supplier of precision-manufactured, thin-wall, low-porosity aluminum die castings.

The Company was formed on December 18, 2003 through the acquisition of the metering systems and certain other businesses of Invensys plc (“Invensys”). Prior to the acquisition, the Company had no active business operations. The metering systems businesses operated by Invensys prior to the acquisition are referred to herein as “Invensys Metering Systems.”

Industry, Markets and Products

We have two principal product groups: utility infrastructure systems products and support products, accounting for approximately 85% and 15% of net sales, respectively, for fiscal 2010. The two product groups, plus corporate operations, are organized into two reporting segments: Utility Infrastructure and Related Communication Systems (formerly Metering and Related Communication Systems) and All Other. The Utility Infrastructure and Related Communication Systems segment includes advanced metering technologies, such as AMI and AMR communications systems, distribution automation systems, demand response technologies, and four principal metering technology categories: water, gas, electricity and heat. Included in the All Other segment, under the Smith-Blair brand name, we manufacture pipe joining and repair products used primarily by water and

 

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gas utilities. Also, the All Other segment includes precision die castings that produce low porosity die casting products for the automotive market through tier I industry suppliers. For fiscal 2008, 2009 and 2010, we had net sales from continuing operations of $722.0 million, $791.9 million and $865.6 million, respectively.

Utility Infrastructure and Related Communication Systems

We provide advanced utility infrastructure and related communication systems, which include utility-wide AMI fixed network RF deployments, AMR systems, distribution automation systems, demand response technologies, advanced metering and related communication technologies, products and solutions to utilities throughout the world and have a large installed base of meters worldwide. The North American and European utility markets are the largest markets in which we participate.

Advanced technology and two-way communications systems provide utilities with the means to measure, manage and control various points in their infrastructure more efficiently and timely. Two-way communications allow a utility not only to receive information from a device (e.g., a meter or transformer), but to send commands to control the device. In addition to meters, our communication technology can be integrated into other devices across the utility’s infrastructure and used in distribution automation and demand response applications such as substations and thermostats. This provides the utility with the ability not only to monitor usage, but also to control distribution and demand, a key aim of the Smart Grid. The ability to communicate and control devices in its infrastructure provides a utility with a way to improve its efficiency and improve resource conservation. Increases in efficiencies and conservation have become strong drivers in the growth in AMI and AMR markets. We offer AMI and AMR systems, which can be deployed with most major competitors’ devices (e.g., meters) as well as our own. In addition, our meters can be deployed on most of the leading AMI and AMR systems in the market.

Conservation Solutions. The Company’s Conservation Solutions business (formerly AMI & Electric) offers the Sensus FlexNet™ two-way RF fixed network AMI and Smart Grid communications solution across electric, gas and water utilities. We participate in electric markets that follow the American National Standards Institute standards with a focus on other countries where there is an organized plan to deploy a Smart Grid solution on a large scale, such as the United Kingdom. Our principal electric market is North America where we participate with our iCon® solid-state meter and our Sensus FlexNet™ AMI system for residential metering applications. The North American electric utility market is made up of approximately 3,000 electric utilities having approximately 140 million meters for residential, commercial and industrial applications. The two main segments of the electric utility market are investor owned utilities (“IOUs”) and public or municipal utilities. IOUs make up 7% of the market segment, but manage approximately 70% of the metering services. In the United States, recent energy legislation—the Energy Advancement and Investment Act (2007) and the Energy Independence and Security Act (2007)—created a requirement for the utility regulatory bodies in each state to consider implementing advanced metering solutions. This requirement has been a significant driver for utilities to upgrade or replace their existing electricity meters with AMR or AMI systems. Furthermore, the American Recovery and Reinvestment Act (“ARRA”) signed into law in February of 2009 allocated $11 billion to Smart Grid technologies that included AMI deployments and an additional $4.5 billion to modernize the nation’s electrical grid and Smart Grid. We expect that the ARRA, and similar legislative initiatives in the European Union to promote energy efficiency, will bolster demand for our products using AMI and AMR technologies.

We believe that our FlexNet™ AMI system provides the utility industry’s most reliable and flexible two-way AMI fixed network solution. This network is based on a Federal Communications Commission (the “FCC”) licensed and protected communications network. We believe that utility customers can benefit from these FlexNet™ AMI system features, as well as others, including IP-based wide area communications, open standards home area networking, advanced Smart Grid products, IP-based information systems, and the ability to provide two-way communications to water and gas meters. The Company’s network solution delivers timely and accurate AMI communications through a dedicated redundant RF data path with high power broadcasting capabilities to minimize infrastructure investments. This allows utilities to communicate with a complete range

 

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of endpoint devices including smart water, gas and electric meters, intelligent home devices, demand response, and distribution automation equipment in any mix of rural and urban settings. We have begun to integrate our FlexNet™ AMI communications into our distribution automation product offering, which we acquired from Telemetric in June 2009. We believe that our FlexNet™ AMI system provides a proven single-technology solution that reduces cost, mitigates technology risk, enables pricing flexibility and demand response, and improves operational efficiency through reliable performance, cross-vendor compatibility, and system scalability.

We continue to expand the iCon® electric meter product family to include commercial and industrial electric meter lines as well as increasing the meter’s AMI and AMR capabilities. We offer our own electric meter AMI and AMR products, which include the Sensus FlexNet™ two-way fixed network system in addition to our RadioRead® mobile walk-by/drive-by system. The key design features of the iCon® meter enable the product to be one of the most highly accurate electricity measurement devices, and the well-engineered mechanical design allows for AMI and AMR product integration of both the Company and compatible third-party AMI/AMR vendor products. These features have permitted the iCon® meter to gain rapid market acceptance in North America. The market growth for solid-state meters is expected to increase in the North American electric meter market due to utilities upgrading to new technologies that integrate new meters with AMI/AMR systems.

During fiscal 2010, the Company executed long-term contracts to deploy its advanced, fixed network AMI technology. As of March 31, 2010, the Company had entered into contracts covering the deployment of approximately 10.3 million FlexNet™ AMI electric and gas endpoints. These long-term contracts, which extend up to 20 years, provide for the deployment of our FlexNet™ AMI Network and contain multiple product and service elements including hardware, software, project management and installation services as well as ongoing support. During fiscal 2010, the Company shipped approximately 3.3 million endpoints under these contracts, an increase of 74% compared to fiscal 2009.

Water and Heat. Our water metering technology products and systems are sold worldwide with our largest markets being North America and Europe. We have developed and introduced to the market new and innovative technologies for both residential and commercial applications, which address numerous long standing industry challenges. Our OMNI™ line of commercial products uses our proprietary floating ball technology to recognize low flow rates with only one single moving part; it also uses an electronic register with numerous additional features. In the residential segment, we have launched iPERL™, which is an intelligent water management system. Our iPERL™ product recognizes ultra low flow rates and incorporates numerous innovative features, which we believe will change the mindset of our customers within the residential segment of the market. In addition, both OMNI™ and iPERL™ are 100% lead free. Our iPERL™ product is constructed with engineered composite materials and OMNI™ is epoxy coated iron. Both technologies are being utilized internationally. The electronic registers in these new products provide the platform for advanced AMI and AMR communications. Our AMI and AMR systems offer utilities several ways to collect meter reading and other data, including TouchRead®, walk-by and drive-by RF RadioRead®, PhoneRead® and two-way fixed-based FlexNet™ RF systems.

In the North American water utility market, we believe that we hold a strong market position along with our three main competitors. Our end-customers in this market are the approximately 53,000 water utilities having approximately 80 million meters located throughout the continent. Historically, we focused our efforts on the small- to mid-size utilities that have an installed base of fewer than 50,000 meters. Such utilities represent approximately 90% of the water utilities in North America. We believe that our high accuracy meters and AMI and AMR systems are attractive to these smaller utilities, which generally have limited resources, because our systems reduce labor-intensive manual meter readings, improve reading accuracy and minimize the cost of repairs.

The European water metering market is another significant market, and we are one of the leading participants in this market. Some of the European residential water meter market is subject to national regulations that effectively limit a meter’s service life, and in these markets these regulations can minimize the need for long- term accuracy. In addition, these utilities do not read the meters frequently, which makes the cost of

 

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advanced metering systems more difficult to justify. As a result of these factors, product differentiation and features, to date, have been less of a basis for competition in Europe than in North America. However, we are witnessing a heightened level of utility market activity with advanced metering communications systems in the European market, and with that, we are pursuing AMI and AMR system solutions for the market that could change these market dynamics. For industrial and commercial meters, durability, accuracy and design specifications are more critical in the customer’s selection process and are a greater basis for competition.

Our heat metering activity is focused on heat utilities and sub-metering companies in Europe with our main activity in countries that utilize hot water for heating purposes. We produce several types of heat meters that measure the energy consumed. Sensors measure the temperature of the water in a closed system as it enters and exits the building or apartment. The difference in temperature is used to calculate the amount of energy consumed. Heat metering products include PolluCom E® compact heat meter, PolluStat E® ultrasonic heat meter and PolluFlow® bulk hot water meter. Advanced metering communications systems are also being reviewed for these markets.

Gas. Our gas metering and regulator products are sold primarily in the North American gas utility market and selected international gas utility markets where our gas products meet the regional product specifications. Our largest market is in North America where the market consists of approximately 1,250 gas utilities with approximately 75 million meters. The majority of the market consists of large IOUs, with the remaining being small-to-mid-size municipal utilities. The IOUs make up approximately 20% of the gas utility companies; however, they manage over 85% of the metering services in the North American market.

We have provided gas metering and regulation products to the gas utility market for over 100 years and are considered a market leader in the markets in which we participate. Over this period, we have continued to provide product improvements and new product developments to the market. We produce diaphragm gas metering devices for residential, commercial and industrial market segments, along with our ultrasonic gas meter product line under the Sonix® brand name. For transport gas customers, we supply the market with large volume turbine and auto-adjust turbine meters. In addition to meters, we provide regulator products that control gas line pressure. We also supply AMI and AMR systems that can read a meter remotely using radio frequency interfaces. Our AMI and AMR systems that are used in the gas utility market include the Sensus FlexNet™ AMI and the Sensus mobile RadioRead® system.

All Other

The All Other segment includes pipe joining, tapping and repair products that consist principally of pipe couplings, tapping sleeves and saddles, and repair clamps that are used by utilities in pipe joining and pipe repair applications. Also included in the All Other segment are die casting products that consist of high quality thin-wall, low porosity aluminum die castings, generally targeting the automotive industry and gas utility markets.

Pipe Joining and Repair Products. Our Smith-Blair brand competes primarily in the North American pipe joining, repairing, restraining, and tapping products market. These products consist principally of pipe couplings, tapping sleeves and saddles, joint restraints, and repair clamps that are used primarily by water and natural gas utilities to construct, extend and repair utility piping systems. Demand for pipe joining, restraining, tapping and repair products is driven by new construction, replacements and repairs. Replacement and repair demand is driven by aging infrastructure as well as extreme weather conditions, including freezes, droughts, hurricanes and earthquakes. Due to the often time-sensitive nature of customer demand for pipe joining, repairing, restraining, and tapping products, a company’s ability to respond promptly to customer needs with effective engineering solutions plays a significant role in its success within this market. Smith-Blair successfully differentiates itself by providing the widest range of both standard products and engineered-to-order products while maintaining the highest levels of customer service and, we believe, the shortest lead times in the industry.

Precision Die Casting Products. In North America, several hundred die casters produce thousands of castings for numerous products ranging from components for automobiles to medical devices. Our die casting

 

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products consist of high quality thin-wall, low porosity aluminum die castings, generally targeting the automotive industry and gas utility markets in North America. We believe that only a few other precision die casters in the United States have the ability to produce these types of products. Sales within the precision die casting market are largely dependent on the success of the automotive platform for which the products are manufactured. In China, we produce thin-wall, low porosity aluminum die castings for the Chinese automotive industry. Demand for our aluminum die casts in this market is being driven by the expanding Chinese automotive industry.

For additional information regarding our reporting segments, including segment revenue, operating income (loss) and total assets, see Note 18 under “Notes to Consolidated Financial Statements” in Item 8 of this Annual Report.

Competition

The Company competes with a number of companies in the delivery of products and services into each of the markets we serve. Our major competitors include Aclara, Badger Meter, Inc., Elster Metering, Itron, Inc., Landis+Gyr AG, Neptune Technologies and Silver Spring Networks.

Sales, Marketing and Distribution

In North America, we utilize a direct sales force to sell and market to large electric, water and gas utilities. For the medium and small electric, water and gas utilities, we use a combination of direct and indirect sales channels, including a network of distributors, some of which, we have had relationships with for over 30 years. Distributors assist us in effectively reaching our broad base of existing and potential customers, which includes approximately 53,000 water, 3,000 electric and 1,250 gas utilities throughout North America. Through strong distribution arrangements in regional and local markets, we are able to leverage those relationships to generate sales. In total, our North American sales force consists of 61 members.

Our sales and marketing strategy in Europe differs from that in North America because of the varying competitive and regulatory landscapes. Most utilities in Europe procure their meters through a tender process required by European Union or in-house regulations. Price, therefore, remains the main competitive factor in most sections of the residential European metering market. To address the specific characteristics of the European market, we maintain a direct field sales force of approximately 70 persons who are highly trained on product specifications and performance attributes and are able to assist customers in analyzing the technical and financial implications of major metering projects. In addition, we selectively use distributors in the European market, primarily in the water and heat sub-metering segments. European distributors act more as wholesalers than distributors and do not maintain significant sales and support groups.

We also have sales personnel in South America, Asia and Africa. Market coverage is mainly achieved through commissioned sales agents and several distributors. Our sales personnel play an important role in specifying products and services and are responsible for obtaining products qualified by utilities’ technical departments.

In addition to the sales and distribution channels, each product line is supported by a product marketing group. The marketing groups furnish product and sales materials by providing literature, promotional programs and web-site management. The corporate marketing group also coordinates product pricing and distributor support programs, as well as support for industry advertising, trade shows and publications.

Customers

Our top ten customers accounted for approximately 39% of net sales for fiscal 2010, and no individual customer accounted for more that 10% of net sales.

 

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Products and Systems Development

We are committed to developing the most technologically advanced products and systems within the utility industry. Currently, we maintain an active engineering and technology program that performs four key functions: development of new products, support of existing products, technical assistance for customers and new technology investigations. Our research and development expenditures for fiscal 2008, 2009 and 2010 were $26.6 million, $31.0 million and $41.2 million, respectively. We currently have 256 technical personnel operating in several facilities around the world, with most based in the United States and Germany.

Our research and development is focused on new product development as well as advancement of existing products and technologies. New product ideas are determined from many sources, including customers and sales and marketing people. We have established engineering teams with specific technical expertise to support global business activities, which eliminate duplication of effort and allow us to focus on enhancing each specific area of expertise. Utilities are very conservative in adopting new technologies and prefer to use products with a proven track record of successful deployment in the field. As a result, new products must undergo extensive system-testing and field-testing prior to release to target markets. Another major activity of our engineering group is the continual refinement and improvement of existing product design and cost.

In addition to developing our own internal technologies, we have many existing strategic relationships, including licensing agreements and development partnerships with third parties. These relationships are typically negotiated on an exclusive basis and provide us with full licensing rights. We also evaluate acquisition opportunities that provide new technology capabilities and resources that strategically fit our business.

Backlog

The Company’s total backlog consists of unshipped orders relating to undelivered contractual commitments and purchase orders. Total backlog at March 31, 2010 was $133.7 million, compared with $123.7 million at March 31, 2009. The 8% increase primarily reflects orders related to our long-term AMI contracts. In addition, at March 31, 2010, the Company cumulatively had approximately 10.3 million AMI electric and gas endpoints under long-term contracts, of which 5.5 million endpoints had been shipped. The potential aggregate future revenue of unshipped endpoints and services under these contracts was approximately $550 million at March 31, 2010, of which approximately $56 million is included in backlog. No assurance can be made that firm purchase orders will be placed under these contracts.

Suppliers and Raw Materials

In fiscal 2010, we purchased approximately $389.8 million of materials. In fiscal 2010, our largest supplier accounted for approximately 21% of total material expenditures, while the top ten suppliers accounted for approximately 67% of total material expenditures.

The principal materials used in the manufacturing processes are commodities that are available from a variety of sources. The key metal materials used in the manufacturing processes include brass castings, aluminum ingots and machined parts. The key non-metal materials used include high performance engineered plastic parts, energy, plastic resins and rubber. We do not maintain long-term supply contracts with our suppliers. Management believes that there is a readily available supply of materials in sufficient quantity from a variety of sources. We have not experienced a significant shortage of key materials and do not engage in hedging transactions for commodity supplies.

We have developed strategic partnerships with contract electronic manufacturers (“CEMs”), our outsource manufacturing providers, and are transitioning an increasing portion of our manufacturing to these providers. These strategic partnerships enable us to leverage the CEMs’ ability and capacity to manufacture high value electric components, while minimizing our manufacturing costs. In addition, CEMs function as an extension of our manufacturing capabilities by assembling some of our products and shipping them directly to customers. During fiscal 2010, the manufacture of products representing 37% of net sales was outsourced.

 

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Intellectual Property

Our success and ability to compete depends substantially upon our intellectual property. We pursue patent and trademark protection in the United States and abroad. Currently we have approximately 200 U.S. and foreign patents. No key or strategic patent protection will expire during the next fiscal year. We also have numerous trademark registrations, 31 of which we believe are significant to the business. With respect to these trademarks, so long as we continue to use and renew the registration for them, we can continue to have exclusive rights to use the trademarks indefinitely in those jurisdictions in which registrations are in effect. We sell many of our products under a number of registered trademarks, which we believe are widely recognized in the relevant industry.

While we rely on patent, copyright, trademark and trade secret law to protect our technology, we also believe that factors such as our existing licensing agreements, contracts with component manufacturers, the technological and creative skills of our personnel, new product developments and ongoing product enhancements are essential to establishing and maintaining a technology leadership position.

Environmental Matters

The Company is aware of known contamination at the following United States facilities: Russellville, Kentucky; DuBois and Uniontown, Pennsylvania; and Texarkana, Arkansas as a result of historic releases of hazardous materials. The former owner of these sites is investigating, remediating and monitoring these properties. The Company is obligated to reimburse the former owner for a portion of cash paid on the remediation plus interest on cash paid at all sites other than Russellville (the “Reimbursement Sites”), where the former owner pays all remediation costs. The Company is unable to estimate the amount of such costs at this time. In connection with the acquisition of Invensys Metering Systems, certain subsidiaries of Invensys agreed to retain liability for the reimbursement obligations related to the Reimbursement Sites.

In addition, there is contamination in the soil and groundwater at our facility in Ludwigshafen, Germany. We were indemnified by the former owner against costs that may result from the contamination, but have accepted a lump-sum payment from the former owner in return for a release of its indemnity obligations. We also have an indemnity, subject to certain limitations, from certain subsidiaries of Invensys regarding this facility pursuant to the terms of the purchase agreement governing the acquisition of Invensys Metering Systems.

Based on information currently available, the Company believes that future environmental compliance expenditures will not have a material effect on its financial position or results of operations, and has established allowances the Company believes are adequate to cover potential exposure to environmental liabilities. However, as to any of the above-described indemnities, we are subject to the credit risk of the indemnifying parties. If the indemnifying parties are unable to reimburse us for our share of the cost of remediation, additional environmental compliance costs and liabilities could reduce the Company’s future net income and cash available for operations.

Other Regulatory Matters

Our products are subject to the rules and regulations of various federal, state and local agencies and foreign regulatory bodies. For example, our AMR/AMI products and systems use radio spectrum and are subject to regulation by the FCC in the United States and by Industry Canada in Canada. Much of the European water and heat metering markets, including Germany, The Netherlands, Austria, Switzerland, the Czech Republic and Slovakia, are subject to national regulation. We are also subject to regulation by other governmental bodies. Further, we are subject to governmental regulations related to occupational safety and health, labor, wage practices and the performance of certain engineering services. We believe that we are currently in material compliance with such regulations; however, failure to comply with current or future regulations could result in the imposition of substantial fines, suspension of production, alteration of production processes, cessation of operations, or other actions that could materially and adversely affect our business, financial condition or results of operations.

 

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In the United States, recent energy legislation—the Energy Advancement and Investment Act (2007) and the Energy Independence and Security Act (2007)—created a requirement for the utility regulatory bodies in each state to consider implementing advanced metering solutions. This requirement has been a significant driver for utilities in the United States to upgrade or replace their existing meters with AMR or AMI systems. In addition, the ARRA has allocated $11 billion to Smart Grid technologies and an additional $4.5 billion to modernize the nation’s electrical grid and Smart Grid. We expect that the ARRA, and similar legislative initiatives in the European Union to promote energy efficiency, will bolster the demand for our products using AMR and AMI technologies. Subject to certain exceptions, federal, state and local public works projects initiated under the ARRA must satisfy certain regulatory requirements, including the requirement that products used in such projects be produced in the United States or in countries with which the United States has entered into trade agreements. Competition within the metering industry remains strong, and our ability to benefit from these recent legislative initiatives will depend, in part, on our ability to meet applicable regulatory requirements. Some of our competitors may be able to better respond to the changing regulatory environment to our competitive detriment. Furthermore, the uncertain nature of government stimulus programs, including the eventual size and timing of implementation, could have a material impact on our results of operations.

Employees

We are headquartered in Raleigh, North Carolina and operate globally with 40 facilities in the United States and other countries, including Germany, France, the United Kingdom, Slovakia, Brazil, Chile, South Africa and China. As of March 31, 2010, we had 3,691 full-time employees, of whom 1,423 were located in the United States and 2,268 were located abroad.

We maintain both union and non-union workforces. As of March 31, 2010, 1,271 of our employees were covered by collective bargaining agreements. The Uniontown, Pennsylvania facility has a five-year agreement with the United Steel Workers of America that expires on February 24, 2013. Sensus Precision Die Casting, Inc., our subsidiary through which we operate our precision die casting product line, has a four-year agreement with the United Automobile Workers that expires on October 11, 2010. Smith-Blair has a four-year labor contract with the United Steel Workers of America that expires on March 27, 2011. Additionally, our Ludwigshafen, Germany and Hannover, Germany employees are represented by IG Metall and negotiate with local employers’ associations that represent the German subsidiaries as well as other employers from the industry. The outcome of these negotiations also indirectly affects non-unionized employees to the extent that individual employment agreements contain references to the relevant metal union contracts. The current agreement covering our German unionized workforce expires on June 30, 2012. The Stara Tura, Slovakia facility has a five-year agreement with the ZZO OZ KOVO CHIRANA-PREMA that expires on December 31, 2010. The Nova Odessa/SP, Brazil facility has an agreement with Sindicato dos Trabalhadores das Indústrias Metalúrgicas Mecânicas e Materiais Electricos de Campinas e Ragião with an indefinite term, cancellable with one month notice.

 

ITEM 1A. RISK FACTORS

In the normal course of our business, in an effort to help keep our security holders and the public informed about our operations, we may from time to time issue or make certain statements, either in writing or orally, that are or contain “forward-looking statements,” as that term is defined in the U.S. federal securities laws. Generally, these statements relate to business plans or strategies, projections involving anticipated revenues, earnings, profitability or other aspects of operating results or other future developments in our affairs or the industry in which we conduct business. The words “expect,” “believe,” “anticipate,” “project,” “estimate” and similar expressions are intended to identify forward-looking statements. We caution readers that such statements are not guarantees of future performance or events and are subject to a number of factors that may tend to influence the accuracy of the statements and the projections upon which the statements are based, including but not limited to those discussed below. All phases of our operations are subject to a number of uncertainties, risks, and other influences, many of which are outside our control, and any one of which, or a combination of which, could materially affect our financial condition or results of operations, the trading price of our publicly traded securities, and whether the forward-looking statements we make ultimately prove to be accurate.

 

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Set forth below are risks that we believe are material to our business operations. Additional risks and uncertainties not known to us or that we currently deem immaterial may also impair our business operations.

We are susceptible to macroeconomic downturns in the United States and abroad that may affect the general economic climate, our performance and the performance of our customers and suppliers.

The recent global financial crisis and general weakness in the global economy have resulted in a general tightening in the credit markets, lower levels of liquidity and corresponding increases in the rates of default and bankruptcy, and extreme volatility in credit, equity and fixed income markets. These macroeconomic developments have had adverse effects on our customers and suppliers and could have adverse effects on our business, including decreased revenue from the sales of products and increased financing costs due to the failure of financial institutions. The combination of some or all of these factors could adversely affect our results of operations and ability to execute our business strategy. Although we have not been materially impacted by the tightening credit environment, the current economic environment may impact our customers’ and suppliers’ abilities to access credit from financial institutions that may be necessary to operate their businesses.

Conditions in the residential, commercial and industrial construction markets may adversely affect our results of operations and financial condition.

Many of our products are distributed to utility contractors in connection with residential, commercial and industrial construction projects. Sales into these markets correlate to the number of new homes and buildings that are built. The strength of the residential, commercial and industrial construction markets depends in part on the availability of consumer and commercial financing. As a result of deteriorating economic conditions and the turmoil in the credit markets, there has been a significant decline in the residential housing construction market and construction of new commercial and industrial buildings has slowed. If these conditions remain as they are today or continue to worsen, it could have a material adverse effect on our operating results and financial condition.

Conditions in the automotive industry may adversely affect our results of operations and financial condition.

We sell precision die castings to tier I automotive component suppliers. Sales within the precision die casting market are largely dependent on the success of the automotive platform for which the products are manufactured. The automotive industry has experienced significant declines due to weakness in the global economy and tightening credit markets. Some automobile manufacturers have announced significant restructuring actions in an effort to improve profitability and others have recently sought bankruptcy protection. If automakers reduce their orders to tier I suppliers, these suppliers will reduce their orders to us, and that would adversely affect our results of operations and financial condition. Due to demand contractions in the automotive market, the Company determined that the goodwill in its precision die casting business unit was impaired and thus recorded a charge of $14.4 million in fiscal 2009 (see Note 1 and Note 4 under “Notes to Consolidated Financial Statements” in Item 8 of this Annual Report).

Our substantial indebtedness could adversely affect our financial health, harm our ability to react to changes to our business and prevent us from fulfilling our obligations under our indebtedness.

We are highly leveraged and have significant debt service obligations. As of March 31, 2010, we had total debt of $465.9 million outstanding. Our cash interest paid for fiscal 2009 and 2010 was $36.2 million and $38.9 million, respectively.

Our substantial level of indebtedness increases the possibility that we may be unable to generate cash sufficient to pay, when due, the principal of, interest on or other amounts due in respect to our indebtedness. Our substantial debt could also have other material consequences. For example, it could a) increase our vulnerability to general economic downturns and adverse competitive industry conditions, b) require us to dedicate a

 

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substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, research and development efforts and other general corporate purposes, c) limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate, d) place us at a competitive disadvantage compared to competitors that have less debt and e) limit our ability to raise additional financing on satisfactory terms or at all.

Furthermore, our interest expense could increase if interest rates increase because a major portion of our debt under the credit agreement governing our senior secured credit facilities is variable-rate debt. Our senior secured credit facilities include a term loan facility of $186.0 million and revolving credit facility totaling $70.0 million, each of which bear interest at variable rates as defined in the credit agreement. During fiscal 2008, 2009 and 2010, we utilized interest rate swap agreements to mitigate our exposure to fluctuations in interest rates on variable-rate debt. We may continue to utilize these agreements to manage interest rate risk in the future. At March 31, 2010, we held interest rate swap agreements covering an aggregate notional amount of $100.0 million. See “—Interest Rate Risk” in Item 7A of this Annual Report.

We are controlled by our principal investors, whose interests in our business may differ, and who control the appointment of our board of directors. As a result, conflicts may exist with respect to fundamental business decisions.

Our principal investors, The Resolute Fund and GS Capital Partners, beneficially own approximately 66.0% and 33.0% of the Company, respectively, through their equity interests in our parent, Sensus (Bermuda 1) Ltd. (“Sensus 1”). Our entire board was designated by persons affiliated with The Resolute Fund and GS Capital Partners, and persons affiliated with The Resolute Fund have the ability to designate a majority of the board. In addition, persons affiliated with our principal investors control the appointment of management and the entering into of mergers, sales of substantially all of our assets and other extraordinary transactions. Affiliates of our principal investors may also have an interest in pursuing acquisitions, divestitures, financings or other transactions that, in their judgment, could enhance their equity investments, even though such transactions might involve risks. In addition, our principal investors or their affiliates may in the future own businesses that directly compete with ours.

We have recorded a significant amount of intangible assets that may never generate the returns we expect, which may require us to write off a significant portion of our intangible assets and would have an adverse effect on our financial condition and results of operations.

The acquisitions of Invensys Metering Systems and Advanced Metering Data Systems, L.L.C. (“AMDS”) resulted in our recording significant identifiable intangible assets and goodwill. Our identifiable intangible assets, which substantially include customer relationships, developed technology, trademarks and tradenames, patents and non-competition agreements, were $188.0 million at March 31, 2010, representing 17% of our total assets. Amortization expense associated with our identifiable intangible assets was $13.0 million in fiscal 2010 and is expected to be $59.6 million over the next five fiscal years (without giving effect to any acquisitions completed subsequent to March 31, 2010). The large amount of amortization expense will adversely affect our net income during this period. Goodwill, which relates to the excess of cost over the fair value of the net assets of the businesses we acquired, was $453.8 million at March 31, 2010, representing 41% of our total assets.

Goodwill and identifiable intangible assets, which are deemed to have indefinite lives, are recorded at fair value on the date of acquisition and, in accordance U.S. generally accepted accounting principles (“U.S. GAAP”), are reviewed at least annually for impairment. Impairment may result from, among other things, deterioration in the performance of the acquired business, adverse market conditions, adverse changes in applicable laws or regulations, including changes that restrict the activities of the acquired business, and a variety of other circumstances. The full value of our intangible assets may never be realized. Any future determination requiring the write-off of a significant portion of our intangible assets would have an adverse effect on our financial condition and results of operations. The Company performed its annual goodwill impairment test during

 

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the fourth quarter of fiscal 2010. Due to demand contractions in the automotive market, the Company determined that the goodwill in its precision die casting business unit was impaired and thus recorded a charge of $14.4 million in fiscal 2009 (see Note 1 and Note 4 under “Notes to Consolidated Financial Statements” in Item 8 of this Annual Report).

We are dependent on the utility industry, which may experience volatility. This volatility could cause our results of operations to vary significantly from period to period.

In fiscal 2010, approximately 85% of our net sales were derived from sales of products and services to the utility industry. Purchases of our products are, to a substantial extent, deferrable in the event that utilities reduce capital expenditures as a result of, among other factors, mergers and acquisitions, pending or unfavorable regulatory decisions, decreased sales due to weather conditions, rising interest rates or general economic downturns.

The utility industry, both domestic and foreign, is generally characterized by long budgeting and purchasing and regulatory process cycles that can take up to several years to complete. Our utility customers typically issue requests for quotes and proposals, establish evaluation committees, review different technical options with vendors, analyze performance and cost/benefit justifications and perform a regulatory review, in addition to applying the normal budget approval process within a utility.

Such purchase decisions are often put on hold indefinitely when merger negotiations begin. If our customers engage in a high volume of merger and acquisition activity, our sales could be materially and adversely affected. If future state or other regulatory decisions are issued that cause a delay in purchasing decisions, or if we experience changes in our customer base or requirements to modify our products and services (or develop new products or services) to meet the needs of market participants, our results could be materially and adversely affected.

Many of our products are distributed to utility contractors in connection with residential, commercial and industrial construction projects. Historically, new housing construction has decreased during economic slowdowns, and the level of activity in the commercial and industrial construction markets depends on the general economic outlook, corporate profitability, interest rates and existing plant capacity utilization. In general, factors such as trends in the construction industry, billing practices, changes in municipal spending or other factors that influence metering products sales are not within our control and, as a result, may have a material adverse effect on our operating results and financial condition.

We are facing increasing competition. If we are unable to implement our business strategy successfully, we risk losing market share to these competitors.

We face competitive pressures from a variety of companies in each of the markets that we serve. Some of our present and potential future competitors have or may have substantially greater financial, marketing, technical or manufacturing resources, and in some cases, greater name recognition, market penetration and experience than us. Our competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements or more effectively take advantage of legislative initiatives, including the ARRA, that impact the metering industry. They may also be able to devote greater resources to the development, promotion and sale of their products and services than we can. In addition, current and potential competitors may make strategic acquisitions or establish cooperative relationships among themselves or with third parties that increase their ability to address the needs of our prospective customers. It is possible that new competitors or alliances among current and new competitors may emerge and rapidly gain significant market share. If we cannot compete successfully against current or future competitors, it could have a material adverse effect on our business, financial condition, results of operations and cash flow.

Additionally, some of our larger, more sophisticated customers are attempting to reduce the number of vendors from which they purchase to increase their efficiency. If we are not selected as one of these preferred

 

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providers, we may lose access to certain sections of the markets in which we compete. Our customers increasingly demand a broad product range, and we must continue to develop our expertise to manufacture and market these products successfully. To remain competitive, we will need to invest continuously in research and development, manufacturing, customer service and support, marketing and our distribution networks. We may also have to adjust the prices of some of our products to stay competitive. There is a risk that we may not have sufficient resources to continue to make such investments and that we may be unable to maintain our competitive position within each of the markets we serve.

We are dependent upon our ability to attract qualified candidates and retain critical employees.

Our success depends on our ability to recruit, retain and motivate highly skilled, technical and qualified personnel. Competition for these individuals in our industry is intense, and there is a risk that we may not be able to recruit, train or retain qualified personnel successfully. Although the Company believes that its relationship with its employees is good, the Company’s ability to achieve its financial and operational objectives depends in large part upon its continuing ability to attract, integrate, retain and motivate highly qualified personnel. The loss or interruption of the continued service of certain of our executive officers and key employees could have a material adverse effect on our business. In addition, to support our continued growth, we must effectively recruit, develop and retain additional qualified personnel both domestically and internationally. Our inability to attract and retain necessary qualified personnel could have a material adverse effect on our business.

We face potential product liability claims relating to products we manufacture or distribute. The successful assertion of a large product liability claim could subject us to substantial damages.

We face risk of exposure to existing and future product liability claims in the event that the use of our products is alleged to have resulted in injury or other adverse effects. We currently maintain product liability insurance coverage, but there is a risk that we may be unable to obtain such insurance on acceptable terms in the future, or at all, and any such insurance may not provide adequate coverage against potential claims. We are entitled to indemnification from certain subsidiaries of Invensys under the terms of the stock purchase agreement for certain product liability claims existing prior to the acquisition of Invensys Metering Systems, we may be unable to recover from the indemnifying parties in the event we are found liable. Product liability claims can be expensive to defend and can divert the attention of management and other personnel for long periods of time, regardless of the ultimate outcome of the litigation with respect to those claims. An adverse result in connection with a product liability claim could have a material adverse effect on our business, financial condition and results of operations. In addition, our business depends on the strong product reputation that we believe we have developed. In the event that this reputation is damaged, we may face difficulty in maintaining the pricing of some of our products, which could result in reduced sales and profitability. See “Legal Proceedings” in Item 3 of this Annual Report for a summary of certain legal proceedings to which we are subject.

We are subject to the effects of fluctuations in foreign exchange rates.

The financial condition and results of operations of each of our operating foreign subsidiaries are reported in the relevant local currency and are then translated into U.S. dollars at the applicable currency exchange rate for inclusion in our financial statements. Exchange rates between these currencies and U.S. dollars in recent years have fluctuated significantly and may do so in the future. In addition to currency translation risk, we incur currency transaction risk whenever one of our operating subsidiaries enters into either a purchase or a sales transaction using a different currency than the relevant local currency. Given the volatility of exchange rates, we may be unable to manage our currency transaction risks effectively. The majority of our businesses source raw materials and sell their products within their local markets in their functional currencies and therefore have limited transaction exposure. Fluctuations in the value of the U.S. dollar may impact our ability to compete in international markets. Currency fluctuations could have a material adverse effect on our future international sales and, consequently, on our financial condition and results of operations. During fiscal 2008, 2009 and 2010, we utilized foreign currency forward contracts to minimize the effect of exchange rate fluctuations and expect to continue to utilize these contracts to manage foreign currency exchange risk in the future as appropriate.

 

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Restrictive covenants in our senior credit facilities and the indenture governing our senior subordinated notes may restrict our ability to pursue our business strategies.

Our senior secured credit facilities contain a number of restrictive covenants that impose significant operating and financial restrictions on us and may limit our ability to engage in acts that may be beneficial to the Company in the future. Our senior secured credit facilities include covenants restricting, among other things, our ability to a) guarantee or incur additional debt, b) incur liens and engage in sale leaseback transactions, c) make loans and investments, d) declare dividends or redeem or repurchase capital stock, e) engage in mergers, amalgamations, acquisitions and other business combinations, f) prepay, redeem or purchase subordinated debt (including the new notes), g) amend or alter terms of debt (including the new notes), h) sell assets, i) transact with affiliates and j) alter the business that we conduct.

Our senior credit facilities also include financial covenants, including requirements that we maintain a minimum interest coverage ratio, a minimum fixed charge coverage ratio and a maximum leverage ratio. These financial covenants become more restrictive over time.

The indenture governing our senior subordinated notes also contains numerous covenants including, among other things, restrictions on our ability to a) incur or guarantee additional indebtedness or issue certain preferred stock, b) pay dividends on our capital stock or redeem, repurchase or retire our capital stock or subordinated indebtedness, c) make certain investments, d) enter into arrangements that restrict dividends from our subsidiaries, e) engage in transactions with affiliates, f) sell assets, including capital stock of our subsidiaries, and g) merge, amalgamate or consolidate with other companies or transfer all or substantially all of our assets.

We depend on our ability to develop new products for our success. We may be unable to continue to develop new products successfully.

We have made, and expect to continue to make, substantial investments in product and technology development. Our future success will depend, in part, on our ability to continue to design and manufacture new competitive products and to enhance our existing products. This product development will require continued investment to maintain our market position. Unforeseen problems could occur with respect to the development and performance of our technologies and products and we may not meet our product development schedules. In addition, our new products and systems may not be accepted in the market. For example, market acceptance for AMI/AMR systems varies by country based on such factors as the regulatory and business environment, labor costs and other economic conditions. We believe that our customers rigorously evaluate their suppliers on the basis of a number of factors, including a) product quality, b) reliability and timeliness of delivery, c) new product innovation, d) price competitiveness, e) technical expertise and development capability, f) product design capability, g) manufacturing expertise, h) operational flexibility, i) customer service and j) overall management.

Our success depends on our ability to continue to meet our customers’ changing requirements. We may be unable to address technological advances and introduce new products that may be necessary to allow us to remain competitive within our businesses. Furthermore, we may not be able to protect adequately any of our own technological developments to sustain a competitive advantage.

We rely on our information technology systems to conduct our business. If these systems fail to perform their functions adequately, or if we experience an interruption in their operation, our business and financial results could be adversely affected.

The efficient operation of our business is dependent on our information technology systems. We rely on our information technology systems to manage effectively our business data, communications, production and supply chain, order entry, order fulfillment, inventory replenishment, e-commerce and other business processes. The failure of our information technology systems to perform as we anticipate could disrupt our business and could result in decreased sales, increased overhead costs, excess inventory or product shortages, causing our business

 

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and results of operations to suffer. In addition, our information technology systems may be vulnerable to damage or interruption from circumstances beyond our control, including fire, natural disasters, power loss and computer systems failure and viruses. Any such interruption could have a material adverse effect on our business.

If we are unable to make necessary capital investments, our business may be adversely affected.

We regularly make capital investments to, among other things, maintain and upgrade our facilities and enhance our production processes. As we maintain and grow our business, we may be required to incur significant capital expenditures. We believe that we will be able to fund these expenditures through cash flow from operations and cash on hand. There is a risk that we will not have, or be able to obtain, adequate funds to make all necessary capital expenditures when required, and the amount of future capital expenditures may materially exceed our anticipated or current expenditures. If we are unable to make necessary capital expenditures, our product line may become dated, our productivity may decrease and the quality of our products may be adversely affected, which, in turn, could result in reduced sales and profitability.

International operations expose us to numerous risks and business uncertainties and to exposure under the Foreign Corrupt Practices Act.

In fiscal 2008, 2009 and 2010, our non-U.S. operations represented 37%, 33% and 29%, respectively, of consolidated net sales. We are subject to the risks inherent in conducting business across national boundaries, any one of which could adversely impact our business. These risks include a) regional economic downturns, b) changes in governmental policy or regulation, c) restrictions on the transfer of funds into or out of the country, d) import and export duties and quotas, e) domestic and foreign customs and tariffs, f) different regimes controlling the protection of our intellectual property, g) international incidents, h) military outbreaks, i) government instability, j) difficulty in staffing and managing widespread operations, k) nationalization of foreign assets, l) government protectionism, m) compliance with U.S. Department of Commerce export controls, n) potentially negative consequences from changes in tax laws, o) higher interest rates, p) requirements relating to withholding taxes on remittances and other payments by subsidiaries and q) restrictions on our ability to own or operate subsidiaries, make investments or acquire new businesses in these jurisdictions. One or more of these factors may impair our current or future international operations and, consequently, our overall business.

We are subject to the Foreign Corrupt Practice Act (“FCPA”) and other laws that prohibit improper payments to foreign governments and their officials for the purpose of obtaining or retaining business. We have operations and conduct business in various countries outside of the United States. Our activities in these countries create the risk of unauthorized payments or offers of payments by one of our employees, consultants, sales agents or distributors, because these parties are not always subject to our control. While it is our policy to implement safeguards to discourage these practices, our existing safeguards and any future improvements may prove to be less than effective, and our employees, consultants, sales agents or distributors may engage in conduct for which we might be held responsible. Violations of the FCPA may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition. In addition, certain governmental authorities may seek to hold us liable for successor liability FCPA violations committed by companies in which we invest of that we acquire.

We may face volatility in the availability of energy and raw materials used in our manufacturing process.

In the manufacturing of our products, we use large amounts of energy, including electricity and gas, and raw materials and processed inputs, including brass castings, aluminum ingot, plastics and rubber. We obtain energy, raw materials and certain manufactured components from third-party suppliers. We do not maintain long-term supply contracts with our suppliers. The loss, or a substantial decrease in the availability, of such products from some of our suppliers or the loss of key supplier relationships could have a material adverse effect on our business, results of operations and financial condition. The availability and prices of electricity, gas and raw materials may be subject to curtailment or change due to, among other things, new laws or regulations, suppliers’ allocations to other purchasers, interruptions in production by suppliers, changes in exchange rates and

 

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worldwide price levels. In addition, supply interruptions could arise from shortages of electricity, gas and raw materials, labor disputes, transportation disruptions, impaired financial condition of suppliers, adverse weather conditions or other natural disasters. Any change in the supply of, or price for, these energy sources and raw materials may adversely affect our ability to satisfy our customers on a timely basis and thereby negatively affect our financial performance. In addition, we may not be able to pass any price increases in raw materials or other product inputs along to our customers in the form of higher prices, which may have an adverse effect on our operating results.

We have transitioned a substantial portion of our manufacturing capabilities to contract manufacturers. If we are unable to manage our outsourcing arrangements effectively, or if we are unable to project demand accurately, our revenue and profitability could be harmed.

Our future operating results will depend on our ability to develop and manufacture products cost-effectively. To minimize manufacturing costs, as well as focus on our core competencies and streamline our operations, we outsourced production of products representing 37% of fiscal 2010 net sales. The outsourcing of production capabilities diminishes the day-to-day control that we are able to exercise over the production process that could result in quality problems, and correspondingly increased product warranty costs. In addition, as we outsource more production capacity, we will retain limited internal production capacity, and will, therefore, rely on our contract manufacturers to fill orders on a timely basis. We will be required to provide accurate forecasts to our contract manufacturers to satisfy demand for our products. If we overestimate our requirements, we may be required to purchase quantities of products that exceed customer demand. If we underestimate our requirements, we may have inadequate inventory from which to meet customer demand.

Our intellectual property may be inadequately protected, which could result in the loss of our exclusive right to use the intellectual property or to use it at all. Additionally, some of our intellectual property may be misappropriated, and we may become involved in litigation relating to intellectual property.

We rely on a combination of patents, trademarks, copyrights, licenses and trade secret rights to protect our intellectual property throughout the world. Our patent and trademark applications may not be approved, and our issued patents and trademark registrations may not adequately protect our intellectual property and could be challenged by third parties. Other parties may independently develop similar or superior technologies or designs around any patents that may be issued to us. We cannot be certain that the steps we have taken will prevent the misappropriation of our intellectual property, particularly in foreign countries where the laws may not protect our proprietary rights as fully as the laws of the United States and Europe.

In the ordinary course of our operations, we, like other companies, from time to time pursue and are pursued in administrative proceedings and litigation concerning the protection of intellectual property rights. If successful, third-party intellectual property lawsuits could subject us to substantial damages, and require us to cease the manufacture, use and sale of infringing products, expend significant resources to develop non-infringing technology or discontinue the use of certain technology. They could also force us to seek licenses to the infringing technology, which licenses may not be available on reasonable terms, or at all. Our ability to sustain current margins on some or all of our products may be affected, which could reduce our sales and profitability. Third-party lawsuits could also invalidate our intellectual property rights. Regardless of the success of any third party-initiated or Company-initiated claims, they would likely be time-consuming and expensive to resolve, and would divert the time and attention of our management. In the current calendar year, no patent infringement claims have been initiated against us. See “Legal Proceedings” in Item 3 of this Annual Report for a summary of pending patent infringement claims that were initiated against us in prior years.

We have licensed technology from third parties to develop new products or product enhancements, including licenses relating to many of our current leading products. We also expect to seek technology from third parties in the future as needed or desirable for future products and product enhancements. Third-party licenses may not be available to us on commercially reasonable terms, or at all. The inability to obtain any third-party license required to develop new products or product enhancements could require us to obtain substitute

 

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technology of lower quality or performance standards or at greater cost, or could require that we change our product and design plans, and we may still become involved in third-party lawsuits, any of which could seriously harm or delay our ability to manufacture and sell our products.

We rely on independent distributors for a significant portion of our sales. We may be unable to retain the services of these distributors.

In addition to our own direct sales force, we depend on the services of independent distributors to sell our products and provide service and aftermarket support to our end-customers. In fiscal 2010, approximately 39% of our net sales were generated from sales to our top ten customers, which include our distribution channels, but no individual customer accounted for more than 10% of net sales. The majority of the distribution contracts that we have with these independent distributors are cancelable by the distributor after a short notice period. There is a risk that these distributors may terminate their agreements with us.

The loss of one or more key distributors, or a substantial number of our other distributors, could materially reduce our sales and profits. While our relationships with our ten largest distributors have been long-standing, distributors in our industry have experienced significant consolidation in recent years, and our distributors could be acquired by other distributors that buy products from our competitors. As consolidation among distributors continues, distributors may pressure us to lower our prices, which could have an adverse impact on our results of operations.

Our business is subject to the regulation of, and dependent on licenses granted by, the FCC and other governmental bodies. Changes in existing regulations or the losses of our licenses could adversely affect our business.

A significant portion of our AMR/AMI products and systems use radio spectrum and are subject to regulation by the FCC in the United States. Licenses for radio frequencies must be obtained and periodically renewed. Any license granted to us or our customers may not be renewed on acceptable terms, or at all, and the FCC may not keep in place rules for our frequency bands that are compatible with our business. In the past, the FCC has adopted changes to the requirements for equipment using radio spectrum, and it is possible that the FCC or the U.S. Congress will adopt additional changes in the future.

We have committed, and expect to continue to commit, significant resources to the development of products that use particular radio frequencies. Action by the FCC could require modifications to our products. If we are unable to modify our products to meet such requirements, we could experience delays in completing such modifications, or the cost of such modifications could have a material adverse effect on our future financial condition and results of operations.

Our radio-based products currently employ both licensed and unlicensed radio frequencies. There must be sufficient radio spectrum allocated by the FCC for our intended uses. As to the licensed frequencies, there is some risk that there may be insufficient available frequencies in some markets to sustain our planned operations. The unlicensed frequencies are available for a wide variety of uses and are not entitled to protection from interference by other users. In the event that the unlicensed frequencies become unacceptably crowded or restrictive, and no additional frequencies are allocated, our business could be materially adversely affected. We are also subject to regulatory requirements on our radio-based products in international markets that vary by country. In some countries, limitations on frequency availability or the cost of making necessary modifications may preclude us from selling our products.

The water and heat meter product lines of our business are subject to national regulation in many European countries. For instance in Germany, there are national regulations that require cold water meters to be recalibrated and repaired every six years. Hot water and heat meters need to be recalibrated and repaired every five years. Other European countries, including The Netherlands, Austria, Switzerland, the Czech Republic and Slovakia, have similar regulations. Because of the relative expense involved in repairing water and heat meters, many customers install new meters at the time these national regulations call for recalibration and repair. If these

 

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national regulations were changed to extend the time for recalibration and repair, that could decrease sales of water and heat meters in Europe. If European or other countries were to impose new or change existing regulations regarding products, it could materially and adversely affect our business, financial condition and results of operations.

We are also subject to governmental regulations related to occupational safety and health, labor, and wage practices. In addition, we are subject to various government regulations regarding the performance of certain engineering services. Failure to comply with current or future regulations could result in the imposition of substantial fines, suspension of production, alteration of our production processes, cessation of operations or other actions that could materially and adversely affect our business, financial condition and results of operations.

We face potential liability from asbestos exposure claims.

We, along with many other third parties, are a defendant in a number of lawsuits filed in various state courts by groups of plaintiffs alleging illnesses from exposure to asbestos or asbestos-containing products and seeking unspecified compensatory and punitive damages. Currently, it is uncertain whether any plaintiffs have dealt with any of our products, were exposed to an asbestos-containing component part of our products or whether such part could have been a contributing factor to the alleged illness. Although we are entitled to indemnification for liabilities and legal costs for asbestos claims related to these products from certain subsidiaries of Invensys pursuant to the stock purchase agreement for the acquisition of Invensys Metering Systems, such indemnities, when aggregated with all other indemnity claims, are limited to the purchase price paid by us in connection with such acquisition.

We are subject to work stoppages at our facilities, or our customers may be subjected to work stoppages, which could have a serious adverse impact our business.

As of March 31, 2010, we had 3,691 employees, of whom 1,423 were employed in the United States and 2,268 were employed abroad. As of March 31, 2010, approximately 34% of our total employees, primarily in the United States and Europe, were represented by labor unions.

In the United States, we are a party to labor agreements with the United Steelworkers of America and the United Automobile Workers. The Uniontown, Pennsylvania facility has a five-year agreement with the United Steelworkers of America that expires on February 24, 2013. Sensus Precision Die Casting, Inc., our subsidiary through which we operate our precision die casting product line, has a four-year labor contract with the United Automobile Workers that expires on October 11, 2010. Smith-Blair has a four-year labor contract with the United Steel Workers of America that expires on March 27, 2011. The Stara Tura, Slovakia facility has a five-year agreement with the ZZO OZ KOVO CHIRANA-PREMA that expires on December 31, 2010. The Nova Odessa/SP, Brazil facility has an agreement with Sindicato dos Trabalhadores das Indústrias Metalúrgicas Mecânicas e Materiais Electricos de Campinas e Ragião with an indefinite term, cancellable with one month notice. Our inability to renew any one of these collective bargaining agreements prior to the expiration thereof, or the exercise of its right to terminate the collective bargaining agreement in the case of our union in Brazil, could result in strikes or work stoppages and could adversely affect our business, financial position and results of operations.

In Germany, our employees are represented by IG Metall, which negotiates labor terms and conditions with local employers associations that also represent other employers. The outcome of these negotiations also directly affects non-unionized employees to the extent that individual employment agreements contain cross references to relevant metal union contracts. The current agreement with IG Metall covering our German unionized workforce expires on June 30, 2012. The inability to renew timely this contract on favorable terms could have a material impact on the financial results of our European business.

Although we believe that our relations with our employees are generally good, a strike, work stoppage or other slowdown by our unionized workers could cause a disruption of our operations, which could interfere with

 

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our ability to deliver products on a timely basis and could have other negative effects, such as decreased productivity and increased labor costs. In addition, if a greater percentage of our work force becomes unionized, our business and financial results could be materially adversely affected.

Many of our suppliers and direct and indirect customers have unionized work forces. Strikes, work stoppages or slowdowns experienced by these customers or their suppliers could result in slowdowns or closures of assembly plants where our products are used and, thus, adversely affect the demand for our products.

We may be unable to identify attractive acquisition candidates, successfully integrate our acquired operations or realize the intended benefits of our acquisitions. As a result, growth from acquisitions could be limited.

We may pursue selective strategic acquisition opportunities, evaluate potential acquisitions, some of which could be material, and engage in discussions with acquisition candidates. We may not be able to identify and acquire suitable acquisition candidates in the future, the financing of any such acquisition may be unavailable on satisfactory terms or at all, and we may be unable to accomplish our strategic objectives as a result of any such acquisition. In addition, our acquisition strategies may not be successfully received by customers or achieve their intended benefits. If we consummate an acquisition, our capitalization and results of operations may change significantly, and our system of internal controls could become more complex and require additional resources to remain effective. Future acquisitions would likely result in the incurrence of debt and contingent liabilities and an increase in interest expense and amortization expense as well as significant charges relating to integration costs, which could have a material adverse effect on our results of operations or financial condition. Often acquisitions are undertaken to improve the operating results of either or both of the acquirer and the acquired company, and we may not be successful in this regard. We may encounter various risks in acquiring other companies, including the possible inability to integrate an acquired business into our operations, diversion of management’s attention and unanticipated problems or liabilities, some or all of which could materially and adversely affect us.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

 

ITEM 2. PROPERTIES

The tables below list the properties utilized by the Company at March 31, 2010. The Company believes that its properties are in good operating condition and are suitable for its current needs.

The table below sets forth the locations of the facilities in North America.

 

Location

   Owned/Leased    Square Feet   

Principal Use of Facility

Texarkana, AR

   Owned    249,912    Manufacturing/Assembly

Goleta, CA

   Leased    9,000    Office

Ontario, Canada

   Leased    1,000    Office

Alpharetta, GA

   Leased    7,583    Office

Boise, ID

   Leased    10,271    Office

Russellville, KY

   Leased    254,904    Manufacturing/Assembly

Covington, LA

   Leased    4,600    Office

Juarez, Mexico

   Leased    45,000    Manufacturing/Assembly

Raleigh, NC

   Leased    30,870    Office

Morrisville, NC

   Leased    24,803    Office

DuBois, PA

   Owned    196,930    Manufacturing/Assembly

DuBois, PA

   Leased    136,566    Manufacturing/Assembly

Pittsburgh (Forest Hills), PA

   Leased    8,845    Office

Uniontown, PA

   Leased    240,228    Manufacturing/Assembly

 

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The table below sets forth the locations of the facilities outside of North America.

 

Location

   Owned/Leased    Square Feet   

Principal Use of Facility

El Eulma, Algeria

   Leased    35,045    Manufacturing/Assembly

Minsk, Belarus

   Owned    1,098    Office

Minsk, Belarus

   Leased    1,228    Warehouse

Minsk, Belarus

   Leased    4,702    Manufacturing/Assembly

Nova Odessa, Brazil

   Leased    26,364    Manufacturing/Assembly

Santiago, Chile

   Leased    27,115    Manufacturing/Assembly

Beijing, China

   Owned    83,181    Manufacturing/Assembly

Jiangdu City, China

   Owned    273,854    Manufacturing/Assembly

Jiangdu City, China

   Owned    79,000    Manufacturing/Assembly

Shanghai, China

   Leased    53,819    Manufacturing/Assembly

Fuzhou, China

   Leased    17,868    Manufacturing/Assembly

Prague, Czech Republic

   Leased    10,204    Office

Neyron, France

   Leased    13,988    Office

Babelsberg, Germany (1)

   Owned    21,617    Manufacturing/Assembly

Hannover, Germany

   Owned    49,453    Manufacturing/Assembly

Ludwigshafen, Germany

   Leased    18,808    Manufacturing/Assembly

Ludwigshafen, Germany

   Owned    317,624    Manufacturing/Assembly

Milan, Italy

   Leased    1,130    Office/Warehouse

Temara, Morocco

   Leased    18,280    Manufacturing/Assembly

Torun, Poland

   Leased    1,248    Office

Stara Tura, Slovakia

   Leased    54,541    Manufacturing/Assembly

Gauteng, South Africa

   Leased    16,172    Manufacturing/Assembly

Barcelona, Spain

   Leased    6,736    Office

Sevilla, Spain

   Leased    708    Office

Hampshire, U.K.

   Leased    20,049    Office

Sumy, Ukraine

   Leased    3,538    Office

 

(1) Leased to a third party.

 

ITEM 3. LEGAL PROCEEDINGS

The Company, as well as many other third parties, has been named as a defendant in several lawsuits filed related to illnesses from exposure to asbestos or asbestos-containing products. The plaintiffs claim unspecified damages. The complaints filed in connection with these proceedings do not specify which plaintiffs allegedly were involved with the Company’s products, and it is uncertain whether any plaintiffs have asbestos-related illnesses or dealt with the Company’s products, much less whether any plaintiffs were exposed to an asbestos-containing component part of the Company’s product or whether such part could have been a substantial contributing factor to the alleged illness. Although we are entitled to indemnification for legal and indemnity costs for asbestos claims related to these products from certain subsidiaries of Invensys under the stock purchase agreement pursuant to which we acquired Invensys Metering Systems, such indemnities, when aggregated with all other indemnity claims, are limited to the purchase price paid by us in connection with the acquisition of Invensys Metering Systems. The Company is unable to estimate the amount of its exposure, if any, related to these claims at this time. The Company does not believe the ultimate resolution of these issues will have a material adverse effect on the Company’s net earnings or financial position.

On December 23, 2008, the Company was sued in a breach of contract action filed by Cannon Technologies, Inc. (“Cannon”). The lawsuit was filed in the U.S. District Court for the District of Minnesota. The lawsuit alleges breach of contract, breach of warranty and fraud with respect to electricity meters sold to Cannon and seeks unspecified damages, interest costs and attorneys’ fees.

 

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On January 29, 2009, the Company, along with a number of other automated metering infrastructure vendors, was sued in a patent infringement lawsuit filed by IP Co., LLC (“IP Co.”). The lawsuit was filed in the U.S. District Court for the Eastern District of Texas and alleges that the Company’s FlexNet System infringes two patents allegedly owned by IP Co. The lawsuit seeks unspecified damages for patent infringement, treble damages for intentional infringement, an injunction against further infringement, interest costs and attorneys’ fees.

On March 13, 2009, the Company was sued in a patent infringement lawsuit filed in the U.S. District Court for the Eastern District of Texas by EON Corp. IP Holdings, LLC (“EON”). This lawsuit alleges the infringement of two patents allegedly owned by EON (the “EON Patents”). The lawsuit alleges that the Company infringes the EON Patents by “making, using, offering for sale, and/or selling two-way communication networks and/or data systems that fall within the scope of at least one claim of each of the EON Patents.” The lawsuit seeks unspecified damages, an injunction against further infringement, interest costs and attorneys’ fees.

On September 9, 2009, the Company was notified of an arbitration commenced against the Company in Pittsburgh under the rules of the American Arbitration Association. The claim is by Power Sales and Service (“Power Sales”), a terminated distributor. Power Sales claims commissions allegedly due under its contract with the Company before it was terminated.

On November 24, 2009, the Company was sued in a patent infringement lawsuit filed in the U.S. District Court for the Eastern District of Texas by SIPCO, LLC (“SIPCO”). The lawsuit generally alleges that the Company’s FlexNet system and/or components thereof infringe(s) three patents allegedly owned by SIPCO. The lawsuit seeks unspecified damages, an injunction, litigation costs and attorneys’ fees.

On February 22, 2010, the Company and one of its distributors, Aqua-Metric Sales Co. (“Aqua-Metric”) were sued by Valley Center Municipal Water District (the “District”). The lawsuit was filed in the California Superior Court, San Diego County and alleges breach of contract and breach of express and implied warranties related to water meters supplied to the District. The suit claims unspecified damages. The Company has agreed to indemnify Aqua-Metric under its contract with Aqua-Metric, subject to a reservation of rights.

On April 6, 2010 the Company, along with approximately a dozen other companies, was sued by a group of individual plaintiffs in North Carolina State Court, Wake County over injuries and deaths suffered in an explosion at a factory in rural North Carolina. The plaintiffs claim unspecified damages. As discovery has only just commenced, we are unable to estimate the Company’s exposure, if any, in the lawsuit.

We intend to defend the claims vigorously and believe that we have meritorious defenses to each. In our opinion, the ultimate liabilities, if any, and expenses resulting from the aforementioned claims, will not materially affect the consolidated financial position, results of operations or cash flows of the Company.

In addition, we are, from time to time, party to legal proceedings arising out of the operations of our business. We believe that an adverse outcome of our existing legal proceedings, including the proceedings described above, would not have a material adverse impact on our business, financial condition or results of operations. Nevertheless, unexpected adverse future events, such as an unforeseen development in our existing proceedings, a significant increase in the number of new cases or changes in our current insurance arrangements could result in liabilities that have a material adverse impact on our business, financial condition and results of operations.

 

ITEM 4. RESERVED

 

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PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

(a) None.

(b) Not applicable.

(c) None.

 

ITEM 6. SELECTED FINANCIAL DATA

We have derived the following selected consolidated financial data from our audited consolidated financial statements. The information set forth below is not necessarily indicative of the results of future operations and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included elsewhere in this Annual Report.

 

(in millions)

   Year Ended
March  31,
2006
    Year Ended
March 31,
2007 (1)
    Year Ended
March 31,
2008 (1)
    Year Ended
March 31,
2009 (1)
    Year Ended
March  31,
2010
 

Income Statement Data:

          

Net sales

   $ 613.9      $ 631.4      $ 722.0      $ 791.9      $ 865.6   

Net loss attributable to controlling interest

     (3.2     (9.0     (8.3     (18.4     (7.5

Other Financial Data:

          

Restructuring costs (2)

   $ 7.2      $ 8.5      $ 7.0      $ 9.9      $ 25.9   

Capital expenditures (including intangibles and software development costs)

     24.8        18.3        27.8        36.7        48.3   

Balance Sheet Data:

          

Cash and cash equivalents

   $ 52.6      $ 34.9      $ 37.6      $ 37.9      $ 59.2   

Total assets

     935.1        973.8        993.9        998.3        1,095.0   

Total debt

     485.6        475.5        454.5        438.9        465.9   

Stockholder’s equity

     186.4        225.6        217.7        198.7        195.8   

 

(1) In October 2009, the Financial Accounting Standards Board amended the accounting standards related to revenue recognition for arrangements with multiple deliverables and arrangements that include software elements. In the fourth quarter of fiscal 2010, the Company adopted the new accounting principles on a retrospective basis. This resulted in the revision of the financial data for the years ended March 31, 2007, 2008 and 2009. See Note 1 and Note 2 under “Notes to Consolidated Financial Statements” in Item 8 of this Annual Report.
(2) For additional information regarding restructuring costs, see Note 8 under “Notes to Consolidated Financial Statements” in Item 8 of this Annual Report. Restructuring costs are added to net income for purposes of determining compliance by the Company with the financial covenants of both the senior credit facilities and the indentures governing the notes.

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Annual Report on Form 10-K includes certain statements that may be deemed to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this report, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan” and similar expressions as they relate to us are intended to identify these forward-looking statements. All statements by us regarding our expected financial position, sales, cash flow and other operating results, business strategy, financing plans,

 

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forecasted trends related to the markets in which we operate, legal proceedings and similar matters, other than those of historical fact, are forward-looking statements. Our expectations expressed or implied in these forward-looking statements may turn out to be incorrect. Our actual results could be materially different from our expectations because of various risks. These risks include our susceptibility to macroeconomic downturns in the United States and abroad, conditions in the residential, commercial and industrial construction markets and in the automotive industry, our dependence on new product development and intellectual property, and our dependence on independent distributors and third-party contract manufacturers, automotive vehicle production levels and schedules, our substantial financial leverage, debt service and other cash requirements, liquidity constraints and risks related to future growth and expansion. Other important risk factors that could cause actual events or results to differ from those contained or implied in the forward-looking statements include, without limitation, our ability to integrate acquired companies, general economic and business conditions, competition, adverse changes in the regulatory or legislative environment in which we operate, and other factors beyond our control. See “Risk Factors” in Item 1A of this Annual Report.

Our fiscal year ends on March 31 and references herein to a fiscal year refer to the twelve-month period ended as of that date.

General

We are a leading provider of advanced utility infrastructure systems, metering technologies and related communication systems to the worldwide utility industry. We have over a century of experience in providing support to utilities. Our technologies, products and systems enable our utility customers to measure, manage and control electricity, water and natural gas more efficiently thereby enhancing conservation of those limited resources. Our products and technologies provide key functionality that will be required for the development of the “Smart Grid” in the United States. We are a leading provider of AMI fixed network RF systems and solutions with a wide range of product offerings to meet the evolving demands of the electric, water, and gas utility sectors. We believe that we are the fastest growing participant in the North American electric metering systems market and the largest global manufacturer of water meters, a leading supplier of AMR devices to the North American water utilities market and a leading global developer and manufacturer of gas and heat metering systems. We are recognized throughout the utility industry for developing and manufacturing metering products with long-term accuracy and robust product features, innovative metering communications systems, as well as for providing comprehensive customer service for all of our products and services. In addition to our advanced utility infrastructure and metering business, we believe that we are the leading North American producer of pipe joining and repair products for water and natural gas utilities and we are a premier supplier of precision-manufactured, thin-wall, low-porosity aluminum die castings.

Acquisitions

Rongtai. On July 27, 2005, the Company formed a joint venture, PDC Rongtai, in China for its Sensus Precision Die Casting business with Yangzhou Runlin Investment Co., Ltd. On September 29, 2009, the Company completed the acquisition of the 40% noncontrolling interest held by Yangzhou Runlin Investment Co., Ltd. As a result of the acquisition and in accordance with the terms of the equity transfer agreement, PDC Rongtai became wholly owned by a subsidiary of the Company and was subsequently renamed Sensus Precision Die Casting (Yangzhou) Co., Ltd. The terms of the agreement provide for the payment of total consideration with an estimated fair value of $17.7 million. In conjunction with the equity transfer agreement, the Company entered into a real estate transfer contract with Yangzhou Rongtai Industrial Development Co., Ltd. (“Yangzhou”) to sell certain buildings, ancillary equipment and land-use rights to Yangzhou for approximately $2.0 million. See Note 3 under “Notes to Consolidated Financial Statements” in Item 8 of this Annual Report.

Telemetric. On June 30, 2009, the Company acquired substantially all of the assets and assumed certain liabilities of Telemetric for approximately $6.8 million in cash at closing and $1.0 million payable within approximately one year of the closing date of the related asset purchase agreement, of which $0.3 million was paid to Telemetric in fiscal 2010. Additional cash consideration may become payable based on the performance

 

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of the acquired business through June 2013. Acquisition-date fair value for this contingent consideration is estimated at $3.9 million. Payments on an undiscounted basis are projected to be $5.8 million and are subject to a $12 million cap. The Company financed the transaction primarily with cash on hand and borrowings under its senior credit facilities. Telemetric provides utilities with distribution automation systems that use commercial cellular networks and PowerVistaTM, a web-based software application. This acquisition is expected to provide the Company with a significant and established presence in the distribution automation portion of the utility landscape and augment the Company’s AMI and Smart Grid solutions. See Note 3 under “Notes to Consolidated Financial Statements” in Item 8 of this Annual Report.

AMDS. On July 6, 2006, the Company acquired substantially all of the assets and assumed certain liabilities of AMDS for $62.6 million consisting of $49.8 million in cash and 15,000 vested preference shares issued by our parent, Sensus 1. The Company financed the transaction with equity contributions totaling $30.4 million in cash from Sensus 1, cash on hand and utilization of the Company’s revolving credit facility. As discussed below, the vested preference shares were subject to mandatory redemption by Sensus 1 for $15 million at the option of the holder once certain future financial performance targets were achieved.

During fiscal 2008 and 2009, the performance thresholds were achieved related to the vested preference shares. Accordingly, 15,000 vested preference shares were released from restrictions, and in fiscal 2009, AMDS opted to have the 15,000 unrestricted shares redeemed for $15 million in cash. As required by the AMDS purchase agreement, the $15 million was funded by Sensus 1 during fiscal 2009, and thus the Company’s cash position was not impacted.

The Company is also required to make additional future cash payments to AMDS based on certain financial performance measures of the acquired business through March 2011. Related to the performance of the acquired business, the Company accrued $34.7 million for fiscal 2010 and $45.6 million cumulatively, net of $5.5 million previously paid ($0.9 million in fiscal 2008 and $4.6 million in fiscal 2009) and $13.4 million paid in fiscal 2010 in accordance with the purchase agreement. In the accompanying consolidated balance sheet as of March 31, 2010, $28.5 million is classified as accruals and other current liabilities and $17.1 million is classified as other long-term liabilities. These gross accrued amounts reflect additional purchase price and are recorded as goodwill.

In addition, on the date of acquisition, Sensus 1 issued 15,000 unvested preference shares to AMDS, which are subject to vesting based on the performance of the acquired business over a five-year period following closing. The redemption value of the unvested preference shares is $15 million if the specified performance thresholds are achieved over the relevant period. During fiscal 2010, the performance thresholds were achieved related to the unvested preference shares, and all of these preference shares became vested. Accordingly, 15,000 vested preference shares were released from restrictions, and AMDS opted to have the 15,000 unrestricted shares redeemed for cash. As required by the AMDS purchase agreement, the $15 million was funded by Sensus 1 in fiscal 2010, and thus the Company’s cash position was not impacted.

 

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For Results of Operations and Liquidity and Capital Resources, all dollar amounts and variances in the narrative discussions are rounded to millions; however, percentages are calculated based on dollar amounts depicted in the tables.

Results of Operations

The following table provides results of operations for the periods presented:

 

(dollars in millions)

   Year Ended
March 31,
2010
    %     Year Ended
March 31,
2009
    %     Year Ended
March 31,
2008
    %  

Net sales

   $ 865.6      100   $ 791.9      100   $ 722.0      100

Gross profit

     247.2      29     199.4      25     186.9      26

Selling, general and administrative expenses

     153.4      18     134.0      17     121.5      17

Restructuring costs

     25.9      3     9.9      1     7.0      1

Amortization of intangible assets

     13.0      2     13.5      2     19.7      3

Loss on debt extinguishment

     5.9      1     —        —          —        —     

Impairment of goodwill

     —        —          14.4      2     —        —     

Acquisition-related costs

     1.2      —          —        —          —        —     

Other operating expense, net

     3.4      —          2.7      —          2.3      —     
                                          

Operating income

     44.4      5     24.9      3     36.4      5

Interest expense, net

     (43.6   (5 )%      (39.9   (5 )%      (41.8   (6 )% 

Other income (expense), net

     1.9      —          (0.3   —          (2.4   —     
                                          

Income (loss) before income taxes

     2.7      —          (15.3   (2 )%      (7.8   (1 )% 

Provision (benefit) for income taxes

     7.7      1     0.7      —          (1.4   —     
                                          

Consolidated net loss

     (5.0   (1 )%      (16.0   (2 )%      (6.4   (1 )% 

Less: Net income attributable to the noncontrolling interest

     (2.5   —          (2.4   —          (1.9   —     
                                          

Net loss attributable to controlling interest

     (7.5   (1 )%    $ (18.4   (2 )%    $ (8.3   (1 )% 
                                          

In October 2009, the Financial Accounting Standards Board (“FASB”) amended the accounting standards related to revenue recognition for arrangements with multiple deliverables and arrangements that include software elements. In the fourth quarter of fiscal 2010, the Company adopted the new accounting principles on a retrospective basis. This resulted in the revision of the financial data for the years ended March 31, 2008 and 2009. See Note 1 and Note 2 under “Notes to Consolidated Financial Statements” in Item 8 of this Annual Report.

Fiscal Year Ended March 31, 2010 Compared with Fiscal Year Ended March 31, 2009

Net Sales.

 

(dollars in millions)

   Year Ended
March  31,

2010
   Year Ended
March  31,
2009
   Dollar
Change
   Percent
Change
 

Net sales

   $ 865.6    $ 791.9    $ 73.7    9

Net sales during fiscal 2010 increased $74 million, or 9%, compared to fiscal 2009 primarily due to increased demand for FlexNet systems and SmartPoint products to support AMI electric and gas customers as they rolled out their smart grid implementations. SmartPoint shipments increased to 3.3 million units, or by approximately 74%, compared to fiscal 2009.

Partially offsetting these improvements, worldwide water and gas product demands contracted over fiscal 2010 driven by global macroeconomic events, including a significant reduction in North America commercial and residential building starts.

 

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Our top ten customers accounted for approximately 39% of net sales for fiscal 2010, and no individual customer accounted for more than 10% of net sales.

Gross Profit.

 

(dollars in millions)

   Year Ended
March  31,
2010
   Year Ended
March  31,
2009
   Dollar
Change
   Percent
Change

Gross profit

   $ 247.2    $ 199.4    $ 47.8    24%

Gross profit as a percent of net sales

     29%      25%       16%

Gross profit in dollars, and as a percent of net sales, for fiscal 2010 improved from fiscal 2009 levels. AMI Smart Grid deployments of FlexNet systems and SmartPoint products were the primary drivers of the improvements compounded with sourcing actions and cost alignments taken during the year in all business units. Product volumes, mix and improved operating scale and efficiency also contributed to the improvements.

Selling, General and Administrative (“SG&A”) Expenses.

 

(dollars in millions)

   Year Ended
March  31,

2010
   Year Ended
March  31,
2009
   Dollar
Change
   Percent
Change

SG&A expenses

   $ 153.4    $ 134.0    $ 19.4    14%

SG&A expenses as a percent of net sales

     18%      17%       6%

SG&A expenses for fiscal 2010 were higher than fiscal 2009 as the Company’s cost structure reflects increased investment for research and development and infrastructure to support marketing strategies and customer obligations.

Restructuring Costs. Restructuring costs for fiscal 2010 and 2009 were $26 million and $10 million, respectively, and relate primarily to the restructuring activities associated with our manufacturing operations in Germany.

Amortization of Intangible Assets. Amortization expense relates primarily to the intangible assets consisting of non-competition agreements, customer relationships and other intangible assets recorded at the time of the acquisition of Invensys Metering Systems and the intangible assets consisting of developed technology recorded as a result of the AMDS acquisition. Amortization of intangible assets decreased to $13 million for fiscal 2010 from $14 million for fiscal 2009 primarily due to one of our direct customer relationship assets having been fully amortized in fiscal 2009.

Loss on Debt Extinguishment. In fiscal 2010, the Company recorded a loss of $6 million on debt extinguishment related to the amendment of our senior credit facilities. See Note 9 under “Notes to Consolidated Financial Statements” in Item 8 of this Annual Report.

Impairment of Goodwill. The Company performed its annual goodwill impairment test during the fourth quarter of fiscal 2010 and 2009. In fiscal 2009, due to demand contractions in the automotive market, the Company determined that the goodwill in its precision die casting business unit was impaired and thus recorded a charge of $14 million.

Acquisition-Related Costs. In Fiscal 2010, the Company recorded approximately $1 million of acquisition costs related to the Telemetric acquisition, the purchase of the PDC Rongtai noncontrolling interest and an unconsummated acquisition.

Other Operating Expense, Net. Other operating expense, net of $3 million for fiscal 2010 and 2009 primarily consisted of recurring management fees of approximately $3 million paid to The Jordan Company, L.P.

 

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Interest Expense, Net. Interest expense, net increased $4 million for fiscal 2010 as compared to fiscal 2009 and reflects the increase in interest rates related to the amendment to our senior credit facilities during the current fiscal year and the treatment of ineffective interest rate swaps.

Other Income (Expense), Net. Other income (expense), net was $2 million for fiscal 2010 and was less than ($1) million for fiscal 2009. Other income (expense), net principally relates to net transactional foreign currency gains and losses.

Provision for Income Taxes. Income tax provision was $8 million in fiscal 2010 and was $1 million for fiscal 2009, and reflects the Company’s pre-tax income (loss) based on the Company’s estimated annual effective tax rate. The $7 million increase in the tax provision reflects the increase in the U.S. income from the Utility Infrastructure and Related Communication Systems segment.

Consolidated Net Loss. Consolidated net loss of $5 million in fiscal 2010 narrowed by $11 million as compared to fiscal 2009 as a result of the factors described above.

Net Income Attributable to the Noncontrolling Interest. Net income attributable to the noncontrolling interest relates to the Company’s partner’s share of income or loss from our joint venture entities and increased slightly for fiscal 2010 as compared to fiscal 2009. The increase in fiscal 2010 is due to net improved results of operations of our joint ventures. The Company holds joint venture interests in entities in the Ukraine (51%), Algeria (55%) and China (55%). On September 29, 2009, the Company purchased the noncontrolling interest of PDC Rongtai. See Note 3 under “Notes to Consolidated Financial Statements” in Item 8 of this Annual Report.

Net Loss Attributable to Controlling Interest. Net loss attributable to controlling interest of $7 million for fiscal 2010 narrowed by $11 million as compared to the net loss attributable to controlling interest of $18 million for fiscal 2009 as a result of the factors described above.

Fiscal Year Ended March 31, 2009 Compared with Fiscal Year Ended March 31, 2008

Net Sales.

 

(dollars in millions)

   Year Ended
March  31,
2009
   Year Ended
March  31,
2008
   Dollar
Change
   Percent
Change
 

Net sales

   $ 791.9    $ 722.0    $ 69.9    10

Net sales during fiscal 2009 increased $70 million, or 10%, compared to fiscal 2008 primarily due to increased demand for FlexNet AMI systems and SmartPoint products. Shipments of SmartPoint products increased to 1.9 million units, or over 550%, compared to fiscal 2008. Partially offsetting the increase in net sales was a reduction in demand for our water and gas offerings attributed to general global economic factors along with a recent historic low in building starts in the residential and commercial real estate markets in North America. Additionally, results were negatively impacted by reduced demand for our precision die cast products due to a weak U.S. automotive market.

Our top ten customers accounted for approximately 34% of net sales for fiscal 2009, and no individual customer accounted for more than 10% of net sales.

Gross Profit.

 

(dollars in millions)

   Year Ended
March  31,
2009
   Year Ended
March  31,
2008
   Dollar
Change
   Percent
Change

Gross profit

   $ 199.4    $ 186.9    $ 12.5    7% 

Gross profit as a percent of net sales

     25%      26%       (4)%

 

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Gross profit in dollars for fiscal 2009 was higher than fiscal 2008. FlexNet AMI systems and SmartPoint products were the most significant drivers. Increased gross profit in dollars was the result of increased product sales volumes and improved operating scale and efficiency in fiscal 2009 as compared to fiscal 2008, offset partially by increased operating and software development investments and reduced demands for water and gas offerings.

Selling, General and Administrative (“SG&A”) Expenses.

 

(dollars in millions)

   Year Ended
March  31,
2009
   Year Ended
March  31,
2008
   Dollar
Change
   Percent
Change

SG&A expenses

   $ 134.0    $ 121.5    $ 12.5    10%

SG&A expenses as a percent of net sales

     17%      17%       —  

SG&A expenses for fiscal 2009 were higher than fiscal 2008 primarily due to our continued investment in product development and marketing and sales support primarily to support AMI growth. The Company’s cost structure reflected the increased spending to support the market demands of the AMI technology migration discussed above.

Restructuring Costs. Restructuring costs for fiscal 2009 and 2008 were $10 million and $7 million, respectively, and relate primarily to the restructuring activities associated with our manufacturing operations in Germany.

Amortization of Intangible Assets. Amortization expense relates primarily to the intangible assets consisting of non-competition agreements, customer relationships and other intangible assets recorded at the time of the acquisition of Invensys Metering Systems and the intangible assets consisting of developed technology recorded as a result of the AMDS acquisition. Amortization of intangible assets decreased to $14 million for fiscal 2009 from $20 million for fiscal 2008 due to the majority of our non-compete agreements having been fully amortized in fiscal 2008.

Impairment of Goodwill. The Company performed its annual goodwill impairment test during the fourth quarter of fiscal 2009. Due to demand contractions in the automotive market, the Company determined that the goodwill in its precision die casting business unit was impaired and thus recorded a charge of $14 million.

Other Operating Expense, Net. Other operating expense, net of $3 million for fiscal 2009 increased by $1 million from fiscal 2008 and primarily consisted of recurring management fees of approximately $3 million paid to The Jordan Company, L.P., partially offset by other non-recurring income.

Interest Expense, Net. Interest expense, net of $40 million decreased by $2 million for fiscal 2009 as compared to fiscal 2008 and reflects the Company’s decision to service debt early and lower interest rates, partially offset by interest expense related to the ineffectiveness of one of our interest rate swaps. During fiscal 2009, the Company reduced its indebtedness by $16 million.

Other Expense, Net. Other expense, net was less than $1 million for fiscal 2009 and was $2 million for fiscal 2008. Other expense, net principally relates to net transactional foreign currency gains and losses.

Provision (Benefit) for Income Taxes. Income tax provision was $1 million in fiscal 2009 and income tax benefit of ($1) million for fiscal 2008 reflects the Company’s pre-tax loss based on the Company’s estimated annual effective tax rate.

Consolidated Net Loss. Consolidated net loss of $16 million in fiscal 2009 increased $10 million as compared to fiscal 2008 as a result of the factors described above.

 

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Net Income Attributable to the Noncontrolling Interest. Net income attributable to the noncontrolling interest relates to the Company’s partner’s share of income or loss from our joint venture entities and increased slightly for fiscal 2009 as compared to fiscal 2008 due to net improved results of operations of our joint ventures. The Company holds joint venture interests in entities in the Ukraine (51%), Algeria (55%) and China (55%).

Net Loss Attributable to Controlling Interest. Net loss attributable to controlling interest of $18 million for fiscal 2009 increased $10 million as compared to fiscal 2008 as a result of the factors described above.

Liquidity and Capital Resources

During fiscal 2010, we funded our operating, investing and financing requirements through cash flow generated from operating activities, borrowing under our credit facilities and cash on hand.

Net cash flow provided by operating activities in fiscal 2010, 2009 and 2008 was $73 million, $61 million and $51 million, respectively. The $12 million increase in cash provided by operating activities in fiscal 2010 compared to fiscal 2009 was primarily driven by cash flow generated from growth in our AMI business and decreased net trade working capital. Similarly, the $10 million increase in cash provided by operating activities in fiscal 2009 compared to fiscal 2008 was driven in large part by cash flow generated from growth in our AMI business.

Cash expenditures for restructuring for fiscal 2010, 2009 and 2008 were $18 million, $7 million and $6 million, respectively, and were reflected within cash used in operations. As of March 31, 2010, we had $16 million of restructuring accruals reflected on our consolidated balance sheet within current liabilities and other long-term liabilities. Cash restructuring expenses of approximately $20 million are expected to be incurred in fiscal 2011 as existing restructuring programs are implemented.

Cash used for investing activities were $64 million, $42 million and $29 million for fiscal 2010, 2009 and 2008, respectively. For fiscal 2010, 2009 and 2008, expenditures for property, plant and equipment (“PP&E”) were $34 million, $27 million and $23 million, respectively, of which 39%, 41% and 22%, respectively, reflected investment in the AMI business. PP&E expenditure requirements were comprised of equipment, molds and tooling for replacement and cost efficiency, and maintenance, safety and expansions that extend useful lives. In fiscal 2010, 2009 and 2008, respectively, we purchased intangible assets of $7 million, $1 million and less than $1 million. We incurred software development costs of $8 million, $9 million and $5 million for fiscal 2010, 2009 and 2008, respectively, related to the AMI business. For fiscal 2011, we expect to make expenditures for PP&E, intangible assets and software development costs of approximately $50 million reflecting our continuing emphasis on a growth-oriented investment program. Business acquisition expenditures in fiscal 2010 were $20 million, $13 million of which were contingent payments related to the performance of the acquired AMDS business and $7 million of which were related to the acquisition of substantially all of the assets and assumptions of certain liabilities of Telemetric. Business acquisition expenditures in fiscal 2009 were $5 million, $4 million of which were contingent payments related to the performance of the acquired AMDS business and $1 million of which relate to the acquisition of certain assets of Global Metering Systems, LLC. Business acquisition expenditures in fiscal 2008 of approximately $1 million reflected the contingent payments related to the performance of the acquired AMDS business. Proceeds from sale of assets of approximately $5 million in fiscal 2010 are primarily from the sale of the sale of the Company’s Orlando, Florida water meter manufacturing facility.

Net cash provided by (used in) financing activities was $12 million, $(16) million and $(22) million for fiscal 2010, 2009 and 2008, respectively. Net cash provided by financing activities for fiscal 2010 consisted primarily of $35 million of proceeds from debt issuance, $(9) million of debt issuance costs related to the amendment to our credit facility (see Note 9 under “Notes to Consolidated Financial Statements” in Item 8 of this Annual Report and discussion below), $(8) million of principal payments on debt and $(6) million for the

 

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purchase of the PDC Rongtai noncontrolling interest. Net cash used in financing activities for fiscal 2009 consisted of $14 million of principal prepayments on the Company’s term loan facilities, $1 million in repayments of the Company’s loan to its Rongtai joint venture partner and $1.0 million in decreased short-term borrowings by Rongtai. In fiscal 2009, the Company settled the outstanding balance on its European term loan in its entirety. Net cash used in financing activities for fiscal 2008 consisted of $23 million in principal prepayments on the Company’s term loan facilities, partially offset by $1 million in increased short-term borrowings by Rongtai.

We entered into the senior credit facilities with a syndicate of financial institutions and institutional lenders on December 17, 2003. The credit facilities provide the Company with term loans, revolving loans and a letter of credit facility. The senior credit facilities were amended on July 23, 2009. The amendment extended the maturity of certain of the term loans by providing approximately $131 million of new term loans with a maturity date of June 3, 2013, the aggregate amount of which was deemed to convert a like amount of outstanding principal of previously existing term loans that had a maturity date of December 17, 2010. Approximately $28 million of term loans under the senior credit facility was not extended in connection with the amendment. The amendment also provided an additional $35 million in new term loans, extended the maturity date of the $70 million in revolving loan capacity from December 17, 2009 to December 17, 2012, increased the U.S. letter of credit availability from $20 million to $50 million and modified certain financial covenants to improve financial flexibility. See below for discussion of our total indebtedness at March 31, 2010.

Refer to Note 9 under “Notes to Consolidated Financial Statements” in Item 8 of this Annual Report for a complete description of the aforementioned amendment and the related accounting treatment.

We also have $275 million of senior subordinated notes outstanding, which mature on December 15, 2013 and bear interest at the rate of 8 5/8% per annum. Interest on the senior subordinated notes is payable semi-annually in June and December of each year. The senior subordinated notes are our unsecured senior subordinated obligations and rank equally in right of payment to all of our senior subordinated debt, subordinated in right of payment to all of our senior debt, including our indebtedness under our senior credit facilities, and senior in right of payment to all of our subordinated debt. The senior subordinated notes are guaranteed on a senior subordinated, unsecured basis by certain of our subsidiaries.

We may redeem the senior subordinated notes at the redemption prices indicated below (expressed as a percentage of the principal amount) plus accrued and unpaid interest to the date of redemptions, if redeemed during the twelve-month period beginning on December 15 of each of the years indicated below:

 

Period

   Redemption Price  

2009

   102.875

2010

   101.438

2011 and thereafter

   100.000

The senior subordinated notes are redeemable at the option of the holders of such notes at a repurchase price of 101% of the principal amount thereof, plus accrued and unpaid interest, in the event of certain change of control events related to us.

The indenture governing the senior subordinated notes contains certain covenants that limit, among other things, our ability to a) incur additional indebtedness (including by way of guarantee), subject to certain exceptions, unless we meet a consolidated coverage ratio of 2.0 to 1.0 or certain other conditions apply; b) pay dividends or distributions, or make certain types of investments or other restricted payments, unless we meet certain specified conditions; c) create any encumbrance or restriction on our subsidiary guarantors’ ability to pay dividends or distributions, repay loans, make loans or advances or transfer any property or assets to us; d) dispose of certain assets and capital stock of our subsidiary guarantors; e) enter into certain transactions with affiliates; f) engage in new lines of business; and g) consummate certain mergers and consolidations.

 

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As of March 31, 2010, we had $466 million of total indebtedness outstanding, consisting of $275 million of senior subordinated notes, $186 million under the U.S. term loan facility and $5 million in short-term borrowings related to Rongtai. Interest expense, net, excluding amortization of deferred financing costs, was $41 million for fiscal 2010. The next scheduled principal payment on the term loan facility of approximately $7 million is due on June 30, 2010. There were no borrowings outstanding under the revolving credit facility at March 31, 2010; however, $15 million of the facility was utilized in connection with outstanding letters of credit. We were in compliance with all credit facility covenants at March 31, 2010.

We believe that cash on hand and expected cash flows from operations, together with available borrowings under the revolving credit facility constituting part of our senior secured credit facilities, will provide sufficient funds to enable us to fund our planned capital expenditures, make scheduled principal and interest payments and meet our other cash requirements for the foreseeable future. Our ability to make scheduled payments of principal of, or to pay interest on, or to refinance, our indebtedness or to fund planned capital expenditures will depend on our ability to generate cash in the future. Our ability to generate cash is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.

In conjunction with the AMDS acquisition, the Company is legally obligated to satisfy any additional future cash payments to AMDS based on certain financial performance measures of the acquired business through March 2011. Related to the performance of the acquired business, the Company accrued $35 million for fiscal 2010 and $46 million cumulatively, net of $18 million previously paid ($1 million in fiscal 2008, $4 million in fiscal 2009 and $13 million in fiscal 2010) in accordance with the purchase agreement. In the accompanying consolidated balance sheet as of March 31, 2010, $29 million is classified as accruals and other current liabilities and $17 million is classified as other long-term liabilities. We believe that expected cash flows from operations will provide sufficient funds to fulfill this obligation.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that would have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Contractual Obligations

The following table is a summary of contractual cash obligations (excluding interest) as of March 31, 2010. The interest component of the Company’s term loan facility and senior subordinated notes is discussed in Note 9 of the “Notes to Consolidated Financial Statements” in Item 8 of this Annual Report.

 

     Payments Due by Period

(in millions)

   Less than
1 year
   1-3 years    3-5 years    After
5 years
   Total

Term loan facility

   $ 22.7    $ 3.3    $ 160.0    $ —      $ 186.0

Revolving loan facilities (1)

     —        —        —        —        —  

Operating leases

     4.0      4.9      3.0      1.0      12.9

Senior subordinated notes

     —        —        275.0      —        275.0
                                  

Total contractual cash obligations

   $ 26.7    $ 8.2    $ 438.0    $ 1.0    $ 473.9
                                  

 

(1) The revolving loan facilities provide for $70.0 million of borrowing capacity. The revolving credit facility matures in December 2012. As of March 31, 2010, $14.8 million of letters of credit were issued and are included in the $70.0 million of borrowing capacity under the revolving credit facility.

 

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Taxes

We are subject to taxation in multiple jurisdictions throughout the world. Our effective tax rate and tax liability are affected by a number of factors, such as the amount of taxable income in particular jurisdictions, the tax rates in such jurisdictions, tax treaties between jurisdictions, the extent to which we transfer funds between jurisdictions and repatriate income, and changes in law. Generally, the tax liability for each legal entity is determined either on a) a non-consolidated and non-combined basis or b) a consolidated and combined basis only with other eligible entities subject to tax in the same jurisdiction, in either case without regard to the taxable losses of non-consolidated and non-combined affiliated entities. As a result, we may pay income taxes to some jurisdictions even though on an overall basis a net loss for the period is incurred.

Inflation

Inflation can affect the costs of goods and services that we use. The majority of the countries that are of significance to us, from either a manufacturing or sales viewpoint, have in recent years enjoyed relatively low inflation. The competitive environment in which we operate inevitably creates pressure on us to provide our customers with cost-effective products and services. We believe that our cost reduction programs are critical to maintaining our competitive position.

Critical Accounting Policies

The methods, estimates and judgments used in applying critical accounting policies have a significant impact on the results we report in our financial statements. We evaluate our estimates and judgments on an on-going basis. Estimates are based on historical experience and on assumptions that are believed to be reasonable under the circumstances. Management’s experience and assumptions form the basis for judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may vary from what management anticipates, and different assumptions or estimates about the future could change the reported results.

We believe that the following accounting policies are the most critical to our reported financial statements and require the most difficult, subjective or complex judgments in the preparation of these statements.

Revenue Recognition. Revenues are recognized when persuasive evidence of a sale arrangement exists, delivery has occurred or services are rendered, the sales price or fee is fixed or determinable and collectability is reasonably assured. The Company has certain sales rebate programs with some customers that periodically require rebate payments. The Company estimates amounts due under these sales rebate programs at the point of sale. Net sales are based upon the amount invoiced for the shipped goods less estimated future rebate payments and sales returns and allowances. These estimates are based upon the Company’s historical experience. The Company records an allowance for sales returns based on the historical relationship between shipments and returns. Revisions to these estimates are recorded in the period in which the facts that give rise to the revision become known.

In connection with its AMDS acquisition, the Company began to deploy its new advanced, fixed network AMI technology under long-term contracts, generally up to 20 years. These contracts contain multiple elements, including hardware, software, project management and installation services as well as ongoing customer support.

In October 2009, the FASB issued new revenue recognition guidance for multiple deliverable revenue arrangements which changes the requirements for establishing separate units of accounting in a multiple element arrangement and requires that the arrangement consideration be allocated to each deliverable based on the relative selling price. Concurrently, the FASB issued guidance modifying the scope of software revenue guidance for arrangements that include software elements to exclude software that is sold with a tangible product from the scope of software revenue guidance if the software is essential to the tangible product’s functionality.

 

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The Company elected to early adopt this accounting guidance retrospectively during the quarter ended March 31, 2010. Therefore, previously reported results both for the current fiscal year and fiscal 2009 and 2008 have been revised to reflect the impact of adoption. Upon adoption of the new guidance, the Company concluded that substantially all of its products and services are excluded from the scope of the software revenue recognition guidance. Refer to Note 1 and Note 2 under “Notes to Consolidated Financial Statements” in Item 8 of this Annual Report for a detailed description of the retrospective application of these changes.

Pursuant to the new revenue recognition guidance, the Company allocates revenue to each element based on a selling price hierarchy. The selling price for a deliverable is based on its vendor specific objective evidence (“VSOE”) if available, third party evidence (“TPE”) if VSOE is not available, or best estimated selling price (“BESP”) if neither VSOE nor TPE is available. In multiple element arrangements, revenue is allocated to each separate unit of accounting using the relative selling prices of each of the deliverables in the arrangement based on the aforementioned selling price hierarchy.

The adoption of the new accounting principles increased the Company’s net sales by $231.1 million, $121.2 million and $27.8 million for fiscal 2010, 2009 and 2008, respectively. As of March 31, 2010, the total accumulated deferred revenue associated with the AMI long-term contract sales to date was $8.5 million, and accumulated deferred costs for such sales were $5.1 million.

This accounting for revenue recognition had no effect on cash flows as billings to customers under these contracts occur when the related products and services are delivered and the associated costs are incurred.

Retirement benefits. Pension obligations are actuarially determined and are affected by several assumptions, including discount rate, long-term rate of return on plan assets and assumed annual rate of compensation increase for plan employees. Changes in rates and differences from actual results for each assumption affect the amount of pension expense recognized in current and future periods.

Restructuring. Over the last five fiscal years we have implemented a focused cost reduction program that resulted in restructuring costs being incurred. Additional restructuring programs have been approved and implemented to support new programs and circumstances. The related restructuring reserves reflect estimates, including those pertaining to employee severance costs and contractual lease obligations. Management reassesses the reserve requirements to complete each individual program on a quarterly basis. Actual restructuring costs may be different from the estimates used to establish the restructuring reserves.

Warranty obligations. Product warranty reserves are established in the same period that revenue from the sale of the related products is recognized. The amounts of those reserves are based on warranty terms and best estimates of the amounts necessary to settle future and existing claims on products sold as of the balance sheet date. Estimates of warranty obligations are reevaluated on a quarterly basis. As actual experience becomes available, it is used to modify the historical averages to ensure that the forecast is within the range of likely outcomes. Resulting balances are then compared with present spending rates to ensure that the accruals are adequate to meet expected future obligations.

Income taxes. At the end of each fiscal quarter, management estimates the effective tax rate expected to be applicable for the full fiscal year. The estimated effective tax rate reflects the expected jurisdiction where income is earned as well as tax planning strategies. If the actual results are different from our estimates, adjustments to the effective tax rate may be required in the period in which such determination is made.

We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities. Management regularly reviews deferred tax assets for recoverability and establishes a valuation allowance based on historical losses, projected future taxable income and the expected timing of the reversals of existing temporary differences. As a result of this review, a full valuation allowance has been established against the deferred tax assets related to certain foreign and domestic net operating loss carryforwards.

 

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Impairment of long-lived assets. Long-lived assets are reviewed for impairment when events or circumstances indicate that the carrying amount of a long-lived asset may not be recoverable and for all assets to be disposed. Long-lived assets held for use are reviewed for impairment by comparing the carrying amount of an asset to the undiscounted future cash flows expected to be generated by the asset over its remaining useful life. If an asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value, and is charged to results of operations at that time. Assets to be disposed of are reported at the lower of the carrying amounts or fair value less cost to sell. Management determines fair value using a discounted future cash flow analysis. The determination of market values based on discounted cash flows requires management to make significant estimates and assumptions, including long-term projections of cash flows, market conditions and appropriate discount rates.

Intangible assets. Intangible assets historically have consisted of goodwill, trademarks and patents. Goodwill represents the excess of the purchase price paid over the fair value of the net assets acquired. Patents and trademarks are stated at fair value on the date of acquisition. Goodwill and indefinite-lived intangible assets (trademarks and tradenames) are required to be tested at least annually for impairment using fair value measurement techniques.

We assess the fair value of our reporting units for goodwill impairment based upon an equal weighting of an income and market valuation methodology. If the carrying amount of the reporting unit exceeds the estimated fair value, goodwill impairment may be present. We measure the goodwill impairment loss based upon the fair value of the underlying assets and liabilities of the reporting unit, including any unrecognized intangible assets, and estimate the implied fair value of goodwill. An impairment loss would be recognized to the extent that a reporting unit’s recorded goodwill exceeded the implied fair value of goodwill. The Company performed its annual goodwill impairment test during the fourth quarter of fiscal 2010.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The following discussion about our market risk disclosures involves forward-looking statements. Actual results could differ materially from those projected in forward-looking statements. We are exposed to various market risk factors such as changes in foreign currency rates and fluctuating interest rates.

Currency translation. The results of operations of our foreign subsidiaries are translated into U.S. dollars at the average exchange rates for each period concerned. This translation has no impact on cash flow. The balance sheets of foreign subsidiaries are translated into U.S. dollars at the closing exchange rates. Any adjustments resulting from the translation are recorded as other comprehensive income (loss). As of March 31, 2010, assets of foreign subsidiaries constituted approximately 27% of total assets. Foreign currency exchange rate exposure is most significant with respect to the euro. For the fiscal year ended March 31, 2010 and 2009, net sales were negatively impacted by the devaluation of foreign currencies, primarily the euro, versus the U.S. dollar by $2.8 million and $3.1 million, respectively.

Currency transaction exposure. Currency transaction exposure arises when a business has transactions denominated in foreign currencies. We have entered into forward contracts that are denominated in foreign currencies, principally euros, to offset the remeasurement impact of currency rate changes on intercompany receivables and payables. These contracts are used to offset exchange losses and gains on underlying exposures. Changes in the fair value of these forward contracts are recorded immediately in earnings. We do not enter into derivative instrument transactions for trading or speculative purposes. The purpose of our foreign currency management policy is to minimize the effect of exchange rate fluctuations on certain foreign denominated anticipated cash flows. Holding all other variables constant, a change in the contracted forward rates of 1% on our forward contracts denominated in the present foreign currencies would result in an immaterial gain or loss. We expect to continue to utilize forward contracts to manage foreign currency exchange risk in the future as appropriate.

 

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Interest rate risk. Under the terms of the Company’s senior credit facilities, we pay a variable rate of interest based on the London Interbank Offering Rate (“LIBOR”) or the Alternate Base Rate (as defined in the credit agreement) and are subject to interest rate risk as a result of changes in these rates. The Company’s total indebtedness as of March 31, 2010 was $465.9 million, of which $190.9 million bears interest at variable rates. As of March 31, 2010, substantially all of our variable-rate borrowings were under the term loan facilities consisting of a B-1 tranche and a B-3 tranche. Term loans of $21.1 million under the B-1 tranche bear interest at LIBOR plus a 2% margin. Term loans under the B-3 tranche bear interest, at our option, at Adjusted LIBOR, as defined in the credit agreement, plus a 4.5% margin, or the Alternate Base Rate plus 3.5%. For the B-3 tranche, the credit facility provides for a LIBOR floor of 2.5% and an Alternate Base Rate floor of 3.5%. As of March 31, 2010, $160.0 million of the B-3 tranche was under the LIBOR option and $5.0 million of that tranche was under the Alternate Base Rate option. At March 31, 2010, the weighted-average interest rate on our term loan facility borrowings was approximately 6.5%. In addition, the Company has $100 million of interest rate swaps in place that pay a fixed rate of interest and receive LIBOR. Holding all other variables constant, a change in the LIBOR interest rate of 1%, after giving effect to the interest rate swaps, would impact annual interest costs by $0.9 million.

To hedge exposure to variable interest rates, the Company has entered into various interest rate swap agreements in which it receives periodic variable interest payments at the three-month LIBOR and makes periodic payments at specified fixed rates. See Note 7 under “Notes to Consolidated Financial Statements” in Item 8 of this Annual Report.

 

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of

Sensus (Bermuda 2) Ltd.

We have audited the accompanying consolidated balance sheets of Sensus (Bermuda 2) Ltd. as of March 31, 2010 and 2009, and the related consolidated statements of operations, stockholder’s equity, and cash flows for each of the three years in the period ended March 31, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sensus (Bermuda 2) Ltd. at March 31, 2010 and 2009, and the consolidated results of its operations and its cash flows for each of the three years in the period ended March 31, 2010, in conformity with U.S. generally accepted accounting principles.

As discussed in Notes 1 and 2 to the consolidated financial statements, Sensus (Bermuda 2) Ltd. has retrospectively adopted the Financial Accounting Standards Board’s amended accounting standards related to revenue recognition for arrangements with multiple deliverables and arrangements that include software elements.

/s/ Ernst & Young LLP

Raleigh, North Carolina

May 7, 2010

 

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SENSUS (BERMUDA 2) LTD.

CONSOLIDATED BALANCE SHEETS

(in millions, except per share and share data)

 

     March 31,
2010
    March 31,
2009
 
           (As revised)  
ASSETS     

CURRENT ASSETS:

    

Cash and cash equivalents

   $ 59.2      $ 37.9   

Accounts receivable:

    

Trade, net of allowance for doubtful accounts of $1.3 and $1.2 respectively

     122.4        112.8   

Other

     1.9        2.9   

Inventories, net

     67.0        66.4   

Prepayments and other current assets

     12.9        11.8   

Deferred income taxes

     6.9        6.8   

Deferred costs

     5.1        5.7   
                

Total current assets

     275.4        244.3   

Property, plant and equipment, net

     136.3        131.5   

Intangible assets, net

     188.0        187.3   

Goodwill

     453.8        394.5   

Deferred income taxes

     16.4        18.8   

Other long-term assets

     25.1        21.9   
                

Total assets

   $ 1,095.0      $ 998.3   
                
LIABILITIES AND STOCKHOLDER’S EQUITY     

CURRENT LIABILITIES:

    

Accounts payable

   $ 115.5      $ 87.1   

Accruals and other current liabilities

     115.7        80.7   

Current portion of long-term debt

     22.7        38.5   

Short-term borrowings

     4.9        4.9   

Income taxes payable

     0.3        2.9   

Restructuring accruals

     12.9        7.3   

Deferred revenue

     11.6        19.8   
                

Total current liabilities

     283.6        241.2   

Long-term debt, less current portion

     438.3        395.5   

Pensions

     53.1        44.4   

Deferred income taxes

     84.5        77.3   

Deferred revenue

     2.4        1.7   

Other long-term liabilities

     32.2        27.6   
                

Total liabilities

     894.1        787.7   

Commitments and Contingencies (Note 19)

    

STOCKHOLDER’S EQUITY:

    

Common stock, par value $1.00 per share, 12,000 shares authorized, issued and outstanding

     —          —     

Paid-in capital

     251.7        245.4   

Accumulated deficit

     (54.4     (46.9

Accumulated other comprehensive (loss) income

     (1.5     0.2   
                

Total stockholder’s equity

     195.8        198.7   
                

Noncontrolling interest

     5.1        11.9   
                

Total equity

     200.9        210.6   
                

Total liabilities and stockholder’s equity

   $ 1,095.0      $ 998.3   
                

The accompanying notes are an integral part of these consolidated financial statements.

 

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SENSUS (BERMUDA 2) LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions)

 

      Year Ended
March 31, 2010
    Year Ended
March 31, 2009
    Year Ended
March 31, 2008
 
           (As revised)     (As revised)  

NET SALES

   $ 865.6      $ 791.9      $ 722.0   

COST OF SALES

     618.4        592.5        535.1   
                        

GROSS PROFIT

     247.2        199.4        186.9   

OPERATING EXPENSES:

      

Selling, general and administrative expenses

     153.4        134.0        121.5   

Restructuring costs

     25.9        9.9        7.0   

Amortization of intangible assets

     13.0        13.5        19.7   

Loss on debt extinguishment

     5.9        —          —     

Impairment of goodwill

     —          14.4        —     

Acquisition-related costs

     1.2        —          —     

Other operating expense, net

     3.4        2.7        2.3   
                        

OPERATING INCOME

     44.4        24.9        36.4   

NON-OPERATING (EXPENSE) INCOME:

      

Interest expense, net

     (43.6     (39.9     (41.8

Other income (expense), net

     1.9        (0.3     (2.4
                        

INCOME (LOSS) BEFORE INCOME TAXES

     2.7        (15.3     (7.8

PROVISION (BENEFIT) FOR INCOME TAXES

     7.7        0.7        (1.4
                        

CONSOLIDATED NET LOSS

     (5.0     (16.0     (6.4

LESS: NET INCOME ATTRIBUTABLE TO THE NONCONTROLLING INTEREST

     (2.5     (2.4     (1.9
                        

NET LOSS ATTRIBUTABLE TO CONTROLLING INTEREST

   $ (7.5   $ (18.4   $ (8.3
                        

The accompanying notes are an integral part of these consolidated financial statements.

 

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SENSUS (BERMUDA 2) LTD.

CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY

(in millions)

 

    Common
Stock
  Paid-in
Capital
    Accumulated
Deficit
    Accumulated
Other
Comprehensive
Income (Loss)
    Total
Stockholder’s
Equity
    Noncontrolling
Interest
    Total
Equity
 

Balance at March 31, 2007

  $ —     $ 243.2      $ (18.1   $ 1.4      $ 226.5      $ 8.1      $ 234.6   

Revisions (Note 2)

    —       —          (0.9     —          (0.9     —          (0.9
                                                     

Revised Balance at March 31, 2007

    —       243.2        (19.0     1.4        225.6        8.1        233.7   

Adoption of FIN 48 adjustment

    —       —          (1.1     —          (1.1     —          (1.1

Dividend payment to Joint Venture

    —       —          —          —          —          (0.7     (0.7

Other comprehensive (loss) income:

             

Net loss

    —       —          (8.3     —          (8.3     1.9        (6.4

Foreign currency translation adjustment

    —       —          —          4.8        4.8        —          4.8   

Defined benefit pension plan adjustment, net of tax of $0.1 million

    —       —          —          (2.9     (2.9     —          (2.9

Unrealized loss on interest rate swaps, net of tax of $2.5 million

    —       —          —          (3.6     (3.6     —          (3.6
                               

Total comprehensive loss

            (10.0     1.9        (8.1

Adoption of FAS 158

    —       —          —          3.2        3.2          3.2   
                               

Total comprehensive loss

            (6.8     1.9        (4.9

Foreign currency translation adjustment related to noncontrolling interest

              0.9        0.9   
                                                     

Revised Balance at March 31, 2008

    —       243.2        (28.4     2.9        217.7        10.2        227.9   

Equity adjustment from parent related to AMDS acquisition

    —       2.2        —          —          2.2        —          2.2   

Dividend Payment to Joint Venture

    —       —          —          —          —          (0.4     (0.4

Other comprehensive (loss) income:

             

Net loss

    —       —          (18.4     —          (18.4     2.4        (16.0

Foreign currency translation adjustment.

    —       —          —          (5.3     (5.3     —          (5.3

Defined benefit pension plan adjustment, net of tax of $0.4 million

    —       —          —          1.3        1.3        —          1.3   

Unrealized gain on interest rate swaps, net of tax of $0.9 million

    —       —          —          1.3        1.3        —          1.3   
                               

Total comprehensive loss

            (21.1     2.4        (18.7

Adoption of FAS 158

    —       —          (0.1     —          (0.1     —          (0.1

Foreign currency translation adjustment related to noncontrolling interest

    —       —          —          —          —          (0.3     (0.3
                                                     

Revised Balance at March 31, 2009

    —       245.4        (46.9     0.2        198.7        11.9        210.6   

Equity adjustment from parent related to AMDS acquisition

    —       15.0        —          —          15.0          15.0   

Purchase of noncontrolling equity interest

    —       (8.7     —          —          (8.7     (9.0     (17.7

Dividend payable to Joint Venture

    —       —          —          —          —          (0.4     (0.4

Other comprehensive (loss) income:

             

Net loss

    —       —          (7.5     —          (7.5     2.5        (5.0

Foreign currency translation adjustment

    —       —          —          3.0        3.0        —          3.0   

Defined benefit pension plan adjustment, net of tax of $0.0 million

    —       —          —          (6.6     (6.6     —          (6.6

Unrealized gain on interest rate swaps, net of tax of $1.0 million

    —       —          —          1.9        1.9        —          1.9   
                               

Total comprehensive loss

            (9.2     2.5        (6.7

Foreign currency translation adjustment related to noncontrolling interest

    —       —          —          —          —          0.1        0.1   
                                                     

Balance at March 31, 2010

  $ —     $ 251.7      $ (54.4   $ (1.5   $ 195.8      $ 5.1      $ 200.9   
                                                     

The accompanying notes are an integral part of these consolidated financial statements.

 

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SENSUS (BERMUDA 2) LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

 

     Year Ended
March 31,  2010
    Year Ended
March 31,  2009
    Year Ended
March 31,  2008
 
           (As revised)     (As revised)  

OPERATING ACTIVITIES:

      

Consolidated net loss

   $ (5.0   $ (16.0   $ (6.4

Adjustments to reconcile net loss to net cash provided by operating activities:

      

Depreciation

     27.2        26.4        27.1   

Amortization of intangible assets

     13.0        13.5        19.7   

Amortization of software development costs

     5.3        6.7        0.9   

Amortization of deferred financing costs

     3.1        3.1        2.8   

Deferred income taxes

     2.8        (6.6     (9.8

Impairment of goodwill

     —          14.4        —     

Loss on debt extinguishment

     5.9        —          —     

Other non-cash (gain) loss

     (1.6     1.1        1.5   

Changes in assets and liabilities used in operations, net of effects of acquisitions and divestitures:

      

Accounts receivable

     (7.3     (13.0     (2.4

Inventories

     1.2        2.0        (5.3

Other current assets

     0.2        (1.0     1.7   

Accounts payable, accruals and other current liabilities

     34.4        19.9        14.3   

Income taxes payable

     (2.2     3.0        —     

Deferred revenue less deferred costs primarily from long-term AMI electric and gas contracts

     (7.5     10.3        7.2   

Other

     3.3        (3.1     —     
                        

Net cash provided by operating activities

     72.8        60.7        51.3   

INVESTING ACTIVITIES:

      

Expenditures for property, plant and equipment

     (33.7     (26.7     (22.8

Purchases of intangible assets

     (6.7     (1.2     (0.3

Software development costs

     (7.9     (8.8     (4.7

Business acquisitions

     (20.5     (5.9     (0.9

Proceeds from sale of assets

     4.5        0.2        —     
                        

Net cash used in investing activities

     (64.3     (42.4     (28.7

FINANCING ACTIVITIES:

      

(Decrease) increase in short-term borrowings

     —          (1.0     1.3   

Proceeds from debt issuance

     35.0        —          —     

Principal payments on debt

     (8.0     (14.7     (23.0

Debt issuance costs

     (8.8     —          —     

Purchase of noncontrolling equity interest

     (6.0     —          —     
                        

Net cash provided by (used in) financing activities

     12.2        (15.7     (21.7

Effect of exchange rate changes on cash

     0.6        (2.3     1.8   
                        

INCREASE IN CASH AND CASH EQUIVALENTS

     21.3        0.3        2.7   

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR

   $ 37.9      $ 37.6      $ 34.9   
                        

CASH AND CASH EQUIVALENTS AT END OF YEAR

     $ 59.2      $ 37.9      $ 37.6   
                        

SUPPLEMENTAL DISCLOSURES OF CASH FLOW:

      

Cash paid during the period for:

      

Interest, net

   $ 38.9      $ 36.2      $ 38.9   
                        

Income taxes, net of refunds

   $ 6.7      $ 3.6      $ 4.0   
                        

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES (NOTE 2):

During the year ended March 31, 2010, the 15,000 unvested preference shares issued in connection with the AMDS acquisition became vested with a redemption value of $15.0 million.

During the year ended March 31, 2010, paid-in capital decreased $8.7 million in connection with the purchase of the PDC Rongtai noncontrolling interest, representing the excess purchase price over the carrying value of the noncontrolling interest.

The accompanying notes are an integral part of these consolidated financial statements.

 

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SENSUS (BERMUDA 2) LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

Sensus (Bermuda 2) Ltd. (“Sensus 2”), a wholly owned subsidiary of Sensus (Bermuda 1) Ltd. (“Sensus 1”), together with its subsidiaries, referred to herein as the Company, is a leading provider of advanced metering and related communications solutions to the worldwide utility industry. The Company is a global manufacturer of water, gas, heat and electric meters, as well as a provider of comprehensive metering communications system solutions that include both automatic meter reading (“AMR”) and installation and maintenance of advanced metering infrastructure (“AMI”) systems. In addition, the Company produces pipe joining and repair products for water and natural gas utilities and is a supplier of precision-manufactured aluminum die castings.

The Company was formed on December 18, 2003 through the acquisition of the metering systems and certain other businesses of Invensys plc (“Invensys”). Prior to the acquisition, the Company had no active business operations. The metering systems businesses operated by Invensys prior to the acquisition are referred to herein as “Invensys Metering Systems.” The acquisition was financed through a combination of borrowings under a $230.0 million term loan facility that is part of the Company’s senior credit facilities, the issuance of $275.0 million of 8 5/8% senior subordinated notes due in 2013 (the “Notes”) and equity contributions from Sensus 1.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly and majority owned subsidiaries. Subsidiaries for which the Company has the ability to exercise control are consolidated. All intercompany transactions and accounts have been eliminated.

Retrospective Adoption of New Accounting Principles

In October 2009, the Financial Accounting Standards Board (“FASB”) amended the accounting standards related to revenue recognition for arrangements with multiple deliverables and arrangements that include software elements. In the fourth quarter of fiscal 2010, the Company adopted the new accounting principles on a retrospective basis. The Company believes retrospective adoption provides the most comparable and useful financial information for financial statement users, is more consistent with the information the Company’s management uses to evaluate its business, and better reflects the underlying economic performance of the Company. The financial statements and notes to the financial statements presented herein have been adjusted to reflect the retrospective adoption of the new accounting principles.

Reclassifications

Certain prior year financial statement captions have been reclassified to conform to the current year presentation.

Use of Estimates

The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the financial statements. Due to various factors affecting future costs and operations, actual results could differ from those estimates.

Cash and Cash Equivalents

Highly liquid investments with original maturity dates of three months or less are classified as cash equivalents. Cash equivalents are stated at cost, which approximates fair value.

 

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SENSUS (BERMUDA 2) LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Accounts Receivable

Credit is extended by the Company based upon an evaluation of the customer’s financial position, and collateral generally is not required for the majority of its customers. The Company provides an allowance for doubtful accounts equal to estimated collection losses that will be incurred in the collection of receivables. Estimated losses are based on historical collection experience, as well as a review by management of the current status of all receivables. For certain customers in high risk countries, the Company may require the customer to obtain a letter of credit.

Inventories

Inventories, net are stated at the lower of cost or market using the first-in, first-out (“FIFO”) method. Cost is determined based on standard cost with appropriate adjustments to approximate FIFO cost. Market is determined on the basis of estimated realizable values.

Property, Plant and Equipment

Property, plant and equipment, net are stated at cost, net of accumulated depreciation. Depreciation of property, plant and equipment is provided using the straight-line method over the estimated useful life of the asset, as follows:

 

Buildings and improvements

   13 to 50 years

Machinery and equipment

   3 to 13 years

Computer equipment and software

   3 to 5 years

Improvements and replacements are capitalized to the extent that they increase the useful economic life or increase the expected economic benefit of the underlying asset. Repairs and maintenance expenditures are charged to expense as incurred.

Software Development Costs

Software development costs are expensed as research and development costs until technological feasibility is established, at which point the costs of producing software products, including coding and testing, are capitalized. Capitalization ceases when the products are available for sale to customers, and amortization begins when the products are ready for general release. Software development costs are amortized using the straight-line method over the estimated economic life of the software. At March 31, 2010 and 2009, gross software development costs were $22.1 million and $14.1 million, respectively, and in fiscal 2010 and 2009, $5.3 million and $6.7 million of related amortization expense was recorded, respectively.

Each quarter or when a triggering event occurs, a net realizability test is performed on a product-by-product basis to ensure that the asset value has not been impaired. The unamortized capitalized costs did not exceed the net realizable value as of March 31, 2010 or during any of the quarters, and as such, there was no impairment.

Goodwill and Intangible Assets

Intangible assets consist of tradenames, patents, non-competition agreements, developed technology and customer and distributor relationships. Goodwill at March 31, 2010 represents the excess of the purchase price paid by the Company for Invensys Metering Systems, NexusData, Inc., Advanced Metering Data Systems, L.L.C. (“AMDS”) and Telemetric Corporation (“Telemetric”) over the fair value of the net assets acquired (see Note 3). The purchase price allocation for these acquisitions resulted in $453.8 million of goodwill being

 

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SENSUS (BERMUDA 2) LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

recorded. The goodwill is attributed to the value placed on the Company being an industry leader with market-leading positions in the North American and European water metering markets, the North American clamps and couplings market segment and the expected synergies resulting primarily from the AMDS and Telemetric acquisitions. The Company is also a market leader in the North American gas metering market, the European heat metering market and the North American water AMI market. The Company has achieved these leadership positions by developing and manufacturing innovative products. In addition, future expansion of AMI technology provides a significant opportunity for the Company. Patents, tradenames, developed technology, customer and distributor relationships and non-competition agreements are stated at fair value on the date of acquisition as determined by an independent valuation firm. Trademarks are assumed to have indefinite lives and are not amortized. Patents and customer and distributor relationships are being amortized using the straight-line method over 3 to 15 years, and 5 to 25 years, respectively. The developed technology from the AMDS and Telemetric acquisitions is being amortized ratably over 5 to 12 years. The non-competition agreements are or have been amortized ratably over 4 years, based on the contractual period of the respective agreement.

The Company performs an annual goodwill impairment test during the fourth quarter of each fiscal year and also at any other date when events or changes in circumstances indicate that the carrying value of these assets may exceed their fair value. The Company established reporting units based on its current reporting structure and performs the impairment testing of goodwill at the reporting unit level. Separate valuations are performed for each of these reporting units in order to test for impairment.

The Company uses the two-step method to determine goodwill impairment. First, the carrying amount of the reporting unit is compared to the estimated fair value. For the purposes of testing goodwill, the carrying value has been allocated to these reporting units to the extent it relates to each reporting unit. Second, if the carrying amount of a reporting unit exceeds its estimated fair value, the Company measures the possible goodwill impairment based upon a hypothetical allocation of the fair value estimate of the reporting unit to all of the underlying assets and liabilities of the reporting unit, including previously unrecognized intangible assets. The excess of the reporting unit’s fair value over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. An impairment loss is recognized to the extent that a reporting unit’s recorded goodwill exceeds the implied fair value of goodwill.

To determine the fair value of its reporting units, the Company equally considers both the income and market valuation methodologies. Under the income approach, the Company calculates the fair value of a reporting unit based on the present value of estimated future cash flows. This method requires management to project revenues, operating expenses, working capital investment, capital spending and cash flows for the reporting unit over a multi-year period as well as determine the weighted average cost of capital to be used as the discount rate. Under the market approach, the Company estimates the fair value based on market multiples of EBITDA for comparable companies. These comparable public company multiples are then applied to the reporting unit’s financial performance. During the year ended March 31, 2010, the Company utilized trailing twelve months EBITDA market multiples for its reporting units. The market approach is more volatile as an indicator of fair value as compared to the income approach as internal forecasts and projections have historically been more stable. Since each approach has its merits, the Company equally weights the approaches to balance the internal and external factors affecting the Company’s fair value.

The Company’s fair value estimates of its reporting units and goodwill are sensitive to a number of assumptions including discount rates, cash flow projections, operating margins, and comparable market multiples. To determine the reasonableness of the calculated fair values, the Company reviews the assumptions to ensure that neither the income approach nor the market approach yielded significantly different valuations. The assumptions are updated each year for each reporting unit. Various assumptions are utilized including actual operating results, annual operating plans, strategic plans, economic projections, anticipated future cash flows, the

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

weighted average cost of capital, market data and EBITDA multiples. The assumptions that have the most significant effect on the fair value calculation are the weighted average cost of capital, the EBITDA multiples and terminal growth rates.

The Company did not recognize any goodwill or intangible asset impairment charges in fiscal 2010. Due to demand contractions in the automotive market, the Company determined that the goodwill in its precision die casting business unit, included in its All Other segment, was impaired and thus recorded a charge of $14.4 million in fiscal 2009.

In addition, the Company performed impairment testing of its tradenames as of February 28, using the same business models as used in its impairment testing for goodwill. To arrive at the fair value for the tradenames, the Company utilized the relief from royalty method for each reporting unit on the basis that a tradename has a fair value equal to the present value of the royalty income attributable to it. The fair values of the tradenames were compared to their carrying values. If the carrying values of the tradenames exceed their fair value, an impairment loss would be recognized in an amount equal to that excess. In all instances, the fair values of the future revenues associated with the tradenames exceeded the carrying value, and therefore no impairment was evident.

Impairment of Long-Lived Assets

Long-lived assets held for use are reviewed for impairment when events or circumstances indicate that the carrying amount of a long-lived asset, or group of assets, may not be recoverable. If impairment indicators are present, these assets are reviewed for impairment by comparing the carrying amount of an asset to the undiscounted future cash flows expected to be generated by the asset over its remaining useful life. If an asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value, and is charged to results of operations at that time. Management determines fair value using a discounted future cash flow analysis or other accepted valuation techniques.

Deferred Financing Costs

Other long-term assets at March 31, 2010 and 2009 include deferred financing costs of $11.8 million and $11.7 million, net of accumulated amortization of $22.2 million and $13.3 million, respectively. The costs paid to the lender to obtain, re-finance and amend long-term financing are being amortized using the effective interest method over the term of the related debt. Deferred financing costs and the related amortization expense are adjusted when any prepayments of principal are made on the outstanding debt. Amortization of deferred financing costs is included in interest expense and was $3.1 million, $3.1 million and $2.8 million for the years ended March 31, 2010, 2009 and 2008, respectively.

Restructuring

The Company’s liability for a cost associated with an exit or disposal activity is recognized and measured initially at its fair value in the period in which the liability is incurred, except for certain qualifying employee termination benefits. Severance and related charges are accrued at the date the restructuring was approved by the Company’s Board of Directors based on an estimate of amounts that will be paid to affected employees in accordance with U.S. GAAP.

Warranty

Product warranty reserves are established in the same period that revenue from the sale of the related products is recognized. The amounts of those reserves are based on established terms and the Company’s

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

estimate of the amounts necessary to settle future and existing claims on products sold as of the balance sheet date. Warranty reserves are reflected within accruals and other current liabilities and other long-term liabilities in the accompanying consolidated balance sheets.

Income Taxes

The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement basis and the tax basis of the Company’s assets and liabilities using enacted statutory tax rates applicable to future years when the temporary differences are expected to reverse. The Company records a valuation allowance when it determines that it is more likely than not that all or a portion of a deferred tax asset will not be realized. The Company has a tax holiday in China that provides an income tax benefit of $0.9 million for the current fiscal year. The tax holiday expired at the end of calendar year 2009.

Foreign Currency

Assets and liabilities of subsidiaries operating outside of the United States with a functional currency other than the U.S. dollar are translated into U.S. dollars using exchange rates at the end of the respective period. Revenues and expenses are translated at average exchange rates effective during the respective period. Foreign currency translation adjustments are included in accumulated other comprehensive income (loss) as a separate component of stockholder’s equity. Foreign currency transaction gains (losses), net are included in other non-operating expense and were $0.9 million, ($0.4) million and ($2.3) million for the years ended March 31, 2010, 2009 and 2008, respectively.

Revenue Recognition

The Company recognizes revenue when persuasive evidence of a sale arrangement exists, delivery has occurred or services are rendered, the sales price or fee is fixed or determinable and collectability is reasonably assured. Additionally, the Company has certain sales rebate programs with some customers that periodically require rebate payments. The Company estimates amounts due under these sales rebate programs at the point of sale. Net sales are based upon the amount invoiced for the shipped goods less estimated future rebate payments and sales returns and allowances. These estimates are based upon the Company’s historical experience. The Company records an allowance for sales returns based on the historical relationship between shipments and returns. Revisions to these estimates are recorded in the period in which the facts that give rise to the revision become known.

In October 2009, the FASB issued new revenue recognition guidance for multiple deliverable revenue arrangements which changes the requirements for establishing separate units of accounting in a multiple element arrangement and requires that the arrangement consideration be allocated to each deliverable based on the relative selling price. Concurrently, the FASB issued guidance modifying the scope of software revenue guidance for arrangements that include software elements to exclude software that is sold with a tangible product from the scope of software revenue guidance if the software is essential to the tangible product’s functionality.

The Company elected to early adopt this accounting guidance retrospectively during the quarter ended March 31, 2010. Therefore, previously reported results for the current fiscal year and fiscal 2009 and 2008 have been revised to reflect the impact of adoption. Upon adoption of the new guidance, the Company concluded that substantially all of its products and services are excluded from the scope of the software revenue recognition guidance. See Note 2 for tables that present the effects of the retrospective application of these changes.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The Company has long-term contracts primarily from AMI electric and gas utility customers for the deployment of AMI technology systems that contain multiple elements including hardware, software, project management and installation services as well as ongoing customer support.

Pursuant to the new revenue recognition guidance, the Company allocates revenue to each element based on a selling price hierarchy. The selling price for a deliverable is based on its vendor specific objective evidence (“VSOE”) if available, third party evidence (“TPE”) if VSOE is not available, or estimated selling price (“ESP”) if neither VSOE nor TPE is available. In multiple element arrangements revenue is allocated to each separate unit of accounting using the relative selling prices of each of the deliverables in the arrangement based on the aforementioned selling price hierarchy.

Deferred Revenue and Deferred Costs

Deferred revenue and associated incremental direct costs result primarily from long-term AMI electric and gas contracts whereby the Company has deployed metering infrastructure, shipped product or performed services, including billing customers for the products and services, but for which all revenue recognition criteria for accounting purposes have not yet been met (see Revenue Recognition above). Deferred revenue and deferred costs are shown separately within total liabilities and total assets, respectively, in the accompanying consolidated balance sheets and are classified as current or long-term based on the period such amounts will be realized.

Advertising Costs

Advertising costs are charged to selling, general and administrative expenses as incurred and were $4.1 million, $3.7 million and $3.4 million for the years ended March 31, 2010, 2009 and 2008, respectively.

Research and Development Costs

Research and development costs are charged to selling, general and administrative expenses as incurred and were $41.2 million, $31.0 million and $26.6 million for the years ended March 31, 2010, 2009 and 2008, respectively.

Stock-Based Compensation

Sensus 1 maintains a Restricted Share Plan (the “Plan”) that provides for the award of restricted common shares to officers, directors and consultants of the Company. The restricted shares issued pursuant to the Plan are service time vested over five years from the date of grant, provided that no vesting occurs prior to the second anniversary of the date of grant. In addition, the vesting of the restricted shares may accelerate upon the occurrence of certain stated liquidity events. Common shares awarded under the Plan are subject to restrictions on transfer, repurchase rights and other limitations as set forth in the related management subscription and shareholders’ agreement. As of March 31, 2010, there were 2,000,000 restricted shares of Sensus 1 authorized and 999,000 shares issued and outstanding. The outstanding restricted shares were purchased for $0.01 of cash consideration, which at the time of issuance was determined to be the fair market value. No awards were granted under the Plan in fiscal 2010 or fiscal 2009.

The Company accounts for its compensation cost related to share-based payment transactions based on estimated fair values. The Company performed a fair value analysis of its restricted shares as of the grant date and determined that no compensation expense was required to be recorded. For each reporting period, the Company will perform an evaluation of its contingent repurchase rights on an individual employee-by-employee basis. If the Company’s contingent repurchase features become probable, the Company will assess whether liability classification is appropriate. No compensation expense related to the Plan was recognized for the years ended March 31, 2010, 2009 and 2008.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

On July 19, 2007, the Company’s board of directors approved the Sensus Metering Systems 2007 Stock Option Plan (the “Option Plan”), as well as a form of Notice of Stock Option Grant and Nonqualified Stock Option Agreement. The Option Plan provides for the issuance of stock options to employees, directors and consultants of the Company and its subsidiaries and affiliates. A total of 2,000,000 shares of Sensus 1 Class B common stock authorized for issuance upon exercise of options granted pursuant to the Option Plan. The options awarded under the Option Plan have a contractual term of 10 years, and are service time vested over five years from the date of grant, provided that no vesting occurs prior to the second anniversary of the date of grant, and vesting may accelerate upon the occurrence of certain stated liquidity events. As of March 31, 2010, 108,000 of the options outstanding under the Option Plan were vested.

Concentration of Credit and Workforce

Approximately 6%, 7% and 11% of total net sales for the years ended March 31, 2010, 2009 and 2008, respectively, was with one of the Company’s major customers and its affiliates. Approximately 11% and 13% of total accounts receivable at March 31, 2010 and 2009, respectively, was with another of the Company’s significant customers and its affiliates.

Approximately 34% of the Company’s labor force in the United States and Europe, is covered by collective bargaining agreements. Sensus Precision Die Casting, Inc., our subsidiary through which we operate our precision die casting product line, has a four-year agreement with the United Automobile Workers that expires on October 11, 2010. Our European operations have a five-year agreement with ZZO OZ KOVO CHIRANA-PREMA in Slovakia that expires on December 31, 2010. Additionally, our German unionized workforce that is represented by IG Metall has a current agreement that expires on June 30, 2012. The Nova Odessa/SP, Brazil facility has an agreement with Sindicato dos Trabalhadores das Indústrias Metalúrgicas Mecânicas e Materiais Electricos de Campinas e Ragião with an indefinite term, cancellable with one month notice. Smith-Blair Inc., our subsidiary through which we operate our Smith-Blair product line, has a four-year agreement with the United Steelworkers of America that expires on March 27, 2011. As of March 31, 2010, these agreements in aggregate cover 29% of the Company’s labor force.

Shipping and Handling Costs

The Company classifies costs associated with shipping and handling activities within cost of sales and amounts billed to customers as revenues in the consolidated statements of operations. Shipping and handling costs were $15.5 million, $14.3 million and $12.6 million for the years ended March 31, 2010, 2009 and 2008, respectively.

Fair Value Measurements

U.S. GAAP defines fair value, establishes a framework for measuring fair value, including consideration of non-performance risk, and expands disclosures about fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., an exit price).

U.S. GAAP also establishes a fair value hierarchy that categorizes and prioritizes the inputs used to estimate fair value into three levels based upon their observability. Level 1 has the highest priority and Level 3 the lowest. If an input is based on bid and ask prices, the guidance permits the use of a mid-market pricing convention. The three levels of the fair value hierarchy are defined as follows:

 

   

Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

   

Level 2 inputs are other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices (in non-active markets or in active markets for similar assets or liabilities), inputs other than quoted prices that are observable, and inputs that are not directly observable, but that are corroborated by observable market data.

 

   

Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs shall be used to the extent that observable inputs are not available, allowing for situations in which there is little, if any, market activity for an asset or liability.

For the current fiscal year, fair value measurements affect the Company’s contingent consideration and derivative instruments as disclosed in Note 3 Acquisitions and Note 7 Financial Instruments, respectively, and pension plan assets as disclosed in Note 12 Retirement Benefits.

U.S. GAAP permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The decision about whether to elect the fair value option is applied on an instrument-by-instrument basis, is irrevocable (unless a new election date occurs) and is applied to the entire financial instrument. The guidance was effective for the Company on April 1, 2008. The Company did not elect to adopt the fair value option for any financial instruments.

Fair Value of Financial Instruments

The carrying amounts of cash, trade receivables and trade payables approximated fair values as of March 31, 2010 and 2009. The estimated fair value of the Company’s term loans and revolving credit facility borrowings was $186.8 million and $143.9 million at March 31, 2010 and 2009 respectively. The estimated fair value of the Company’s 8.625% senior subordinated notes was approximately $272.3 million and $228.3 million at March 31, 2010 and 2009, respectively, compared to its face value of $275.0 million. The fair value of these notes was determined based upon recent market transactions and dealer indicative pricing.

Recent Accounting Pronouncements

Multiple-Deliverable Revenue Arrangements & Certain Revenue Arrangements that Include Software Elements

In October 2009, the FASB issued guidance that introduces a hierarchy of basis upon which the overall arrangement fee of certain multiple-element contracts can be allocated. The selling price used for each element will be based on:

 

   

vendor-specific objective evidence (“VSOE”) if available,

 

   

third-party evidence (“TPE”), if VSOE is not available or

 

   

estimated selling price if neither VSOE nor TPE is available.

Additional guidance was issued by the FASB, which requires multiple-element arrangements that include tangible products containing software components and non-software components that function together to deliver the product’s essential functionality to use the hierarchy introduced in the new guidance to establish an element’s selling price on which to allocate the overall arrangement fee.

For multiple-element arrangements within the scope of these updated standards, revenue recognition should occur sooner, generally at the time of an element’s delivery, rather than being deferred as historically has been the case for our arrangements for which VSOE could not be established. The Company adopted these revised standards on a retrospective basis during the fourth quarter of fiscal 2010.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

2. RETROSPECTIVE ADOPTION OF NEW ACCOUNTING PRINCIPLES

The following tables present the effects of the retrospective adoption of the new accounting principles to the Company’s previously reported Consolidated Balance Sheet as of March 31, 2009 (in millions, except share amounts):

 

    March 31, 2009  
    As reported     Adjustments     As Revised  

CURRENT ASSETS:

     

Cash and cash equivalents

  $ 37.9      $ —        $ 37.9   

Accounts receivable:

     

Trade, net of allowance for doubtful accounts of $1.2

    112.8        —          112.8   

Other

    2.9        —          2.9   

Inventories, net

    66.4        —          66.4   

Prepayments and other current assets

    11.8        —          11.8   

Deferred income taxes

    6.5        0.3        6.8   

Deferred costs

    10.6        (4.9     5.7   
                       

Total current assets

    248.9        (4.6     244.3   

Property, plant and equipment, net

    131.5        —          131.5   

Intangible assets, net

    187.3        —          187.3   

Goodwill

    394.5        —          394.5   

Deferred income taxes

    39.5        (20.7     18.8   

Deferred costs

    88.7        (88.7     —     

Other long-term assets

    21.9        —          21.9   
                       

Total assets

  $ 1,112.3        (114.0   $ 998.3   
                       

CURRENT LIABILITIES:

     

Accounts payable

  $ 87.1      $ —        $ 87.1   

Accruals and other current liabilities

    80.7        —          80.7   

Current portion of long-term debt

    38.5        —          38.5   

Short-term borrowings

    4.9        —          4.9   

Income taxes payable

    2.9        —          2.9   

Restructuring accruals

    7.3        —          7.3   

Deferred revenue

    19.0        0.8        19.8   
                       

Total current liabilities

    240.4        0.8        241.2   

Long-term debt, less current portion

    395.5        —          395.5   

Pensions

    44.4        —          44.4   

Deferred income taxes

    76.4        0.9        77.3   

Deferred revenue

    149.8        (148.1     1.7   

Other long-term liabilities

    27.6        —          27.6   
                       

Total liabilities

    934.1        (146.4     787.7   

Commitments and Contingencies

     

STOCKHOLDER’S EQUITY:

     

Common stock, par value $1.00 per share, 12,000 shares authorized, issued and outstanding

    —          —          —     

Paid-in capital

    245.4        —          245.4   

Accumulated deficit

    (79.3     32.4        (46.9

Accumulated other comprehensive income

    0.2        —          0.2   
                       

Total stockholder’s equity

    166.3        32.4        198.7   
                       

Noncontrolling interest

    11.9        —          11.9   
                       

Total equity

    178.2        32.4        210.6   
                       

Total liabilities and stockholder’s equity

  $ 1,112.3      $ (114.0   $ 998.3   
                       

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The following tables present the effects of the retrospective adoption of the new accounting principles to the Company’s previously reported Consolidated Statements of Operations for the years ended March 31, 2009 and 2008 (in millions):

 

     Year Ended March 31, 2009  
      As Reported     Adjustments    As Revised  

NET SALES

   $ 670.7      $ 121.2    $ 791.9   

COST OF SALES

     523.4        69.1      592.5   
                       

GROSS PROFIT

     147.3        52.1      199.4   

OPERATING EXPENSES:

       

Selling, general and administrative expenses

     134.0        —        134.0   

Restructuring costs

     9.9        —        9.9   

Amortization of intangible assets

     13.5        —        13.5   

Impairment of goodwill

     14.4        —        14.4   

Other operating expense, net

     2.7        —        2.7   
                       

OPERATING (LOSS) INCOME

     (27.2     52.1      24.9   

NON-OPERATING EXPENSE:

       

Interest expense, net

     (39.9     —        (39.9

Other expense, net

     (0.3     —        (0.3
                       

LOSS BEFORE INCOME TAXES

     (67.4     52.1      (15.3

(BENEFIT) PROVISION FOR INCOME TAXES

     (19.9     20.6      0.7   
                       

CONSOLIDATED NET LOSS

     (47.5     31.5      (16.0

LESS: NET INCOME ATTRIBUTABLE TO THE NONCONTROLLING INTEREST

     (2.4     —        (2.4
                       

NET LOSS ATTRIBUTABLE TO CONTROLLING INTEREST

   $ (49.9   $ 31.5    $ (18.4
                       

 

     Year Ended March 31, 2008  
      As Reported     Adjustments    As Revised  

NET SALES

   $ 694.2      $ 27.8    $ 722.0   

COST OF SALES

     510.3        24.8      535.1   
                       

GROSS PROFIT

     183.9        3.0      186.9   

OPERATING EXPENSES:

       

Selling, general and administrative expenses

     121.5        —        121.5   

Restructuring costs

     7.0        —        7.0   

Amortization of intangible assets

     19.7        —        19.7   

Other operating expense, net

     2.3        —        2.3   
                       

OPERATING INCOME

     33.4        3.0      36.4   

NON-OPERATING EXPENSE:

       

Interest expense, net

     (41.8     —        (41.8

Other (expense), net

     (2.4     —        (2.4
                       

LOSS BEFORE INCOME TAXES

     (10.8     3.0      (7.8

BENEFIT FOR INCOME TAXES

     (2.6     1.2      (1.4
                       

CONSOLIDATED NET LOSS

     (8.2     1.8      (6.4

LESS: NET INCOME ATTRIBUTABLE TO THE NONCONTROLLING INTEREST

     (1.9     —        (1.9
                       

NET LOSS ATTRIBUTABLE TO CONTROLLING INTEREST

   $ (10.1   $ 1.8    $ (8.3
                       

 

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SENSUS (BERMUDA 2) LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

3. ACQUISITIONS

Rongtai. On July 27, 2005, the Company formed a joint venture in China for its Sensus Precision Die Casting business with Yangzhou Runlin Investment Co., Ltd. The joint venture was called Sensus-Rongtai (Yangzhou) Precision Die Casting Co., Ltd. (“PDC Rongtai”). On September 29, 2009, the Company completed the acquisition of the 40% noncontrolling interest held by Yangzhou Runlin Investment Co., Ltd. As a result of the acquisition and in accordance with the terms of the equity transfer agreement, PDC Rongtai became wholly owned by a subsidiary of the Company and was subsequently renamed Sensus Precision Die Casting (Yangzhou) Co., Ltd. The terms of the agreement include total consideration with an estimated fair value of $17.7 million that consists of the following:

 

   

$6.0 million in cash at closing;

 

   

$4.8 million that is expected to be paid in October 2010;

 

   

$6.5 million of estimated contingent consideration based on certain earnings performance measures that is expected to be paid in August 2010; and

 

   

$0.4 million installment that is expected to be paid in September 2011.

The carrying value of the non-controlling interest at September 29, 2009 was $9.0 million. The $8.7 million of excess consideration paid and to be paid over the carrying value of the noncontrolling interest decreased paid-in capital.

In conjunction with the equity transfer agreement, the Company entered into a real estate transfer contract with Yangzhou Rongtai Industrial Development Co., Ltd. (“Yangzhou”) to sell certain buildings, ancillary equipment and land-use rights to Yangzhou for approximately $2.0 million. These assets are included in the Company’s all other segment. Title to the transferred property will pass to Yangzhou upon receipt of the required regulatory approvals. In the interim, the Company will continue to use the existing facilities in the normal course of operations and production; accordingly, the facilities will remain classified as held and used and continue to be depreciated.

Telemetric. On June 30, 2009, the Company acquired substantially all of the assets and assumed certain liabilities of Telemetric for approximately $6.8 million in cash at closing and $1.0 million payable within approximately one year of the closing date of the related asset purchase agreement. Additional cash consideration may become payable based on the performance of the acquired business through June 2013. Acquisition-date fair value for this contingent consideration was estimated at $3.9 million. The Company financed the transaction primarily with cash on hand and borrowings under its senior credit facilities. Telemetric provides utilities with distribution automation systems that use commercial cellular networks and PowerVistaTM, a web-based software application. This acquisition is expected to provide the Company with a significant and established presence in the distribution automation portion of the utility landscape and augment the Company’s AMI and smart grid solutions.

The Company recorded $4.6 million of goodwill related to the acquisition. This value is attributable primarily to the expected synergies arising from the complementary technologies of Telemetric and the Company as well as the assembled workforce. Goodwill was assigned to the Company’s utility infrastructure and related communication systems segment, and is deductible for income tax purposes over 15 years.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Consideration and the net assets recognized as of the acquisition date are summarized in the table below (in millions):

 

     June 30,
2009

Consideration:

  

Cash

   $ 6.8

Payable within one year

     1.0

Contingent (performance based)

     3.9
      

Fair value of total consideration

   $ 11.7
      

Assets acquired and liabilities assumed

  

Assets

  

Current assets:

  

Accounts receivable, trade

   $ 0.3

Inventories, net

     0.7
      

Total current assets

     1.0
      

Property, plant and equipment, net

     0.1

Intangible assets, net

     7.1

Goodwill

     4.6
      

Total assets

   $ 12.8

Liabilities

   $ 1.1
      

Net assets acquired

   $ 11.7
      

Acquisition-related costs of $0.3 million are classified as acquisition-related costs in the accompanying consolidated statement of operations.

The contingent consideration component of the purchase consideration will become payable if the acquired business achieves certain financial performance measures through June 2013, and is subject to a $12 million cap. Payments on an undiscounted basis are projected to be $5.8 million. The estimated fair value of the contingent purchase consideration is based upon management-developed forecasts, a level 3 input in the fair value hierarchy. These cash flows are discounted based upon a weighted-average cost-of-capital (“WACC”) in arriving at the acquisition-date fair value of $3.9 million. The WACC was developed using market participant company data, a level 2 input in the fair value hierarchy. From the date of acquisition to March 31, 2010, there have been no significant changes in the $5.8 million estimate of undiscounted cash flows. During that same time period, $0.5 million was accreted to the fair value of the contingent consideration for the passage of time, with the corresponding expense classified as acquisition-related costs in the accompanying consolidated statement of operations.

The following table presents the fair value measurements of contingent consideration and the associated fair value hierarchy level as of March 31, 2010 (in millions):

 

     Fair Value Measurements  
     Fair Value    Quoted Prices in Active
Markets for Identical
Liabilities

(Level 1)
   Significant  Other
Observable
Inputs

(Level 2)
   Significant
Unobservable
Inputs

(Level 3)
 

Liabilities:

           

Contingent consideration

   $ 4.4    $ —      $ —      $ 4.4 (1) 
                             

 

(1) Note that because there are both level 2 and level 3 inputs included in the determination of fair value of the contingent consideration, the Company has characterized this measure as level 3.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Global Metering Systems. On January 22, 2009, the Company acquired certain assets of Global Metering Systems, LLC (“Global Metering”), a manufacturer of gas regulators for the residential utility market. This purchase enabled the Company to expand its product offerings, by adding residential service regulators, and installed customer base. The preliminary purchase price for the net assets of Global Metering was $1.3 million as of March 31, 2010. The assets acquired consisted of inventory valued at $0.4 million, property, plant and equipment valued at $0.6 million and a customer list valued at $0.3 million.

AMDS. On July 6, 2006, the Company acquired substantially all of the assets and assumed certain liabilities of AMDS for $62.6 million consisting of $49.8 million in cash and 15,000 vested preference shares issued by Sensus 1. The Company financed the transaction with equity contributions totaling $30.4 million in cash from Sensus 1, cash on hand and utilization of the Company’s revolving credit facility. As discussed below, the vested preference shares were subject to mandatory redemption by Sensus 1 for $15 million at the option of the holder once certain future financial performance targets were achieved.

This purchase provides the Company with core capability to deliver comprehensive AMI technology with robust two-way offerings to the electricity market and powerful one-way solutions for the water and gas markets, which complements the Company’s existing AMR technologies. Prior to the acquisition, the Company had marketed AMDS’ technology to the electric utility and combined utility markets in North America under an exclusive licensing agreement. The Company has finalized the purchase price allocation attributable to the AMDS acquisition, subject to the payment of any additional future consideration to AMDS discussed below. As of March 31, 2010, $69.0 million of goodwill, of which $55.5 million is expected to be deductible for tax purposes, was allocated to this acquisition.

During fiscal 2008 and 2009, the performance thresholds were achieved related to the vested preference shares. Accordingly, 15,000 vested preference shares were released from restrictions, and in fiscal 2009, AMDS opted to have the 15,000 unrestricted shares redeemed for $15 million in cash. As required by the AMDS purchase agreement, the $15 million was funded by Sensus 1 during fiscal 2009, and thus the Company’s cash position was not impacted.

The Company is also required to make additional future cash payments to AMDS based on certain financial performance measures of the acquired business through March 2011. Related to the performance of the acquired business, the Company accrued $34.8 million for fiscal 2010 and $45.6 million cumulatively, net of $18.9 million paid in accordance with the purchase agreement ($0.9 million in fiscal 2008, $4.6 million in fiscal 2009 and $13.4 million in fiscal 2010). In the accompanying consolidated balance sheet as of March 31, 2010, $28.5 million is classified as accruals and other current liabilities and $17.1 million is classified as other long-term liabilities. The offset to these gross accrued amounts reflects additional purchase price and is classified as goodwill.

In addition, on the date of acquisition, Sensus 1 issued 15,000 unvested preference shares to AMDS, which are subject to vesting based on the performance of the acquired business over a five-year period following closing. The redemption value of the unvested preference shares is $15 million if the specified performance thresholds are achieved over the relevant period. During fiscal 2010, the performance thresholds were achieved related to the unvested preference shares, and all of these preference shares became vested. Accordingly, 15,000 vested preference shares were released from restrictions, and in fiscal 2010, AMDS opted to have the 15,000 unrestricted shares redeemed for cash. As required by the AMDS purchase agreement, the $15 million was funded by Sensus 1, and thus the Company’s cash position was not impacted.

Cumulative accrued amounts to be paid in cash, any additional future cash consideration and the fair value of the unvested preference shares represent additional purchase price and will increase the amount of recorded

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

goodwill when the contingencies are resolved. The operating results from the AMDS acquisition have been included in the Company’s consolidated financial statements from the date of acquisition.

 

4. INTANGIBLE ASSETS

Goodwill by reportable business segment at March 31, 2010, 2009 and 2008 (in millions):

 

     Utility infrastructure and related
communication systems
   All other     Total  

Balance as of April 1, 2008

       

Goodwill

   $ 322.4    $ 55.2      $ 377.6   

Acquired during the year

     31.3      —          31.3   

Impairment loss

     —        (14.4     (14.4

Balance as of March 31, 2009

       

Goodwill

     353.7      55.2        408.9   

Accumulated impairment losses

     —        (14.4     (14.4
                       
     353.7      40.8        394.5   

Acquired during the year

     59.3      —          59.3   

Balance as of March 31, 2010

       

Goodwill

     413.0      55.2        468.2   

Accumulated impairment losses

     —        (14.4     (14.4
                       
   $ 413.0    $ 40.8      $ 453.8   
                       

Intangible assets are summarized as follows (in millions):

 

     March 31, 2010     March 31, 2009  
     Cost    Accumulated
Amortization
    Cost    Accumulated
Amortization
 

Intangible assets not subject to amortization:

          

Goodwill

   $ 453.8    $ —        $ 394.5    $ —     

Tradenames (indefinite lived)

     25.0      —          27.1      —     
                              
     478.8      —          421.6      —     

Intangible assets subject to amortization:

          

Distributor and marketing relationships

     204.5      (67.2     193.8      (58.5

Developed technology

     28.3      (8.3     26.0      (5.8

Non-competition agreements

     30.5      (30.4     30.5      (30.3

Patents

     16.4      (12.8     15.8      (11.5

Tradenames (definite lived)

     3.2      (1.2     0.2      —     
                              
     282.9      (119.9     266.3      (106.1
                              

Total intangible assets

   $ 761.7    $ (119.9   $ 687.9    $ (106.1
                              

The following presents the estimated amortization expense (in millions) for intangible assets for each of the next five fiscal years:

 

     Years Ended
March  31

2011

   $ 13.3

2012

     12.8

2013

     11.6

2014

     11.5

2015

     11.4

 

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The following summarizes the weighted-average amortization periods in years for intangible assets subject to amortization as of March 31, 2010:

 

Distributor and marketing relationships

   20.8

Developed technology

   11.9

Non-competition agreements

   4.0

Patents

   6.8

Tradenames (definite lived)

   2.9

All intangible assets

   17.3

The following represents a reconciliation of the changes in goodwill (in millions) for the periods presented:

 

Goodwill at March 31, 2008

   $ 377.6   

AMDS acquisition-related adjustments

     31.4   

PDC impairment

     (14.4

Foreign currency translation adjustment

     (0.1
        

Goodwill at March 31, 2009

   $ 394.5   

AMDS acquisition-related adjustments

     53.0   

Telemetric acquisition-related adjustments

     6.2   

Foreign currency translation adjustment

     0.1   
        

Goodwill at March 31, 2010

   $ 453.8   
        

The Company performed its annual goodwill impairment test during the fourth quarter of fiscal 2010. The Company determined that no impairment of goodwill existed as of March 31, 2010. Due to demand contractions in the automotive market in fiscal 2009, the Company determined that the goodwill in its precision die casting business unit was impaired and thus recorded a charge of $14.4 million. This impairment charge is reflected as a separate line item within operating expense in the consolidated statement of operations and in the consolidated statement of cash flows.

 

5. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment, net is summarized as follows (in millions):

 

     March 31, 2010     March 31, 2009  

Land, buildings and improvements

   $ 51.5      $ 51.1   

Machinery and equipment

     204.3        179.8   

Construction in progress

     13.6        8.7   
                

Total property, plant and equipment

     269.4        239.6   

Less accumulated depreciation

     (133.1     (108.1
                

Property, plant and equipment, net

   $ 136.3      $ 131.5   
                

 

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6. INVENTORIES

Inventories consist of the following (in millions):

 

     March 31, 2010     March 31, 2009  

Raw materials, parts and supplies

   $ 37.4      $ 36.8   

Work in process

     10.4        11.3   

Finished goods

     21.1        20.0   

Allowance for shrink and obsolescence

     (1.9     (1.7
                

Inventories, net

   $ 67.0      $ 66.4   
                

 

7. FINANCIAL INSTRUMENTS

The Company utilizes derivative instruments, specifically forward contracts and interest rate swap agreements, to manage its exposure to market risks such as foreign currency exchange and interest rate risks. The Company records derivative instruments as assets or liabilities on the consolidated balance sheet, measured at fair value.

As of March 31, 2010, the Company had one foreign currency forward contract outstanding, with an expiration date of April 8, 2010, to sell approximately $2.1 million, by buying 1.5 million EUR. Such contracts are arranged to manage the exposure to foreign currency risks related primarily to certain intercompany receivable and payable balances denominated in those currencies and substantially offset exchange losses and gains on underlying exposures. Gains and losses on these contracts, as well as gains and losses on the items being hedged, are included as a component of other non-operating income (expense) in the Company’s consolidated statements of operations. The Company does not utilize hedge accounting treatment for its forward contracts. The Company recorded a net gain of less than $0.1 million and net losses of $0.7 million and $1.2 million for fiscal 2010, 2009 and 2008, respectively, on the foreign currency forward contracts, which included an immaterial amount in fiscal 2010 and $0.6 million and $1.6 million of realized losses upon settlement of certain contracts in each of fiscal 2009 and 2008.

The Company utilizes interest rate swap agreements to mitigate its exposure to fluctuations in interest rates on variable-rate debt. The Company has entered into various interest rate swap agreements in which it receives periodic variable interest payments at the three-month LIBOR and makes periodic payments at specified fixed rates.

The following table describes the terms of the Company’s interest rate swap agreements as in effect on March 31, 2010:

 

Trade Dates

   Effective Dates    Maturity Dates    Notional
Amounts

(in  millions)
   Pay
Fixed
Rates
    Receive
Three-Month
LIBOR as of
March 31, 2010
 

December 9, 2005

   January 20, 2006    September 30, 2010    $ 50.0    4.927   0.24875

March 24, 2006

   August 22, 2006    June 30, 2010      50.0    5.121   0.25125
                 

Total

         $ 100.0     
                 

As of March 31, 2010, the Company has discontinued the hedging relationship on all of its outstanding interest rate swaps, and accordingly we no longer receive hedge accounting treatment for changes in market

 

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value. Prior to termination of the hedging relationship, changes in market value were recorded in other comprehensive income on the consolidated balance sheet. Upon termination of the hedging relationship, the amount recorded in other comprehensive income was fixed and will be amortized to income through interest expense over the remaining life of the swap. Prospectively, all changes in the fair market value of the swaps will be recorded through earnings in interest expense. All of the Company’s interest rate swaps are due to expire by September 30, 2010.

The following table shows how the swap contracts were recorded on the Company’s consolidated balance sheet at fiscal year end (in millions):

 

     March 31,
2010
   March 31,
2009

Swap interest payable, net

   $ 0.7    $ 0.6

Swap fair value (other current liabilities)

     1.8      —  

Swap fair value (other long-term liabilities)

     —        5.6

Other comprehensive income

     1.0      4.5

During fiscal 2010, the Company amortized $1.7 million (net of tax of $1.0 million) of other comprehensive income and reported an unrealized gain of $0.5 million due to the change in market value of the swap contracts. For fiscal 2011, the Company anticipates amortization expense of $0.6 million (net of tax of $0.4 million).

Our derivative instruments are valued using modeling techniques that incorporate level 2 observable inputs as defined by U.S. GAAP. Key inputs include interest rate yield curves, foreign exchange rates, spot prices and volatility. The following table presents the fair value measurements of our derivatives and their associated fair value hierarchy level as of March 31, 2010 (in millions):

 

          Fair Value Measurements
     Fair Value    Quoted Prices in Active
Markets for Identical
Liabilities

(Level 1)
   Significant  Other
Observable

Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)

Liabilities:

           

Interest rate swaps

   $ 1.8    $ —      $ 1.8    $ —  
                           

As of March 31, 2010, interest rate swaps are classified within accruals and other current liabilities on the Company’s consolidated balance sheet.

 

8. RESTRUCTURING COSTS

For the year ended March 31, 2010, the Company incurred restructuring costs of $25.9 million, primarily related to the rationalization of its water and heat meter product lines across Europe, the Middle East/Africa and South America and an early retirement program in Germany.

On September 18, 2008, Sensus GmbH, Ludwigshafen, a subsidiary of the Company, reached an understanding with its German works council on the general terms of a restructuring of the Ludwigshafen operations. The restructuring is part of a plan adopted by the Company to improve the competitiveness of its German operations. The restructuring is expected to include the closure of certain production lines at the facility and a reduction of approximately 180 employees. As a result of this reduction of employees, the Company expects to record total charges of approximately $27.3 million of severance and related payroll costs. The Company currently expects that these restructuring measures will be concluded by December 31, 2011. During

 

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the current fiscal year, under this plan the Company accrued $21.0 million for the reduction of approximately 119 employees. Costs of $2.9 million were incurred primarily for existing German restructuring programs (as described below) and $2.0 million for other restructuring programs throughout the fiscal year.

For the year ended March 31, 2009, the Company incurred restructuring costs of $9.9 million, primarily related to a plan adopted by the Company to improve the competitiveness of its German operations. Under this plan the Company accrued $5.6 million for the reduction of approximately 57 employees for fiscal 2009. Costs of $2.9 million were incurred primarily for existing German restructuring programs (as described below) and $1.4 million for other restructuring programs throughout the year.

For the year ended March 31, 2008, the Company incurred restructuring costs of $7.0 million, primarily related to a plan to rationalize its water meter product lines across Europe, the Middle East/Africa and South America. These costs are attributable to the Company’s focus on improving returns in its core water metering businesses by rationalizing manufacturing capacity and related administrative overheads. These restructuring activities affected both direct and indirect headcount and resulted in a net reduction of 30 employees across Europe and South America. Specific initiatives included the discontinuation of selected product lines in Germany and North Africa, outsourcing of certain product lines, the reorganization of the Western Europe sales organization, rationalization of administrative support for the new Global Water organization and the elimination of certain dormant legal entities in the U.K. A significant portion of the costs recognized in fiscal 2008 relate to an early retirement program in Germany, which continued through fiscal 2010.

The following reflects activity associated with costs related to the Company’s restructuring initiatives (in millions):

 

     Year Ended
March 31, 2010
   Year Ended
March 31, 2009
   Year Ended
March 31, 2008

Employee severance and exit costs:

        

Accrued

   $ 22.5    $ 8.2    $ 5.1

Expensed as incurred

     2.6      1.5      1.5

Impairment of long-lived assets

     0.1      0.2      —  

Inventory write-down

     —        —        0.3

Contract termination costs

     0.7      —        —  

Legal costs expensed as incurred

     —        —        0.1
                    

Total

   $ 25.9    $ 9.9    $ 7.0
                    

Changes in restructuring accruals are summarized as follows (in millions):

 

     Year Ended
March 31, 2010
    Year Ended
March 31, 2009
 

Balance at beginning of year

   $ 9.1      $ 7.6   

Cash payments

     (15.3     (5.9

Accrual of new committed/announced programs

     22.5        8.2   

Foreign currency translation adjustment

     (0.4     (0.8
                

Balance at end of year

   $ 15.9      $ 9.1   
                

Current portion

   $ 12.9      $ 7.3   

Non-current portion

     3.0        1.8   
                

Total

   $ 15.9      $ 9.1   
                

 

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Restructuring accruals are reflected within current liabilities and other long-term liabilities in the accompanying consolidated balance sheets. As of March 31, 2010, restricted cash of $4.0 million, comprising $1.8 million classified as other long-term assets and $2.2 million classified as prepayments and other current assets in the accompanying consolidated balance sheet, was earmarked to fund the Company’s early retirement contracts for certain of its German employees.

 

9. DEBT

On December 17, 2003, the Company entered into a term loan credit agreement (the “Credit Agreement”) with Credit Suisse (formerly known as Credit Suisse First Boston) under which the Company has outstanding Term B-1 loans at March 31, 2010 of $21.1 million. Interest on borrowings under the Credit Agreement accrues at adjusted LIBOR or the Alternate Base Rate, as defined in the Credit Agreement, plus an applicable margin. The margin on rates linked to LIBOR is 2% and the margin on rates linked to the Alternate Base Rate is 1%. The weighted-average interest rate for these loans was approximately 2.25% at March 31, 2010. The term loans require quarterly payments of principal and interest, and the facility matures on December 17, 2010.

The senior credit facilities were amended on July 23, 2009. The amendment extended the maturity of certain of the term loans by providing approximately $131.2 million of new term loans with a maturity date of June 3, 2013, the aggregate amount of which was deemed to convert a like amount of outstanding principal of previously existing term loans that had a maturity date of December 17, 2010. Approximately $27.8 million of term loans under the senior credit facilities were not extended in connection with the amendment, of which $21.1 million remains outstanding. The amendment also provided an additional $35.0 million in new term loans, extended the maturity date of the $70.0 million in revolving loan capacity from December 17, 2009 to December 17, 2012, increased the U.S. letter of credit availability from $20.0 million to $50.0 million and modified certain financial covenants to improve financial flexibility.

At March 31, 2010, the Company had no revolving loans outstanding under the revolving credit facility; however, $14.8 million of the facility was utilized in connection with outstanding letters of credit. Letter of credit fees are based on 3.625% of the outstanding letters of credit balance and totaled $0.3 million in fiscal 2010. This facility expires on December 17, 2012.

The amendment provides for a LIBOR floor of 2.5% and an Alternate Base Rate floor of 3.5% applicable to certain term loans and revolving loans. Term loans under the senior credit facilities bear interest, at the Company’s option, at Adjusted LIBOR, as defined in the credit agreement, plus a 4.5% margin, or the Alternate Base Rate, as defined in the credit agreement, plus 3.5%. Revolving loans under the amended senior credit facilities bear interest, at our option at Adjusted LIBOR plus a 3.5% margin, or the Alternate Base Rate plus 2.5%, exclusive in each case of a 1% facility fee.

The Company determined that the amendment should be treated as an extinguishment of debt. Accordingly, the following transactions were reflected:

 

   

net proceeds of $29.5 million ($35.0 million in new debt less $4.9 million in creditor fees and $0.6 million in third-party costs);

 

   

derecognized the old debt of $131.2 million;

 

   

derecognized debt issuance costs associated with the old debt of $0.7 million,

 

   

recorded the new debt at fair value of $166.2 million, which equaled its face value;

 

   

recorded third-party costs associated with the new debt of $0.6 million to be deferred and amortized over the term of the new debt; and

 

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recognized a loss on extinguishment of debt of $5.6 million ($4.9 million in creditor fees and $0.7 million for write-offs of debt issuance costs associated with the old debt).

The terms of the $70 million revolving line-of-credit were also changed as a result of the senior credit facility amendment. The revolving line-of-credit remained at $70 million. Certain lenders chose not to extend and were replaced with additional lenders, while certain lenders chose to extend. For those lenders that did not extend, old debt issuance costs were derecognized. For those lenders that were added, fees paid to the creditor and third-party costs are deferred and amortized. For those that extended, U.S. GAAP provides guidance on the accounting for changes in a revolving line-of credit, and the Company determined that the unamortized old deferred costs, creditor fees and third-party costs associated with the modification are deferred and amortized. Accordingly, the following transactions were reflected:

 

   

net costs of $3.3 million ($3.1 million in creditor fees and $0.2 million in third-party costs) were incurred;

 

   

recorded net debt issuance costs of $3.0 million ($3.3 million of creditor fees and third-party costs associated with the new and extended revolving line-of-credit, partially offset by $0.3 million of derecognized debt issuance costs associated with the non-extended revolving line-of credit); and

 

   

recognized a loss on extinguishment of debt of $0.3 million for write-offs of old debt issuance costs.

The Credit Agreement, as amended, contains certain terms, covenants, conditions and financial ratio requirements that impose substantial limitations on the Company. The Company was in compliance with all covenants at March 31, 2010. The Credit Agreement is guaranteed by the Company’s wholly owned U.S. domestic subsidiaries and is secured by substantially all of their real and personal property. The Company is required under the Credit Agreement to make mandatory prepayments of its loan facilities, subject to certain exceptions, out of, among other things a) net cash proceeds received from the sales of certain assets; b) the issuance of indebtedness for money borrowed; and c) a percentage of the Company’s excess cash flow, as defined.

At March 31, 2010, the Company had $275.0 million of 8.625% senior subordinated notes outstanding, which mature on December 15, 2013. Interest is payable semi-annually on June 15 and December 15. The Notes are unsecured obligations of Sensus USA Inc. and are guaranteed on a senior subordinated basis by Bermuda 2 and, subject to certain limited exceptions, its U.S. subsidiaries.

The Company’s total indebtedness outstanding consists of the following (in millions):

 

     March 31,
2010
   March 31,
2009

Current portion of U.S. term loan facility

   $ 22.7    $ 38.5

Short-term borrowings—PDC Yangzhou

     4.9      4.9
             

Total current portion of long-term debt and short-term borrowings

     27.6      43.4

U.S. term loan facility

     163.3      120.5

Senior subordinated notes

     275.0      275.0
             

Total long-term debt

     438.3      395.5
             

Total debt

   $ 465.9    $ 438.9
             

 

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The following represents the scheduled maturities of long-term debt for the fiscal years ended March 31 (in millions):

 

2011

   $ 22.7

2012

     1.7

2013

     1.7

2014

     434.9

2015

     —  

Thereafter

     —  
      

Total long-term debt

   $ 461.0
      

 

10. WARRANTY OBLIGATIONS

Changes in product warranty reserves are summarized as follows (in millions):

 

     Year Ended
March 31, 2010
    Year Ended
March 31, 2009
 

Balance at beginning of year

   $ 11.7      $ 10.7   

Warranty provision

     6.6        12.5   

Settlements made

     (8.2     (11.0

Foreign currency translation adjustment

     0.2        (0.5
                

Balance at end of year

   $ 10.3      $ 11.7   
                

Current portion

   $ 8.8      $ 8.7   

Non-current portion

     1.5        3.0   
                

Total

   $ 10.3      $ 11.7   
                

 

11. ACCRUALS AND OTHER CURRENT LIABILITIES

Accruals and other current liabilities are summarized as follows (in millions):

 

     March 31,
     2010    2009

Accrued employee related and payroll costs

   $ 30.0    $ 28.6

Interest payable

     11.7      7.9

Customer support accruals

     9.5      9.6

Accrued other taxes payable

     5.0      5.0

Warranty obligations

     8.8      8.7

Accrued AMDS contingent payments (Note 3)

     36.1      13.6

Other

     14.6      7.3
             

Accruals and other current liabilities

   $ 115.7    $ 80.7
             

 

12. RETIREMENT BENEFITS

The Company has defined benefit plans in Germany and the United States. Pension benefits in Germany for salaried employees generally are based on years of credited service and average earnings. Pension benefits for hourly employees generally are based on specified benefit amounts and years of service. The U.S. defined benefit plan consists of only unionized hourly employees. The Company’s policy is to fund its pension obligations in

 

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conformity with the funding requirements of laws and governmental regulations applicable in the respective country.

German Pension Plan

The following table reflects the benefit obligation and net liability information for participants in the German pension plan (in millions):

 

     Year Ended
March 31, 2010
    Year Ended
March 31, 2009
 

Change in projected benefit obligation:

    

Benefit obligation at beginning of year

   $ 44.5      $ 54.3   

Service cost

     0.6        0.7   

Interest cost

     2.9        2.8   

Amendments

     0.4        0.3   

Actuarial loss (gain)

     6.2        (2.2

Benefits paid

     (2.6     (2.6

Foreign currency translation adjustment

     0.8        (8.8
                

Benefit obligation at end of year

   $ 52.8      $ 44.5   

Liability on balance sheet consists of:

    

Current pension liability

   $ 2.6      $ 2.5   

Long-term pension liability

     50.2        42.0   
                

Liability on balance sheet

   $ 52.8      $ 44.5   
                

Amounts recognized in accumulated other comprehensive loss:

    

Actuarial (loss) gain

   $ (3.7   $ 2.9   

Unrecognized prior service cost

     (2.4     (2.9
                

Net amount recognized

   $ (6.1   $ 0.0   
                

Weighted-average assumptions used to determine benefit obligations as of measurement date:

    

Discount rate

     5.25     6.25

Rate of compensation increase

     2.25     2.25

The following table provides a reconciliation of net periodic benefit cost for the German pension plan (in millions):

 

    Year Ended
March 31, 2010
    Year Ended
March 31, 2009
    Year Ended
March 31, 2008
 

Service cost

  $ 0.6      $ 0.7      $ 0.8   

Interest cost

    2.9        2.8        2.4   

Amortization of prior service cost

    0.4        0.4        0.3   
                       

Net periodic benefit cost

  $ 3.9      $ 3.9      $ 3.5   
                       

Weighted-average assumptions used to determine net periodic benefit cost:

     

Discount rate

    6.25     5.50     4.75

Compensation increase rate

    2.25     2.00     1.50

The Company expects to pay benefits under its German pension benefit plan of $2.7 million in fiscal 2011, 2012 and 2013, $2.9 million in fiscal 2014, and $15.8 million collectively for the five years thereafter.

 

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U.S. Pension Plan

The following table provides a reconciliation of projected benefit obligation, plan assets and funded status for the U.S. pension plan (in millions):

 

     Year Ended
March 31, 2010
    Year Ended
March 31, 2009
 

Change in projected benefit obligation:

    

Benefit obligation at beginning of year

   $ 5.4      $ 4.5   

Service cost

     1.0        1.3   

Interest cost

     0.4        0.3   

Actuarial loss (gain)

     1.2        (0.8

Benefits paid

     (0.1     (0.1

Plan amendments

     —          0.2   
                

Benefit obligation at end of year

   $ 7.9      $ 5.4   

Change in plan assets and funded status:

    

Fair value of plan assets at beginning of year

   $ 3.0      $ 3.5   

Actual return on plan assets

     1.2        (1.3

Employer contributions

     0.9        0.9   

Benefits paid

     (0.1     (0.1
                

Fair value of plan assets at end of year

     5.0        3.0   
                

Underfunded status at end of year

   $ 2.9      $ 2.4   
                

Long-term pension liability on balance sheet

   $ 2.9      $ 2.4   
                

Amounts recognized in accumulated other comprehensive loss:

    

Actuarial loss

   $ 1.7      $ 1.4   

Unrecognized prior service cost

     0.2        0.3   
                

Total amount recognized

   $ 1.9      $ 1.7   
                

Weighted-average assumptions used to determine benefit obligations as of measurement date:

    

Discount rate

     6.00     7.25

The following table provides a reconciliation of net periodic pension cost for the U.S. pension plan (in millions):

 

     Year Ended
March 31, 2010
    Year Ended
March 31, 2009
    Year Ended
March 31, 2008
 

Service cost

   $ 1.0      $ 1.3      $ 1.1   

Interest cost

     0.4        0.3        0.2   

Amortization of net loss

     0.1        0.0        0.0   

Expected return on plan assets

     (0.3     (0.3     (0.2
                        

Net periodic benefit cost

   $ 1.2      $ 1.3      $ 1.1   
                        

Weighted-average assumptions used to determine net periodic benefit cost:

      

Discount rate

     7.25     6.00     5.75

Expected rate of return on plan assets

     7.50     7.75     7.75

The Company’s investment strategy is to build an efficient, well-diversified portfolio based on a long-term strategic outlook of the investment markets. The investment markets outlook utilizes both historical-based and forward-looking return forecasts to establish future return expectations for various asset classes. These return

 

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SENSUS (BERMUDA 2) LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

expectations are used to develop a core asset allocation based on the specific needs of the plan. The core asset allocation utilizes multiple investment managers to maximize the plan’s return while minimizing risk.

The assumed rate of return on plan assets represents an estimate of long-term returns on an investment portfolio consisting of a mixture of equities, fixed income and alternative investments. In determining the expected return on plan assets, the Company considers long-term rates of return on the asset classes (historically and forecasted) in which the Company expects the pension funds to be invested.

The table below presents information about our plan assets measured and recorded at fair value as of December 31, 2009, and indicates the fair value hierarchy of the inputs utilized by the Company to determine the fair values (see Fair Value Measurements in Note 1).

 

Investment Option (in millions)

   Level 1*
(Quoted prices in
active markets)
   Level 2**
(Significant
other inputs
including daily
pricing)
   Level 3***
(Unobservable
inputs)

Mutual Funds

        

MFS Value A Fund

   $ 0.5      —        —  

Aim Intl Growth A Fund

     0.2      —        —  

Vanguard Developed Markets Ind Fund

     0.2      —        —  

All Other

     0.4      —        —  

Separate Accounts

        

Principal Core Plus Bond I SA-R6

     —      $ 0.6      —  

Principal Large Cap Growth II SA-R6

     —        0.6      —  

Principal Bond and Mortgage SA-R6

     —        0.8      —  

Principal Large Cap S&P 500 S&P 500 In SA-R6

     —        0.4      —  

All Other

     —        0.7      —  

Principal U.S. Property SA-R6

     —        —      $ 0.1