SENSUS USA INC - FORM 10-Q/A - December 17, 2010

Attached files

file	filename
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 15D-14(A) - SENSUS USA INC	dex311.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO RULE 15D-14(A) - SENSUS USA INC	dex312.htm
EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER - SENSUS USA INC	dex321.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q/A

(Amendment No. 1)

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

For the quarterly period ended June 30, 2010

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

For the transition period from to

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)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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 ¨ No x

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 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 December 13, 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.

Part I—Financial Information


		Page

Item 1.	Financial Statements

	Consolidated Balance Sheets as of June 30, 2010 (Restated and unaudited) and March 31, 2010		5

	Consolidated Statements of Operations (unaudited) for the fiscal quarters ended June 30, 2010 (Restated) and June 27, 2009		6

	Consolidated Statement of Stockholder’s Equity (Restated and unaudited) for the fiscal quarter ended June 30, 2010		7

	Consolidated Statements of Cash Flows (unaudited) for the fiscal quarters ended June 30, 2010 (Restated) and June 27, 2009		8

	Notes to Unaudited Consolidated Financial Statements		9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		36

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		43

Item 4.	Controls and Procedures		44

Part II—Other Information

Item 1.	Legal Proceedings		47

Item 1A.	Risk Factors		47

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		47

Item 3.	Defaults Upon Senior Securities		47

Item 4.	Reserved		47

Item 5.	Other Information		47

Item 6.	Exhibits		47

EXPLANATORY NOTE

Sensus (Bermuda 2) Ltd. and Sensus USA Inc. are filing this Amendment No. 1 (this “Amendment”) to their Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2010, as filed with the Securities and Exchange Commission on August 3, 2010 (the “Form 10-Q”). This Amendment includes a restatement of the following previously filed consolidated financial statements and data (and related disclosures): (1) our consolidated balance sheet as of June 30, 2010, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the fiscal quarter then ended; (2) our management’s discussion and analysis of financial condition and results of operations as of and for our fiscal quarter ended June 30, 2010, contained in Part I, Item 2 of this Quarterly Report on Form 10-Q/A; and (3) certain Notes to Consolidated Financial Statements in Part I, Item 1 this Quarterly Report on Form 10-Q/A.

As previously announced, under the supervision of our Audit Committee, we initiated an internal review of certain revenue recognition and other accounting practices prior to closing our books for the fiscal quarter ended September 30, 2010. During the course of this internal review, we identified material errors in our financial statements for fiscal 2010 and 2009, primarily related the recognition of revenue under multi-element contracts associated with our Conservation Solutions business. This resulted in our Audit Committee determining that the Company’s audited consolidated financial statements for the fiscal years ended March 31, 2010 and 2009, and the related reports of the Company’s independent registered public accounting firm thereon, and the unaudited interim consolidated financial statements for each of the fiscal quarters in the years then ended should no longer be relied upon. Similarly, our Audit Committee determined that press releases, reports and shareholder communications describing the Company’s financial statements and results of operations for these periods should no longer be relied upon.

The Company identified three primary causes of the errors, each of which resulted in the premature recognition of revenue within certain contracts. First, there was a failure to appropriately evaluate service level agreements and other performance obligations within certain contracts, which, if considered, would have required the deferral of revenue until such obligations were satisfied. This error resulted in the improper timing of revenue recognition of $2.1 million in the fiscal quarter ended June 30, 2010. Second, the Company improperly recognized revenue under certain contracts in which the revenue was contingent on the delivery of future products and/or services. Although this error had an impact on the Company’s consolidated financial statements for fiscal 2010 and 2009, it did not have any impact on revenue for the fiscal quarter ended June 30, 2010. Third, the Company failed to take into consideration certain contract commitments, upgrades, pre-billing and other undeliverable elements. This error resulted in the Company prematurely recognizing revenue in prior periods that now results in a gain of $1.0 million of additional revenue in the fiscal quarter ended June 30, 2010. See the Company’s Annual Report on Form 10-K/A for the fiscal year ended March 31, 2010, as filed with the SEC on December 17, 2010. The effect of this restatement to correct the timing of revenue recognition for affected contracts and products is a reduction in revenue of $1.1 million on our operating results and the balance sheet for the fiscal quarter ended June 30, 2010.

ended June 30, 2010. Third, the Company identified failures in its financial closing and period cut-off procedures, whereby the lack of appropriate controls over accounts payable cut-off resulted in an understatement of legal, recruitment and other expenses. These expenses were initially booked in the current fiscal quarter and have now been reversed, thus resulting in a decrease in expense of $1.1 million in the fiscal quarter ended June 30, 2010. Adjustments due to these errors result in a $1.4 million reduction of expenses recorded in the Company’s consolidated financial results for the fiscal quarter ended June 30, 2010.

The following table summarizes the financial statement caption adjustments to our previously reported consolidated statement of operations impacting operating income for the fiscal quarter ended June 30, 2010 (in millions):


Net sales	$	(1.1	)
Cost of sales		0.5
Selling, general and administrative expenses		0.9

Effect on operating income	$	0.3

For more information regarding the restatement, please refer to Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; Note 2, “Restatement of Previously Reported Consolidated Financial Statements,” of the Notes to Consolidated Financial Statements in Part I, Item 1; and Part I, Item 4, “Controls and Procedures.”

This Amendment sets forth the Form 10-Q in its entirety. However, this Amendment only amends and restates the Items described above, in each case, solely as a result of, and to reflect, the restatement, and no other information in the Form 10-Q is amended hereby. This Quarterly Report on Form 10-Q/A continues to speak as of the dates described herein, and we have not updated the disclosures contained in this Quarterly Report on Form 10-Q/A to reflect any events that occurred subsequent to such dates. Accordingly, this Quarterly Report on Form 10-Q/A should be read in conjunction with our filings made with the Securities and Exchange Commission subsequent to August 3, 2010, as information in such filings may update or supersede certain information contained in this Quarterly Report on Form 10-Q/A. In addition, as required by Rule 12b-15 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), currently dated certifications by our principal executive officer and principal financial officer are included in this Amendment and apply to the Form 10-Q, as amended by this Amendment. The certifications of our principal executive officer and principal financial officer are attached to this Quarterly Report on Form 10-Q/A as Exhibits 31.1, 31.2, 32.1, respectively.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

SENSUS (BERMUDA 2) LTD.

CONSOLIDATED BALANCE SHEETS

(in millions, except per share and share data)


	June 30, 2010			March 31, 2010
	(As restated)
	(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	31.2		$	59.2
Accounts receivable:
Trade, net of allowance for doubtful accounts of $1.3 at June 30, 2010 and March 31, 2010		114.6			121.1
Other		1.0			1.9
Inventories, net		66.2			67.2
Prepayments and other current assets		12.3			12.2
Deferred income taxes		19.3			19.6
Deferred costs		5.2			4.3

Total current assets		249.8			285.5
Property, plant and equipment, net		131.2			134.9
Intangible assets, net		184.7			188.0
Goodwill		453.4			443.3
Deferred income taxes		15.8			15.8
Deferred costs		1.4			1.3
Other long-term assets		24.5			25.1

Total assets	$	1,060.8		$	1,093.9

LIABILITIES AND STOCKHOLDER’S EQUITY
CURRENT LIABILITIES:
Accounts payable	$	82.5		$	117.3
Accruals and other current liabilities		99.5			114.8
Current portion of long-term debt		15.7			22.7
Short-term borrowings		27.3			4.9
Income taxes payable		0.2			—
Restructuring accruals		8.6			12.9
Deferred revenue		35.5			34.3

Total current liabilities		269.3			306.9
Long-term debt, less current portion		437.9			438.3
Pensions		48.6			53.1
Deferred income taxes		81.6			81.7
Deferred revenue		4.3			4.8
Other long-term liabilities		36.8			28.6

Total liabilities		878.5			913.4
Commitments and Contingencies (Note 13)

STOCKHOLDER’S EQUITY:
Common stock, par value $1.00 per share, 12,000 shares authorized, issued and outstanding		—			—
Paid-in capital		250.5			251.5
Accumulated deficit		(72.7	)		(74.6	)
Accumulated other comprehensive loss		(1.0	)		(1.5	)

Total stockholder’s equity		176.8			175.4

Noncontrolling interest		5.5			5.1

Total equity		182.3			180.5

Total liabilities and equity	$	1,060.8		$	1,093.9

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

SENSUS (BERMUDA 2) LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions)

(unaudited)


	Fiscal Quarter Ended June 30, 2010			Fiscal Quarter Ended June 27, 2009
	(As restated)
NET SALES	$	224.7		$	195.4

COST OF SALES		161.6			145.6

GROSS PROFIT		63.1			49.8

OPERATING EXPENSES:
Selling, general and administrative expenses		41.8			35.4
Restructuring costs		1.0			6.8
Amortization of intangible assets		3.3			2.8
Other operating expense, net		1.0			0.8

OPERATING INCOME		16.0			4.0

NON-OPERATING (EXPENSE) INCOME:
Interest expense, net		(11.3	)		(9.0	)
Other income, net		0.3			1.5

INCOME (LOSS) BEFORE INCOME TAXES		5.0			(3.5	)

PROVISION (BENEFIT) FOR INCOME TAXES		2.6			(0.8	)

CONSOLIDATED NET INCOME (LOSS)		2.4			(2.7	)

LESS: NET INCOME ATTRIBUTABLE TO THE NONCONTROLLING INTEREST		(0.5	)		(0.8	)

NET INCOME (LOSS) ATTRIBUTABLE TO CONTROLLING INTEREST	$	1.9		$	(3.5	)

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

SENSUS (BERMUDA 2) LTD.

CONSOLIDATED STATEMENT OF STOCKHOLDER’S EQUITY

(in millions)

(unaudited)


	Common Stock		Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total Stockholder’s Equity			Noncontrolling Interest			Total Equity
Balance at March 31, 2010	$	—	$	251.5		$	(74.6	)	$	(1.5	)	$	175.4		$	5.1		$	180.5
Equity adjustment from parent related to Rongtai acquisition		—		(1.0	)		—			—			(1.0	)		—			(1.0	)
Other comprehensive income:
Net income		—		—			1.9			—			1.9			0.5			2.4
Unrealized gain on interest rate swaps, net of tax of $0.3 million		—		—			—			0.5			0.5			—			0.5

Total comprehensive income													2.4			0.5			2.9

Foreign currency translation adjustment related to noncontrolling interest		—		—			—			—			—			(0.1	)		(0.1	)

Restated Balance at June 30, 2010	$	—	$	250.5		$	(72.7	)	$	(1.0	)	$	176.8		$	5.5		$	182.3

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

SENSUS (BERMUDA 2) LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(unaudited)


	Fiscal Quarter Ended June 30, 2010			Fiscal Quarter Ended June 27, 2009
	(As restated)
OPERATING ACTIVITIES:
Consolidated net income (loss)	$	2.4		$	(2.7	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation		7.1			6.3
Amortization of intangible assets		3.3			2.8
Amortization of software development costs		1.3			1.7
Amortization of deferred financing costs		0.8			0.7
Net loss (gain) on foreign currency transactions		0.3			(1.0	)
Changes in assets and liabilities used in operations:
Trade accounts receivable		3.4			3.3
Inventories		(0.8	)		(0.5	)
Other current assets		(1.6	)		1.1
Accounts payable, accruals and other current liabilities		(49.7	)		(10.8	)
Income taxes payable		1.2			(2.9	)
Deferred revenue less deferred costs primarily from long-term AMI electric and gas contracts		(0.2	)		1.7
Other		(1.6	)		(1.5	)

Net cash used in operating activities		(34.1	)		(1.8	)

INVESTING ACTIVITIES:
Expenditures for property, plant and equipment		(6.9	)		(6.5	)
Software development costs		(1.3	)		(2.3	)

Net cash used in investing activities		(8.2	)		(8.8	)

FINANCING ACTIVITIES:
Increase in short-term borrowings		22.4			—
Principal payments on debt		(7.4	)		—

Net cash provided by financing activities		15.0			—
Effect of exchange rate changes on cash		(0.7	)		0.6

DECREASE IN CASH AND CASH EQUIVALENTS		(28.0	)		(10.0	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR	$	59.2		$	37.9

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	31.2		$	27.9

SUPPLEMENTAL DISCLOSURES OF CASH FLOW:
Cash paid during the period for:
Interest	$	17.1		$	12.6

Income taxes, net of refunds	$	1.3		$	2.0

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES (NOTE 3):

During the three months ended June 30, 2010, paid-in capital decreased $1.0 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.

SENSUS (BERMUDA 2) LTD.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. General

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.”

Presentation

The accompanying consolidated financial statements are unaudited and have been prepared by the Company’s management in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information related to the Company’s organization, significant accounting policies and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted. In the opinion of management, all adjustments consisting of normal recurring adjustments considered necessary for the fair presentation of the unaudited consolidated financial statements have been included, and the unaudited consolidated financial statements present fairly the financial position and results of operations for the interim periods presented. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended March 31, 2010 and related notes thereto included in the Company’s Annual Report on Form 10-K/A as filed with the SEC.

The accompanying consolidated financial statements present results of the Company for the fiscal quarters ended June 30, 2010 and June 27, 2009. Effective April 1, 2010, the Company elected to change its quarterly reporting period to be based on the calendar quarter end. Prior to April 1, 2010, the Company operated on a 4 week, 4 week, 5 week financial and business closing schedule for all periods, except year end, which was March 31, and the fiscal half year, which was September 30. The three-month period ended June 30, 2010 includes three more days than the 13-week period of the corresponding period of the prior fiscal year as a result of transitioning to the new reporting period. Operating results for interim periods are not necessarily indicative of the results that may be achieved for the full year.

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 reflects 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.

SENSUS (BERMUDA 2) LTD.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In October 2009, the Financial Accounting Standards Board (“ 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 fiscal 2010 and prior fiscal periods were 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.

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, revenue arrangements with multiple elements are divided into separate units of accounting if the delivered item(s) have value to the customer on a standalone basis and delivery/performance of the undelivered item(s) is probable. 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 and the applicable revenue recognition criteria. For our standard contract arrangements that combine deliverables such as hardware, software, project management and installation services, each deliverable is generally considered a single unit of accounting. The amount allocable to a delivered item is limited to the amount that we are entitled to collect and that is not contingent upon the delivery/performance of additional items.

Hardware revenues are generally recognized at the time of shipment, receipt by customer, or, if applicable, upon completion of customer acceptance provisions. For software arrangements with multiple elements, revenue recognition is also dependent upon the availability of VSOE of fair value for each of the elements. The lack of VSOE, or the existence of extended payment terms or other inherent risks, may affect the timing of revenue recognition for software arrangements. If project management and installation services are essential to a software arrangement, revenue is recognized upon meeting the software acceptance provisions in the contract. Hardware and software post sale maintenance support fees are recognized ratably over the life of the related service contract.

The Company records reductions to revenue for estimated commitments related to liquidated damages and contractual guarantees. The Company also records reductions to revenue for expected future product returns based on the Company’s historical experience.

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.

SENSUS (BERMUDA 2) LTD.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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 June 30, 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 the fiscal quarters ended June 30, 2010 and June 27, 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 performs 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 fiscal quarters ended June 30, 2010 and June 27, 2009.

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 are 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. During the fiscal quarter ended June 30, 2010, 56,000 stock options were granted and 41,500 were forfeited under the Option Plan. As of June 30, 2010, 125,600 of the 1,051,000 options outstanding under the Option Plan were vested.

Fair Value Measurements

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).

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.

•

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.

SENSUS (BERMUDA 2) LTD.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

•

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 quarter, fair value measurements affect the Company’s contingent consideration and derivative instruments as disclosed in Note 3 “Acquisitions” and Note 6 “Financial Instruments”, respectively.

Fair Value of Financial Instruments

The carrying amounts of cash, trade receivables and trade payables approximated fair values as of June 30, 2010 and June 27, 2009. The estimated fair value of the Company’s term loans and revolving credit facility borrowings was $202.0 million and $186.8 million at June 30, 2010 and March 31, 2010, respectively. The estimated fair value of the Company’s 8.625% senior subordinated notes was approximately $266.8 million and $272.3 million at June 30, 2010 and March 31, 2010, 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.

Use of Estimates

The preparation of financial statements in accordance with GAAP 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.

2. Restatement of Previously Reported Consolidated Financial Statements

As previously announced, under the supervision of our Audit Committee, we initiated an internal review of certain revenue recognition and other accounting practices prior to closing our books for the fiscal quarter ended September 30, 2010. During the course of this internal review, we identified material errors in our financial statements for fiscal 2010 and 2009, primarily related the recognition of revenue under multi-element contracts associated with our Conservation Solutions business. This resulted in our Audit Committee determining that the Company’s audited consolidated financial statements for the fiscal years ended March 31, 2010 and 2009, and the related reports of the Company’s independent registered public accounting firm thereon, and the unaudited interim consolidated financial statements for each of the fiscal quarters in the years then ended, and the unaudited consolidated financial statements for the fiscal quarter ended June 30, 2010 should no longer be relied upon. Similarly, our Audit Committee determined that press releases, reports and shareholder communications describing the Company’s financial statements and results of operations for these periods should no longer be relied upon.

The Company identified three primary causes of the errors, each of which resulted in the premature recognition of revenue within certain contracts. First, there was a failure to appropriately evaluate service level agreements and other performance obligations within certain contracts, which, if considered, would have required the deferral of revenue until such obligations were satisfied. This error resulted in the improper timing of revenue recognition of $2.1 million in the fiscal quarter ended June 30, 2010. Second, the Company improperly recognized revenue under certain contracts in which the revenue was contingent on the delivery of future products and/or services. Although this error had an impact on the Company’s consolidated financial statements for fiscal 2010 and 2009, it did not have any impact on revenue for the fiscal quarter ended June 30, 2010. Third, the Company failed to take into consideration certain contract commitments, upgrades, pre-billing and other undeliverable elements. This error resulted in the Company prematurely recognizing revenue in prior periods that now results in a gain of $1.0 million of additional revenue in the fiscal quarter ended June 30, 2010. The effect of this restatement to correct the timing of revenue recognition for affected contracts and products is a reduction in revenue of $1.1 million on our operating results and the balance sheet for the fiscal quarter ended June 30, 2010.

SENSUS (BERMUDA 2) LTD.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Further, during the course of the internal review of revenue recognition and other accounting matters, management identified additional accounting errors relating to certain aspects of our fiscal 2010 financial year-end closing process. The Company identified three principal causes of these accounting errors. First, a lack of review and monitoring of the asset base resulted in (1) a failure by the Company to timely write off the $1.4 million carrying value of a software application developed for internal use that was abandoned in fiscal 2010 and (2) the Company recording prepaid assets aggregating $0.9 million in fiscal 2010 for items that are required to be expensed under GAAP. Although these errors resulted in a write-off of $2.3 million in fiscal 2010, they had no effect in the fiscal quarter ended June 30, 2010. Second, due to the absence of a comprehensive technical review process, the Company inappropriately recognized a gain of $1.0 million relating to production related concessions from a vendor during fiscal 2010 prior to realization. As the materials from the concessions are now being used, the reversal of this journal entry results in a decrease in expense of $0.1 million for the fiscal quarter ended June 30, 2010. Third, the Company identified failures in its financial closing and period cut-off procedures, whereby the lack of appropriate controls over accounts payable cut-off resulted in an understatement of legal, recruitment and other expenses. These expenses were initially booked in the current fiscal quarter and have now been reversed, thus resulting in a decrease in expense of $1.1 million in the fiscal quarter ended June 30, 2010. Adjustments due to these errors result in a $1.4 million reduction of expenses recorded in the Company’s consolidated financial results for the fiscal quarter ended June 30, 2010.

SENSUS (BERMUDA 2) LTD.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following tables present the effects of the restatement to the Company’s previously reported unaudited Consolidated Balance Sheet as of June 30, 2010 (in millions, except share amounts):


	June 30, 2010
	As reported			Adjustments			As restated
CURRENT ASSETS:
Cash and cash equivalents	$	31.2		$	—		$	31.2
Accounts receivable:
Trade, net of allowance for doubtful accounts of $1.3		115.3			(0.7	)		114.6
Other		1.0			—			1.0
Inventories, net		66.3			(0.1	)		66.2
Prepayments and other current assets		13.8			(1.5	)		12.3
Deferred income taxes		6.6			12.7			19.3
Deferred costs		6.1			(0.9	)		5.2

Total current assets		240.3			9.5			249.8
Property, plant and equipment, net		132.6			(1.4	)		131.2
Intangible assets, net		184.7			—			184.7
Goodwill		464.4			(11.0	)		453.4
Deferred income taxes		16.4			(0.6	)		15.8
Deferred costs		—			1.4			1.4
Other long-term assets		24.5			—			24.5

Total assets	$	1,062.9		$	(2.1	)	$	1,060.8

CURRENT LIABILITIES:
Accounts payable	$	81.3		$	1.2		$	82.5
Accruals and other current liabilities		100.5			(1.0	)		99.5
Current portion of long-term debt		15.7			—			15.7
Short-term borrowings		27.3			—			27.3
Income taxes payable		1.4			(1.2	)		0.2
Restructuring accruals		8.6			—			8.6
Deferred revenue		11.6			23.9			35.5

Total current liabilities		246.4			22.9			269.3
Long-term debt, less current portion		437.9			—			437.9
Pensions		48.6			—			48.6
Deferred income taxes		84.4			(2.8	)		81.6
Deferred revenue		2.3			2.0			4.3
Other long-term liabilities		40.8			(4.0	)		36.8

Total liabilities		860.4			18.1			878.5
Commitments and Contingencies

STOCKHOLDER’S EQUITY:
Common stock, par value $1.00 per share, 12,000 shares authorized, issued and outstanding		—			—			—
Paid-in capital		250.7			(0.2	)		250.5
Accumulated deficit		(52.7	)		(20.0	)		(72.7	)
Accumulated other comprehensive loss		(1.0	)		—			(1.0	)

Total stockholder’s equity		197.0			(20.2	)		176.8

Noncontrolling interest		5.5			—			5.5

Total equity		202.5			(20.2	)		182.3

Total liabilities and stockholder’s equity	$	1,062.9		$	(2.1	)	$	1,060.8

SENSUS (BERMUDA 2) LTD.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table presents the effects of the restatement to the Company’s previously reported unaudited Consolidated Statement of Operations for the fiscal quarter ended June 30, 2010 (in millions):


	Fiscal Quarter Ended June 30, 2010
	As reported			Adjustments			As restated
NET SALES	$	225.8		$	(1.1	)	$	224.7
COST OF SALES		162.1			(0.5	)		161.6

GROSS PROFIT		63.7			(0.6	)		63.1

OPERATING EXPENSES:
Selling, general and administrative expenses		42.7			(0.9	)		41.8
Restructuring costs		1.0			—			1.0
Amortization of intangible assets		3.3			—			3.3
Other operating expense, net		1.0			—			1.0

OPERATING INCOME		15.7			0.3			16.0

NON-OPERATING (EXPENSE) INCOME:
Interest expense, net		(11.3	)		—			(11.3	)
Other income, net		0.3			—			0.3

INCOME BEFORE INCOME TAXES		4.7			0.3			5.0

PROVISION FOR INCOME TAXES		2.5			0.1			2.6

CONSOLIDATED NET INCOME		2.2			0.2			2.4

LESS: NET INCOME ATTRIBUTABLE TO THE NONCONTROLLING INTEREST		(0.5	)		—			(0.5	)

NET INCOME ATTRIBUTABLE TO CONTROLLING INTEREST	$	1.7		$	0.2		$	1.9

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 $18.8 million consisting of:

•

$6.0 million in cash at closing;

•

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

•

$0.4 million installment that is expected to be paid in September 2010; and

•

$7.6 million of estimated contingent consideration based on certain earnings performance measures that is expected to be paid in October 2010.

The carrying value of the noncontrolling interest at September 29, 2009 was $8.8 million. The $10.0 million of excess consideration paid and to be paid over the carrying value of the noncontrolling interest decreased paid-in capital.

SENSUS (BERMUDA 2) LTD.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In conjunction with the equity transfer agreement, the Company had 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 continues 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, of which $0.7 million was paid to Telemetric in fiscal 2010. 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 PowerVista^TM, a web-based software application. This acquisition provides the Company with a significant and established presence in the distribution automation portion of the utility landscape and augments 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 related to the acquisition was assigned to the Company’s utility infrastructure and related communication systems segment, and is deductible for income tax purposes over 15 years.

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

SENSUS (BERMUDA 2) LTD.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Acquisition-related costs of $0.1 million for the fiscal quarter ended June 30, 2010 are classified as other operating expense, net 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 discount rate was developed using market participant company data, a level 2 input in the fair value hierarchy. From the date of acquisition to June 30, 2010, there have been no significant changes in the $5.8 million estimate of undiscounted cash flows. During that same time period, $0.7 million was accreted to the fair value of the contingent consideration for the passage of time, with the corresponding expense classified as other operating expense, net 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 June 30, 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	$	4.6	$	—	$	—	$	4.6	(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.

AMDS. On July 6, 2006, the Company acquired substantially all of the assets and assumed certain liabilities of Advanced Metering Data Systems, L.L.C. (“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.

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 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 $10.0 million for the fiscal quarter ended June 30, 2010 and $48.1 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 June 30, 2010, $24.3 million is classified as accruals and other current liabilities and $23.8 million is classified as other long-term liabilities. These gross accrued amounts reflect additional purchase price and are classified as goodwill.

SENSUS (BERMUDA 2) LTD.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In addition, on the date of acquisition, Sensus 1 issued 15,000 unvested preference shares to AMDS, which were 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 was $15 million if the specified performance thresholds were 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 and any additional future cash consideration represent additional purchase price and increase the amount of recorded 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. Goodwill and Identifiable Intangible Assets

Intangible assets consist of tradenames, patents, non-competition agreements, developed technology and customer and distributor relationships. Goodwill of $453.4 million at June 30, 2010 represents the excess of the purchase price paid by the Company for Invensys Metering Systems, NexusData, Inc., AMDS and Telemetric over the fair value of the net assets acquired. 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 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, trademarks, 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.

Intangible assets are summarized as follows (in millions):


	June 30, 2010					March 31, 2010
	(As restated)
	Cost		Accumulated Amortization			Cost		Accumulated Amortization
Intangible assets not subject to amortization:
Goodwill	$	453.4	$	—		$	443.3	$	—
Tradenames (indefinite lived)		25.0		—			25.0		—

		478.4		—			468.3		—

Intangible assets subject to amortization:
Distributor and marketing relationships		204.5		(69.4	)		204.5		(67.2	)
Developed technology		28.3		(8.9	)		28.3		(8.3	)
Non-competition agreements		30.5		(30.4	)		30.5		(30.4	)
Patents		16.2		(12.8	)		16.4		(12.8	)
Tradenames (definite lived)		3.2		(1.5	)		3.2		(1.2	)

		282.7		(123.0	)		282.9		(119.9	)

Total intangible assets	$	761.1	$	(123.0	)	$	751.2	$	(119.9	)

SENSUS (BERMUDA 2) LTD.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

5. Inventories

Inventories consist of the following (in millions):


	June 30, 2010			March 31, 2010
	(As restated)
Raw materials, parts and supplies	$	39.3		$	37.6
Work in process		10.5			10.4
Finished goods		19.1			21.1
Allowance for shrink and obsolescence		(2.7	)		(1.9	)

Inventories, net	$	66.2		$	67.2

6. 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 June 30, 2010, the Company had no foreign currency forward contracts outstanding.

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 London Interbank Offered Rate (“LIBOR”) and makes periodic payments at specified fixed rates.

The following table describes the terms of the Company’s interest rate swap agreement:


Trade Date	Effective Date		Maturity Date		Notional Amount (in millions)		Pay Fixed Rate			Receive Three-Month LIBOR as of June 30, 2010
December 9, 2005		January 20, 2006		September 30, 2010	$	50.0		4.927	%		0.30531	%

As of June 30, 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 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. As of June 30, 2010, the unamortized accumulated other comprehensive loss associated with these swaps was $0.2 million before tax. This amount is being amortized to interest expense on a straight-line basis through September 30, 2010. During the fiscal quarter ended June 30, 2010, the Company amortized $0.5 million (net of tax of $0.3 million) of other comprehensive loss.

SENSUS (BERMUDA 2) LTD.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Our derivative instruments are valued using modeling techniques that incorporate level 2 observable inputs as defined by 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 June 30, 2010 (in millions):


	Fair Value		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	$	0.6	$	—	$	0.6	$	—

As of June 30, 2010, interest rate swaps are classified within accruals and other current liabilities on the Company’s consolidated balance sheet.

7. Restructuring Costs

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


	Fiscal Quarter Ended June 30, 2010		Fiscal Quarter Ended June 27, 2009
Employee severance and exit costs:
Accrued	$	0.6	$	6.4
Expensed as incurred		0.4		0.4

Total	$	1.0	$	6.8

For the fiscal quarter ended June 30, 2010, the Company incurred $1.0 million of restructuring costs 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 $26.1 million of severance and related payroll costs. The Company currently expects that these restructuring measures will be substantially concluded by December 31, 2011. During the current fiscal quarter, the Company accrued $0.3 million for the reduction of employees. As of June 30, 2010, the Company has cumulatively accrued $24.3 million under this plan. The Company expects to incur additional restructuring costs for this and other programs of approximately $0.8 million in fiscal 2011.

SENSUS (BERMUDA 2) LTD.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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


	Fiscal Quarter Ended June 30, 2010			Fiscal Quarter Ended June 27, 2009
Balance at beginning of year	$	15.9		$	9.1
Accrual of new committed/announced programs		0.6			6.4
Cash payments		(3.9	)		(5.1	)
Foreign currency translation adjustment		(1.3	)		0.3

Balance at end of period	$	11.3		$	10.7

Current portion	$	8.6		$	8.8
Non-current portion		2.7			1.9

Total	$	11.3		$	10.7

Restructuring accruals are reflected within current liabilities and other long-term liabilities on the Company’s consolidated balance sheets. As of June 30, 2010, restricted cash of $3.4 million, consisting of $2.0 million classified as other long-term assets and $1.4 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.

8. 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 established terms and the Company’s 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.

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


	Fiscal Quarter Ended June 30, 2010			Fiscal Quarter Ended June 27, 2009
	(As restated)
Balance at beginning of year	$	11.9		$	13.7
Warranty provision		3.3			1.9
Settlements made		(2.9	)		(2.0	)
Foreign currency translation adjustment		(0.2	)		0.2

Balance at end of period	$	12.1		$	13.8

Current portion	$	11.1		$	10.8
Non-current portion		1.0			3.0

Total	$	12.1		$	13.8

SENSUS (BERMUDA 2) LTD.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

Net periodic benefit cost for the German pension plan consists of the following (in millions):


	Fiscal Quarter Ended June 30, 2010		Fiscal Quarter Ended June 27, 2009
Service cost	$	0.3	$	0.3
Interest cost		0.6		0.7

Net periodic benefit cost	$	0.9	$	1.0

Net periodic pension cost for the U.S. pension plan consists of the following (in millions):


	Fiscal Quarter Ended June 30, 2010			Fiscal Quarter Ended June 27, 2009
Service cost	$	0.3		$	0.2
Interest cost		0.1			0.1
Expected return on plan assets		(0.1	)		—

Net periodic benefit cost	$	0.3		$	0.3

The Company expects to continue to make contributions sufficient to fund benefits paid under its U.S. pension plan. The Company contributed approximately $0.2 million in the current fiscal quarter to its U.S. plan. Such contributions for the current fiscal year will be approximately $1.1 million, and additional contributions may be made at the Company’s discretion.

10. Business Segment Information

Reporting Segments. The Company has two principal product groups: utility infrastructure systems products and support products. Utility infrastructure systems products include AMI and AMR communications systems, distribution automation and demand response systems and four principal metering product categories: water, gas, heat and electricity. Support products include pipe joining and repair products and die casting products. The two product groups, plus corporate operations, are organized into two reporting segments: Utility Infrastructure and Related Communication Systems and All Other.

Utility Infrastructure and Related Communication Systems revenues consist solely of third-party sales. All Other revenues consist of third-party and inter-segment sales.

Inter-segment sales generally approximate cost. Cost of sales is based on standard cost, which includes materials, direct labor, warranty expense, overhead allocation, as well as variances from standard costs. Operating expenses directly associated with the reporting group include sales, marketing, product development and administrative expenses and amortization of intangible assets.

SENSUS (BERMUDA 2) LTD.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Corporate operating expenses, interest expense, amortization of intangible assets and deferred financing costs, and management fees are not allocated to the product lines and are incorporated in the All Other operating segment.

Reporting Segment Products


Reporting Segment		Major Products
Utility Infrastructure and Related Communication Systems		Fixed network AMI, AMR systems; commercial and residential water, gas, electric and heat meters used by utilities. Fixed network AMI systems include communications technology, hardware and software. AMR systems include handheld and mobile radio-frequency reading systems. All AMI and meter reading system solutions include installation services and ongoing systems support.

All Other		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. Die casting products that consist of high quality thin-wall, low porosity aluminum die castings, generally targeting the automotive industry and gas utility markets.

The following table provides revenue, operating income and pre-tax income (loss) for each segment (in millions):


	Fiscal Quarter Ended June 30, 2010			Fiscal Quarter Ended June 27, 2009
	(As restated)
Segment revenue
Utility infrastructure and related communication systems	$	192.6		$	168.9
All other		32.5			27.4
Eliminations		(0.4	)		(0.9	)

Total	$	224.7		$	195.4

Operating income (loss)
Utility infrastructure and related communication systems	$	17.2		$	4.4
All other		(1.2	)		(0.4	)

Total	$	16.0		$	4.0

Income (loss) before income taxes
Utility infrastructure and related communication systems	$	16.5		$	5.6
All other		(11.5	)		(9.1	)

Total	$	5.0		$	(3.5	)

SENSUS (BERMUDA 2) LTD.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Geographic Regions. Net sales to third parties and long-lived assets by geographic region are as follows (in millions):


	Net Sales to Third Parties				Long-Lived Assets
	Fiscal Quarter Ended June 30, 2010		Fiscal Quarter Ended June 27, 2009		June 30, 2010		March 31, 2010
	(As restated)				(As restated)
North America	$	162.2	$	136.9	$	73.3	$	73.4
Europe, Middle East, Africa		47.1		46.7		33.8		38.2
South America		4.1		3.6		1.8		1.7
Asia		11.3		8.2		22.3		21.6

Total	$	224.7	$	195.4	$	131.2	$	134.9

Net sales to third parties are attributed to the geographic regions based on the country in which the shipment originates. Amounts attributed to the geographic regions for long-lived assets are based on the location of the entity that holds such assets. Long-lived assets include property, plant and equipment, net.

11. Comprehensive Income

Comprehensive income (loss) consists of the following (in millions):


	Fiscal Quarter Ended June 30, 2010			Fiscal Quarter Ended June 27, 2009
	(As restated)
Consolidated net income (loss)	$	2.4		$	(2.7	)
Other comprehensive income:
Foreign currency translation adjustment		—			0.9
Net gain on interest rate swaps, net of tax (see Note 6)		0.5			0.3

Consolidated comprehensive income (loss)	$	2.9		$	(1.5	)

Less: Comprehensive income attributable to the noncontrolling interest	$	(0.5	)	$	(0.8	)

Comprehensive income (loss) attributable to controlling interest	$	2.4		$	(2.3	)

12. Income Taxes

The income tax expense for the current fiscal quarter ended June 30, 2010 reflects the Company’s pre-tax income based on the Company’s estimated annual effective tax rate.

The Company had $4.0 million of unrecognized tax benefits as of June 30, 2010, including interest and penalties, $3.3 million of which is reflected in other long-term liabilities on the accompanying consolidated balance sheet. The total amount of net unrecognized tax benefits that, if recognized in a future period, would affect the effective rate was $4.0 million as of June 30, 2010.

The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense. As of June 30, 2010 and March 31, 2010, the Company accrued $1.0 million and $0.9 million, respectively, in other long-term liabilities for interest and penalties.

SENSUS (BERMUDA 2) LTD.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Due to the expiration of foreign, federal and state statutes of limitations, settlements with tax authorities and tax law changes, it is reasonably possible that the Company’s net unrecognized tax benefits may change within the next 12 months but would be immaterial.

As of April 1, 2010, the Company is subject to foreign and U.S. federal income tax examination for fiscal years ending March 31, 2007 through 2010, and it is subject to U.S. state and local income tax examination for fiscal years ending March 31, 2006 through 2010. Presently, the Company is under audit in one U.S. jurisdiction and one foreign jurisdiction.

13. Commitments and Contingencies

The Company is, from time to time, involved in various unresolved legal actions, administrative proceedings and claims in the ordinary course of its business involving product liability, product warranty, property damage, insurance coverage, intellectual property and environmental matters. Although it is not possible to predict with certainty the outcome of these unresolved legal actions or the range of possible loss or recovery, based upon current information, management believes these unresolved legal actions will not have a material effect on the financial position or results of operations of the Company.

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.

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.

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.

SENSUS (BERMUDA 2) LTD.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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, it is impossible to know the Company’s exposure, if any, in the lawsuit.

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 results of operations or financial position.

The Company has entered into various agreements that require letters of credit for financial assurance purposes. These letters of credit are available to fund the payment of such obligations. At June 30, 2010, the Company had $15.0 million of letters of credit outstanding that had not been drawn upon with expiration dates ranging from one month to 12 months.

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

SENSUS (BERMUDA 2) LTD.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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 of 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.

14. Debt

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


	June 30, 2010		March 31, 2010
Current portion of U.S. term loan facility	$	15.7	$	22.7
Short-term borrowings		27.3		4.9

Total current portion of long-term debt		43.0		27.6
U.S. term loan facility		162.9		163.3
Senior subordinated notes		275.0		275.0

Total long-term debt		437.9		438.3

Total debt	$	480.9	$	465.9

15. 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 June 30, 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, the amount determined to be the fair market value at the date of issuance. No awards were granted under the Plan in fiscal 2010 or fiscal 2009.

SENSUS (BERMUDA 2) LTD.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

and vesting may accelerate upon the occurrence of certain stated liquidity events. During the fiscal quarter ended June 30, 2010, 56,000 stock options were granted and 41,500 were forfeited under the Option Plan. As of June 30, 2010, 125,600 of the 1,051,000 options outstanding under the Option Plan were vested.

The fair value of each option award is estimated on the date of grant using the Black-Scholes model. Because the Company’s shares are not publicly traded and the Company does not have a history of issuing stock options, the expected volatility and expected term variables used in the Black-Scholes model were based upon analysis of similar public companies. Expected volatility was based upon historical volatility of similar public companies’ stock prices. Since expected volatility is a measure of both historical and implied volatility, as a point of reference, we then compared this calculated amount to similar public companies’ disclosed expected volatilities for reasonableness. Expected term was developed giving consideration to vesting terms, contractual life and review of disclosure of similar public companies. Given that our shares are not publicly traded and we do not have a history of granting stock options, we believe that this approach provides a reasonable estimate of expected volatility and expected term. The risk-free interest rate was based upon the U.S. Treasury note stripped principal rate corresponding to our estimate of expected term. Expected dividends were $0, as the Company does not anticipate offering dividends on the shares underlying the options.

The following table summarizes each of these variables for grants of stock options during the fiscal quarters ended June 30, 2010 and June 27, 2009:


	Fiscal Quarter Ended June 30, 2010			Fiscal Quarter Ended June 27, 2009
Expected volatility		47.9	%		na	*
Expected term (in years)		5			na	*
Risk-free rate		2.0	%		na	*
Expected dividends		—			na	*

There were no stock options granted during the fiscal quarter ended June 27, 2009.

A summary of option activity during the fiscal quarter ended June 30, 2010 is presented in the table below:


	Option shares (in thousands)			Weighted-average exercise price		Weighted-average remaining contractual term in years
Outstanding at March 31, 2010		1,036		$	5.82		8.41
Granted		56			7.50		—
Exercised		—			—		—
Forfeited		(41	)		—		—

Outstanding at June 30, 2010		1,051		$	5.91		8.25

Exercisable at June 30, 2010		126		$	5.50		7.22

The compensation committee of the Company’s board of directors (the “Compensation Committee”) selects the exercise price. For grants during the fiscal quarter ended June 30, 2010, the exercise price was $7.50. Stock compensation expense recognized in the fiscal quarters ended June 30, 2010 and June 27, 2009 was immaterial. Unrecognized stock compensation expense as of June 30, 2010 is $0.4 million, which is expected to be recognized over a weighted-average period of approximately four years.

SENSUS (BERMUDA 2) LTD.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Sensus 1 common shares awarded under the Restricted Share Plan and the Option Plan are generally subject to restrictions on transfer, repurchase rights and other limitations as set forth in the related management subscription and shareholders’ agreement. The options to acquire common shares awarded under the Option Plan have exercise prices that are determined by the Compensation Committee at the time of grant.

16. Guarantor Subsidiaries

The following tables present the condensed consolidating balance sheets at June 30, 2010 (unaudited) and March 31, 2010 and unaudited statements of operations and cash flows for the fiscal quarters ended June 30, 2010 and June 27, 2009 for a) Sensus 2 (referred to as Parent), b) Sensus USA Inc. (“Sensus USA”), the issuer of the Notes (referred to as Issuer), c) on a combined basis, the subsidiaries of Sensus 2 that are guaranteeing the Notes (referred to as Guarantor Subsidiaries) and d) on a combined basis, the subsidiaries of Sensus 2 that are not guaranteeing the Notes (referred to as Non-Guarantor Subsidiaries). Separate financial statements for the Issuer and the Guarantor Subsidiaries are not presented because Sensus USA and the Guarantor Subsidiaries are 100% owned by Sensus 2, the guarantees are full and unconditional and joint and several, and the Company believes separate financial statements and other disclosures are not material to investors.

SENSUS (BERMUDA 2) LTD.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Condensed Consolidating Balance Sheets (unaudited)

June 30, 2010

(As restated)


	Parent			Issuer		Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
	(in millions)
Assets
Current assets:
Cash and cash equivalents	$	—		$	3.7	$	—		$	27.5		$	—		$	31.2
Accounts receivable:
Trade, net of allowance for doubtful accounts		—			58.6		13.5			42.5			—			114.6
(To) from affiliates		(1.1	)		50.5		(2.4	)		(47.0	)		—			—
Other		—			0.3		0.7			—			—			1.0
Inventories, net		—			30.1		11.5			24.6			—			66.2
Prepayments and other current assets		—			2.7		0.4			9.2			—			12.3
Deferred income taxes		—			4.7		14.6			—			—			19.3
Deferred costs		—			5.2		—			—			—			5.2

Total current assets		(1.1	)		155.8		38.3			56.8			—			249.8

Notes receivable from affiliates		—			433.2		—			29.1			(462.3	)		—
Property, plant and equipment, net		—			50.1		22.2			58.9			—			131.2
Intangible assets, net		—			144.4		7.7			32.6			—			184.7
Goodwill		—			385.3		40.6			27.5			—			453.4
Investment in subsidiaries		639.9			182.7		—			—			(822.6	)		—
Deferred income taxes		—			0.5		15.3			—			—			15.8
Deferred costs		—			1.4		—			—			—			1.4
Other long-term assets		0.4			21.4		0.6			2.1						24.5

Total assets	$	639.2		$	1,374.8	$	124.7		$	207.0		$	(1,284.9	)	$	1,060.8

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	—		$	50.0	$	5.6		$	26.9		$	—		$	82.5
Accruals and other current liabilities		—			56.1		3.4			40.0			—			99.5
Current portion of long-term debt		—			15.7		—			—			—			15.7
Short-term borrowings		—			22.8		—			4.5			—			27.3
Income taxes payable		—			6.9		(7.0	)		0.3			—			0.2
Restructuring accruals		—			—		—			8.6			—			8.6
Deferred revenue		—			35.4		—			0.1			—			35.5

Total current liabilities		—			186.9		2.0			80.4			—			269.3

Notes payable to affiliates		462.3			57.5		(62.5	)		5.0			(462.3	)		—
Long-term debt, less current portion		—			437.9		—			—			—			437.9
Pensions		—			1.3		1.7			45.6			—			48.6
Deferred income taxes		—			61.7		(3.0	)		22.9			—			81.6
Deferred revenue		—			4.3		—			—			—			4.3
Other long-term liabilities		—			28.0		5.3			3.5			—			36.8

Total liabilities		462.3			777.6		(56.5	)		157.4			(462.3	)		878.5

Stockholders’ equity		176.9			597.2		181.2			49.6			(822.6	)		182.3

Total liabilities and stockholders’ equity	$	639.2		$	1,374.8	$	124.7		$	207.0		$	(1,284.9	)	$	1,060.8

SENSUS (BERMUDA 2) LTD.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Condensed Consolidating Balance Sheets

March 31, 2010


	Parent			Issuer		Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
	(in millions)
Assets
Current assets:
Cash and cash equivalents	$	—		$	22.8	$	—		$	36.4		$	—		$	59.2
Accounts receivable:
Trade, net of allowance for doubtful accounts		—			62.8		11.4			46.9			—			121.1
(To) from affiliates		(1.1	)		52.8		(2.9	)		(48.8	)		—			—
Other		—			0.2		1.5			0.2			—			1.9
Inventories, net		—			30.5		11.1			25.6			—			67.2
Prepayments and other current assets		—			2.2		1.6			8.4			—			12.2
Deferred income taxes		—			5.0		14.6			—			—			19.6
Deferred costs		—			4.3		—			—			—			4.3

Total current assets		(1.1	)		180.6		37.3			68.7			—			285.5

Notes receivable from affiliates		—			433.2		—			29.1			(462.3	)		—
Property, plant and equipment, net		—			48.5		23.5			62.9			—			134.9
Intangible assets, net		—			147.3		7.8			32.9			—			188.0
Goodwill		—			375.2		40.6			27.5			—			443.3
Investment in subsidiaries		638.4			182.1		—			—			(820.5	)		—
Deferred income taxes		—			0.5		15.3			—			—			15.8
Deferred costs		—			1.3		—			—			—			1.3
Other long-term assets		0.4			21.3		0.8			2.6			—			25.1

Total assets	$	637.7		$	1,390.1	$	125.3		$	223.7		$	(1,282.8	)	$	1,093.9

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	—		$	81.7	$	6.2		$	29.4		$	—		$	117.3
Accruals and other current liabilities		—			67.7		3.5			43.6			—			114.8
Current portion of long-term debt		—			22.7		—			—			—			22.7
Short-term borrowings		—			—		—			4.9			—			4.9
Income taxes payable		—			7.3		(7.6	)		0.3			—			—
Restructuring accruals		—			0.1		—			12.8			—			12.9
Deferred revenue		—			34.1		—			0.2			—			34.3

Total current liabilities		—			213.6		2.1			91.2			—			306.9

Notes payable to affiliates		462.3			54.9		(60.9	)		6.0			(462.3	)		—
Long-term debt, less current portion		—			438.3		—			—			—			438.3
Pensions		—			1.3		1.6			50.2			—			53.1
Deferred income taxes		—			61.8		(3.0	)		22.9			—			81.7
Deferred revenue		—			4.8		—			—			—			4.8
Other long-term liabilities		—			19.0		5.3			4.3			—			28.6

Total liabilities		462.3			793.7		(54.9	)		174.6			(462.3	)		913.4
Stockholders’ equity		175.4			596.3		180.2			49.1			(820.5	)		180.5

Total liabilities and stockholders’ equity	$	637.7		$	1,390.0	$	125.3		$	223.7		$	(1,282.8	)	$	1,093.9

SENSUS (BERMUDA 2) LTD.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Condensed Consolidating Statements of Operations (unaudited)

Fiscal Quarter Ended June 30, 2010

(As restated)


	Parent		Issuer			Guarantor Subsidiaries		Non-Guarantor Subsidiaries			Eliminations			Consolidated
	(in millions)
Net sales	$	—	$	136.3		$	25.6	$	66.8		$	(4.0	)	$	224.7
Cost of sales		—		96.9			20.5		48.2			(4.0	)		161.6

Gross profit		—		39.4			5.1		18.6			—			63.1

Selling, general and administrative expenses		—		25.3			2.2		14.3			—			41.8
Restructuring costs		—		—			—		1.0			—			1.0
Amortization of intangible assets		—		2.8			0.1		0.4			—			3.3
Acquisition related costs		—		0.1			—		—			—			0.1
Other operating expense, net		—		0.9			—		—			—			0.9

Operating income		—		10.3			2.8		2.9			—			16.0

Non-operating (expense) income:
Interest (expense) income, net		—		(10.5	)		0.1		(0.9	)		—			(11.3	)
Equity in earnings (loss) of subsidiaries		1.9		0.8			—		—			(2.7	)		—
Other income, net		—		—			—		0.3			—			0.3

Income (loss) before income taxes		1.9		0.6			2.9		2.3			(2.7	)		5.0

Provision for income taxes		—		—			1.9		0.7			—			2.6

Consolidated net income (loss)		1.9		0.6			1.0		1.6			(2.7	)		2.4

Less: Net income attributable to the noncontrolling interest		—		—			—		(0.5	)		—			(0.5	)

Net income (loss) attributable to controlling interest.	$	1.9	$	0.6		$	1.0	$	1.1		$	(2.7	)	$	1.9

SENSUS (BERMUDA 2) LTD.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Condensed Consolidating Statements of Operations (unaudited)

Fiscal Quarter Ended June 27, 2009


	Parent			Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
	(in millions)
Net sales	$	—		$	115.6		$	22.1		$	61.9		$	(4.2	)	$	195.4
Cost of sales		—			87.6			17.1			45.1			(4.2	)		145.6

Gross profit		—			28.0			5.0			16.8			—			49.8

Selling, general and administrative expenses		—			19.4			2.1			13.9			—			35.4
Restructuring costs		—			0.2			—			6.6			—			6.8
Amortization of intangible assets		—			2.4			—			0.4			—			2.8
Other operating expense, net		—			0.8			—			—			—			0.8

Operating income (loss)		—			5.2			2.9			(4.1	)		—			4.0

Non-operating (expense) income:
Interest (expense) income, net		—			(8.3	)		0.1			(0.8	)		—			(9.0	)
Equity in (loss) earnings of subsidiaries		(3.6	)		5.1			—			—			(1.5	)		—
Other (loss) income, net		—			(0.1	)		—			1.6			—			1.5

(Loss) income before income taxes		(3.6	)		1.9			3.0			(3.3	)		(1.5	)		(3.5	)

Provision (benefit) for income taxes		—			0.8			(2.3	)		0.7			—			(0.8	)

Consolidated net (loss) income		(3.6	)		1.1			5.3			(4.0	)		(1.5	)		(2.7	)

Less: Net income attributable to the noncontrolling interest		—			—			—			(0.8	)		—			(0.8	)

Net (loss) income attributable to controlling interest.	$	(3.6	)	$	1.1		$	5.3		$	(4.8	)	$	(1.5	)	$	(3.5	)

SENSUS (BERMUDA 2) LTD.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Condensed Consolidating Statements of Cash Flows (unaudited)

Fiscal Quarter Ended June 30, 2010

(As restated)


	Parent			Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
	(in millions)
Operating activities
Consolidated net income (loss)	$	1.9		$	0.6		$	1.0		$	1.6		$	(2.7	)	$	2.4
Non-cash adjustments		—			7.8			1.8			3.2			—			12.8
Undistributed equity in (earnings) loss of subsidiaries		(1.9	)		(0.8	)		—			—			2.7			—
Changes in operating assets and liabilities		—			(36.4	)		(2.4	)		(10.5	)		—			(49.3	)

Net cash (used in) provided by operating activities		—			(28.8	)		0.4			(5.7	)		—			(34.1	)

Investing activities
Expenditures for property, plant and equipment and software development costs		—			(5.7	)		(0.4	)		(2.1	)		—			(8.2	)

Net cash used in investing activities		—			(5.7	)		(0.4	)		(2.1	)		—			(8.2	)

Financing activities
Increase (decrease) in short-term borrowings		—			22.8			—			(0.4	)		—			22.4
Principal payments on debt		—			(7.4	)		—			—			—			(7.4	)

Net cash provided by (used in) financing activities		—			15.4			—			(0.4	)		—			15.0

Effect of exchange rate changes on cash		—			—			—			(0.7	)		—			(0.7	)

Decrease in cash and cash equivalents		—			(19.1	)		—			(8.9	)		—			(28.0	)
Cash and cash equivalents at beginning of year	$	—		$	22.8		$	—		$	36.4		$	—		$	59.2

Cash and cash equivalents at end of period	$	—		$	3.7		$	—		$	27.5		$	—		$	31.2

SENSUS (BERMUDA 2) LTD.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Condensed Consolidating Statements of Cash Flows (unaudited)

Fiscal Quarter Ended June 27, 2009


	Parent			Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
	(in millions)
Operating activities
Consolidated net (loss) income	$	(3.6	)	$	1.1		$	5.3		$	(4.0	)	$	(1.5	)	$	(2.7	)
Non-cash adjustments		—			7.1			1.3			2.1			—			10.5
Undistributed equity in loss (earnings) of subsidiaries		3.6			(5.1	)		—			—			1.5			—
Changes in operating assets and liabilities		—			(3.6	)		(5.8	)		(0.2	)		—			(9.6	)

Net cash (used in) provided by operating activities		—			(0.5	)		0.8			(2.1	)		—			(1.8	)

Investing activities
Expenditures for property, plant and equipment and software development costs		—			(6.6	)		(0.4	)		(1.8	)		—			(8.8	)

Effect of exchange rate changes on cash		—			—			—			0.6			—			0.6

(Decrease) increase in cash and cash equivalents		—			(7.1	)		0.4			(3.3	)		—			(10.0	)
Cash and cash equivalents at beginning of year	$	—		$	14.1		$	—		$	23.8		$	—		$	37.9

Cash and cash equivalents at end of period	$	—		$	7.0		$	0.4		$	20.5		$	—		$	27.9

17. Subsequent Event

On December 17, 2010, Sensus (Bermuda I), Ltd. made a capital contribution of $35 million to the Company to (I) finance the final payment of $12.8 million for the acquisition of the remaining 40% non controlling interest held by Yangzhou Runlin Investment Co., Ltd. in our Chinese joint venture, and (ii) pay down approximately $22 million of our revolving credit facilities to provide additional capacity for letters of credit to support growth requirements and to increase our availability thereunder.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q/A 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, 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 any future restatements of our consolidated financial statements, our inability to maintain effective internal controls over financial reporting, 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, customer cancellations and other factors beyond our control.

Effective April 1, 2010, we elected to change our quarterly reporting period to be based on the calendar quarter end. Prior to April 1, 2010, we operated on a 13-week financial and business closing schedule for all periods, except year end, which was March 31, and the fiscal half year, which was September 30.The three-month period ended June 30, 2010 includes three more days than the 13-week period of the corresponding period of the prior fiscal year as a result of transitioning to the new reporting period. The following management’s discussion and analysis should be read in conjunction with the unaudited consolidated financial statements for the fiscal quarter ended June 30, 2010 and the related notes thereto included in this report and the audited consolidated financial statements for the year ended March 31, 2010 and related notes thereto included in our Annual Report on Form 10-K/A filed with the SEC.

Unless the context otherwise indicates or requires, the use in this Quarterly Report on Form 10-Q/A of the terms “we,” “us,” “our” or the “Company” refers to Sensus (Bermuda 2) Ltd. and its consolidated subsidiaries. Unless we indicate otherwise, we have rounded dollar amounts to the nearest hundred thousand dollars.

Restatement

In this Quarterly Report on Form 10-Q/A, we have restated our following previously filed consolidated financial statements, data and related disclosures:

(1)

consolidated balance sheet as of June 30, 2010, and the related consolidated statements of operations, stockholder’s equity, and cash flows and any related Notes to Consolidated Financial Statements for the fiscal quarter then ended located in Part I, Item 1 of this Quarterly Report on Form 10-Q/A; and

(2)

management’s discussion and analysis of financial condition and results of operations as of and for our fiscal quarter ended June 30, 2010, contained herein.

The restatement results from our previously announced internal review of our accounting practices with respect to the recognition of revenue for transactions related to certain customer contracts and other certain accounting matters. The following discussion and analysis of our financial condition and results of operation incorporates the restated amounts. See “Explanatory Note” immediately preceding Part I of this Quarterly Report on Form 10-Q/A, Item 1 and Note 2, “Restatement of Previously Reported Consolidated Financial Statements,” of the Notes to Unaudited Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q/A for a detailed discussion of the review and effect of the restatement.

General

We are a leading provider of advanced utility infrastructure systems, metering product 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 radio frequency 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 $18.8 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 Unaudited Consolidated Financial Statements” in Part I, Item 1 of this Quarterly Report on Form 10-Q/A.

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 $0.7 million was paid to Telemetric in fiscal 2010. 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 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 PowerVista^TM , a web-based software application. This acquisition provides the Company with a significant and established presence in the distribution automation portion of the utility landscape and augments the Company’s AMI and Smart Grid solutions. See Note 3 under “Notes to Unaudited Consolidated Financial Statements” in Part I, Item 1 of this Quarterly Report on Form 10-Q/A.

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.

In addition, on the date of acquisition, Sensus 1 issued 15,000 unvested preference shares to AMDS, which were 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 was $15 million if the specified performance thresholds were 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 in fiscal 2010, and thus the Company’s cash position was not impacted.

Other Information about Our Business

The following table presents, as of the dates indicated, additional information about our operations and business:


	Fiscal Quarter Ended
	June 30, 2010		March 31, 2010		December 29, 2009		September 30, 2009		June 27, 2009		March 31, 2009
	(As restated)
Total net sales (in millions)	$	224.7	$	256.3	$	188.7	$	204.0	$	195.4	$	204.6
Employees		3,776		3,838		3,642		3,707		3,671		3,838

Backlog

The Company’s total backlog consists of unshipped orders relating to undelivered contractual commitments and purchase orders. Total backlog at June 30, 2010 was $107 million, compared with $106 million at June 27, 2009. Total backlog at June 30, 2010 and June 27, 2009 included $3 million and $5 million of unfavorable currency effects, respectively. Eliminating the currency impacts, total backlog at June 30, 2010 would have been $110 million representing a $1 million decrease compared with the end of the prior corresponding fiscal quarter. In addition, at June 30, 2010, the Company cumulatively had approximately 11 million AMI electric and gas endpoints under long-term contracts, of which approximately 6.3 million endpoints had been shipped. The potential aggregate future revenue of unshipped endpoints and services under these contracts was approximately $517 million at June 30, 2010, of which approximately $27 million is included in backlog. No assurance can be made that firm purchase orders will be placed under these contracts.

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

We have restated our unaudited consolidated statements of operations and cash flows for the fiscal quarter ended June 30, 2010. The following discussion and analysis of our financial results of operations incorporates the restated amounts. See “Explanatory Note” immediately preceding Part I, Item 1 of this Quarterly Report on Form 10-Q/A and Note 2, “Restatement of Previously Reported Consolidated Financial Statements,” of the Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q/A for a detailed discussion of the restatement.

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


(dollars in millions)	Fiscal Quarter Ended June 30, 2010			%			Fiscal Quarter Ended June 27, 2009			%
	(As restated)
Net sales	$	224.7			100	%	$	195.4			100	%
Gross profit		63.1			28	%		49.8			26	%
Selling, general and administrative expenses		41.8			20	%		35.4			18	%
Restructuring costs		1.0			—			6.8			4	%
Amortization of intangible assets		3.3			1	%		2.8			2	%
Other operating expense, net		1.0			—			0.8			—

Operating income		16.0			7	%		4.0			2	%
Interest expense, net		(11.3	)		(5	)%		(9.0	)		(5	)%
Other income, net		0.3			—			1.5			1	%

Income (loss) before income taxes		5.0			2	%		(3.5	)		(2	)%
Provision (benefit) for income taxes		2.6			1	%		(0.8	)		—

Consolidated net income (loss)		2.4			1	%		(2.7	)		(2	)%
Less: Net income attributable to the noncontrolling interest		(0.5	)		—			(0.8	)		—

Net income (loss) attributable to controlling interest	$	1.9			1	%	$	(3.5	)		(2	)%

Fiscal Quarter Ended June 30, 2010 Compared with Fiscal Quarter Ended June 27, 2009

Net Sales.


(dollars in millions)	Fiscal Quarter Ended June 30, 2010		Fiscal Quarter Ended June 27, 2009		Dollar Change		Percent Change
	(As restated)
Net sales	$	224.7	$	195.4	$	29.3		15	%

Net sales for the fiscal quarter ended June 30, 2010 increased $29 million or 15% compared to the prior corresponding fiscal quarter due to increased demand for FlexNet systems and SmartPoint products to support electric, gas and water customers as they continued to roll out their smart grid implementations. Net sales outside North America were favorably impacted primarily by improving market conditions compared to the prior corresponding fiscal quarter.

Our top ten customers accounted for approximately 40% of net sales for the fiscal quarter ended June 30, 2010, and no individual customer accounted for more than 10% of net sales.

Gross Profit.


(dollars in millions)	Fiscal Quarter Ended June 30, 2010			Fiscal Quarter Ended June 27, 2009			Dollar Change		Percent Change
	(As restated)
Gross profit	$	63.1		$	49.8		$	13.3		27	%
Gross profit as a percent of net sales		28	%		26	%		—		8	%

Gross profit in dollars and as a percentage of net sales improved from the prior corresponding fiscal quarter principally due to the increased demand described above. Product volumes, mix and improved operating scale and efficiency contributed to the improvements.

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


(dollars in millions)	Fiscal Quarter Ended June 30, 2010			Fiscal Quarter Ended June 27, 2009			Dollar Change		Percent Change
	(As restated)
SG&A expenses	$	41.8		$	35.4		$	6.4		18	%
SG&A expenses as a percent of net sales		19	%		18	%		—		6	%

SG&A expenses for the fiscal quarter ended June 30, 2010 were higher than the prior corresponding fiscal quarter 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 the fiscal quarters ended June 30, 2010 and June 27, 2009 were $1 million and $7 million, respectively, and primarily were due 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 for the fiscal quarter ended June 30, 2010 was comparable to the fiscal quarter ended June 27, 2009 at $3 million.

Other Operating Expense, Net. Other operating expense, net of $1 million for the current fiscal quarter and prior corresponding fiscal quarter primarily consisted of recurring management fees for The Jordan Company, L.P.

Interest Expense, Net. Interest expense, net increased approximately $2 million for the fiscal quarter ended June 30, 2010 as compared to the prior corresponding fiscal quarter and reflects the increase in interest rates related to the amendment to our senior credit facilities in July 2009 and an increase in the average outstanding balance of the Company’s term debt.

Other Income, Net. Other income, net was less than $1 million for the current fiscal quarter and was approximately $2 million for the prior corresponding fiscal quarter. Other income, net principally relates to net transactional foreign currency gains and losses.

Provision for Income Taxes. Income tax provision was approximately $3 million for the fiscal quarter ended June 30, 2010 and income tax benefit was $1 million for the fiscal quarter ended June 27, 2009 and reflects the Company’s pre-tax income based on the Company’s estimated annual effective tax rate.

Consolidated Net Income (Loss). Consolidated net income of $2 million for the fiscal quarter ended June 30, 2010 increased $5 million compared to the fiscal quarter ended June 27, 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. 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 Unaudited

Consolidated Financial Statements” in Part I, Item 1 of this Quarterly Report on Form 10-Q/A. Net income attributable to the noncontrolling interest decreased slightly for the current fiscal quarter as compared to the prior corresponding fiscal quarter primarily due to the impact of the purchase of PDC Rongtai described above, partially offset by the net improved results of operations of our remaining joint ventures.

Net Income (Loss) Attributable to Controlling Interest. Net income attributable to controlling interest of $2 million for the fiscal quarter ended June 30, 2010 increased $5 million compared to the fiscal quarter ended June 27, 2009 as a result of the factors described above.

Liquidity and Capital Resources

We have restated our unaudited consolidated statements of operations and cash flows for the fiscal quarter ended June 30, 2010. The following discussion and analysis of our liquidity and capital resources incorporates the restated amounts. See “Explanatory Note” immediately preceding Part I, Item 1 of this Quarterly Report on Form 10-Q/A and Note 2, “Restatement of Previously Reported Consolidated Financial Statements,” of the Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q/A for a detailed discussion of the restatement.

During the fiscal quarter ended June 30, 2010, we funded our operating, investing and financing requirements through cash on hand and short term borrowings on our revolving credit facilities.

Net cash flow used in operating activities in the fiscal quarters ended June 30, 2010 and June 27, 2009 was $34 million and $2 million, respectively. The $32 million decrease in the current fiscal quarter compared to the prior corresponding fiscal quarter was primarily driven by payments of accrued expenses and accounts payable.

Cash expenditures for restructuring for the fiscal quarters ended June 30, 2010 and June 27, 2009 were $4 million and $6 million, respectively, and were reflected within cash used in operations. As of June 30, 2010, we had $11 million of restructuring accruals reflected on our consolidated balance sheet within current liabilities and other long-term liabilities. Additional cash restructuring expenses of approximately $11 million are expected to be incurred in fiscal 2011.

Cash used in investing activities were $8 million and $9 million for the fiscal quarters ended June 30, 2010 and June 27, 2009, respectively. For the current and prior corresponding fiscal quarters expenditures for property, plant and equipment (“PP&E”) were $7 million, of which 31% and 51%, respectively, reflected investment in the AMI business. PP&E expenditures were comprised of equipment, molds and tooling for replacement and cost efficiency, and maintenance, safety and expansion that extend useful lives. We incurred software development costs related to the AMI business of $1 million and $2 million, for the fiscal quarters ended June 30, 2010 and June 27, 2009, respectively. For the remainder of fiscal 2011, we expect to make expenditures for PP&E, software development costs and intangible assets of approximately $40 million, reflecting our continuing emphasis on a growth-oriented investment program.

Net cash provided by financing activities was $15 million for the fiscal quarter ended June 30, 2010 and consisted of $22 million of proceeds from borrowings on our revolver and $7 million of principal payments on the Company’s term loan facilities. There were no cash financing activities for the fiscal quarter ended June 27, 2009.

We maintain senior credit facilities that provide for senior secured financing totaling $249 million, consisting of one U.S. term loan facility in the amount of $179 million and two revolving credit facilities in an aggregate amount of $70 million, under which $54 million is available in the form of U.S. dollar-denominated loans and $16 million is available in the form of U.S. dollar-, euro- or U.K. sterling-denominated loans. Borrowing costs for the revolving loans and approximately $164.6 million of term loans with a maturity date of June 3, 2013 are based on variable rates tied to 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%, which includes, in the case of the revolving loans, a facility fee of 1%. Borrowing costs for approximately $14.0 million of term loans with a final maturity date of December 17, 2010 are based on variable rates tied to adjusted LIBOR plus a 2% margin. See below for discussion regarding the Company’s total indebtedness at June 30, 2010. The revolving credit facilities mature on December 17, 2012, and the term loan facility matures on June 3, 2013.

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.

As of June 30, 2010, we had $481 million of total indebtedness outstanding, consisting of $275 million of senior subordinated notes, $179 million under the U.S. term loan facility and $27 million in short-term borrowings. Interest expense, net, excluding amortization of deferred financing costs, was $11 million for the fiscal quarter ended June 30, 2010. The next scheduled principal payment on the term loan facility of approximately $7 million is due on September 30, 2010. As of June 30, 2010, $15 million of the facility was utilized in connection with outstanding letters of credit that have not been drawn upon. We were in compliance with all credit facility covenants at June 30, 2010. In addition, we do not expect the financial impact of the restatement to have a material adverse effect on our liquidity.

We believe that cash on hand and expected cash flows from operations, together with available borrowings under the revolving credit facilities 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, Telemetric and PDC Rongtai acquisitions, the Company is legally obligated to satisfy any additional future cash payments, including those that may become payable as a result of the acquired businesses achieving certain financial performance measures. See “Acquisitions” in this Part I, Item 2 and Note 3 under “Notes to Unaudited Consolidated Financial Statements” in Part I, Item 1 of this Quarterly Report on Form 10-Q/A. We believe that expected cash flows from operations, together with available borrowings, 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.

Item 3. 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 June 30, 2010, assets of foreign subsidiaries constituted approximately 18% of total assets. Foreign currency exchange rate exposure is most significant with respect to the euro. For the fiscal quarters ended June 30, 2010 and June 27, 2009, net sales were negatively impacted by the devaluation of foreign currencies, primarily the euro, versus the U.S. dollar by $1.5 million and $8.8 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. As of June 30, 2010, we had no foreign currency contracts in place. We expect to continue to utilize forward contracts to manage foreign currency exchange risk in the future as appropriate.

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 June 30, 2010 was $480.9 million, of which $205.8 million bears interest at variable rates. As of June 30, 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 $14.0 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 June 30, 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 June 30, 2010, the weighted-average interest rate on our term loan facility borrowings was approximately 6.6%. In addition, the Company has $50 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 have no impact on annual interest costs.

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 6 under “Notes to Unaudited Consolidated Financial Statements” in Part I, Item 1, of this Quarterly Report on Form 10-Q/A.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Pursuant to Section 302 of the Sarbanes-Oxley Act and Rule 15d-15(e) under the Exchange Act promulgated thereunder, our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q/A. In our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2010, originally filed on August 3, 2010, our management, with the participation of our CEO and CFO, concluded that our disclosure controls and procedures were effective as of June 30, 2010. In connection with our decision to restate our consolidated financial statements for the fiscal quarter ended June 30, 2010, as described in “Explanatory Note” immediately preceding Part I, Item 1 of this Quarterly Report on Form 10-Q/A and Note 2, “Restatement of Previously Reported Consolidated Financial Statements,” of the Notes to Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q/A, our management, including our CEO and CFO, performed a reevaluation and concluded that our disclosure controls and procedures were not effective as of June 30, 2010 as a result of the material weaknesses, significant deficiencies and deficiencies in our internal control over financial reporting as discussed below.

Internal Control over Financial Reporting

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. Management has determined that there was not an effective control environment in place over the evaluation and effective technical accounting involving the execution of the Company’s revenue recognition practices with respect to certain long-term Automated Metering Infrastructure contracts that include multiple deliverables. The Company identified three primary causes of the errors, each of which resulted in the premature recognition of revenue within certain contracts. First, there was a failure to appropriately evaluate service level agreements and other performance obligations within certain contracts, which, if considered, would have required the deferral of revenue until such obligations were satisfied. This error resulted in the improper timing of revenue recognition of $2.1 million in the fiscal quarter ended June 30, 2010. Second, the Company improperly recognized revenue under certain contracts in which the revenue was contingent on the delivery of future products and /or services. Although this error had an impact on the Company’s consolidated financial statements for fiscal 2010 and 2009, it did not have any impact on revenue for the fiscal quarter ended June 30, 2010. Third, the Company failed to take into consideration certain contract commitments, upgrades, pre-billing and other undeliverable elements. This error resulted in the Company prematurely recognizing revenue in prior periods that now results in a gain of $1.0 million of additional revenue in the fiscal quarter ended June 30, 2010. See the Company’s Annual Report on Form 10-K/A for the fiscal year ended March 31, 2010, as filed with the SEC on December 17, 2010.

The material weakness with regard to our evaluation of these contracts has ultimately resulted in the Company restating its financial statements for the fiscal quarter ended June 30, 2010. The effect of this restatement to correct the timing of revenue recognition for affected contracts and products is a reduction in revenue of $1.1 million on our operating results and the balance sheet for the fiscal quarter ended June 30, 2010.

million carrying value of a software application developed for internal use that was abandoned in fiscal 2010 and (2) the Company recording prepaid assets aggregating $0.9 million in fiscal 2010 for items that are required to be expensed under GAAP. Although these errors resulted in a write-off of $2.3 million in fiscal 2010, they had no effect in the fiscal quarter ended June 30, 2010. Second, due to the absence of a comprehensive technical review process, the Company inappropriately recognized a gain of $1.0 million relating to production related concessions from a vendor during fiscal 2010 prior to realization. As the materials from the concessions are now being used, the reversal of this journal entry results in a decrease in expense of $0.1 million for the fiscal quarter ended June 30, 2010. Third, the Company identified failures in its financial closing and period cut-off procedures, whereby the lack of appropriate controls over accounts payable cut-off resulted in an understatement of legal, recruitment and other expenses totaling $1.1 million in fiscal 2010. These expenses were initially booked in the current year and have now been reversed, thus resulting in a decrease in expense of $1.1 million in the fiscal quarter ended June 30, 2010. This combination of deficiencies taken together results in a material weakness in the Company’s internal control over financial reporting. Adjustments due to this material weakness and other miscellaneous adjustments result in a $1.4 million reduction of expenses recorded in the Company’s consolidated financial results for the fiscal quarter ended June 30, 2010.

In summary, the Company did not maintain adequate and effective internal control activities and oversight in the area of financial reporting, and there was an inability to effectively complete the financial closing process. Specifically, the Company did not have sufficient processes and personnel with sufficient technical expertise in the area of revenue recognition accounting to provide adequate review and control with respect to accounting for several matters resulting from the provisions and performance of certain customer contracts. Additionally, the Company lacked a sufficient and effective control environment at the corporate level and operating level that ultimately led to a failure to identify and record certain business transactions on a timely basis. Corporate entity level controls and executive oversight were ineffective to prevent misstatement in the financial results.

In light of the material weaknesses described above, management performed additional analysis and other post-closing procedures to ensure that the Company’s restated financial statements have been prepared in accordance with GAAP. Accordingly, management believes that the financial statements included in this Quarterly Report on Form 10-Q/A present, in all material respects, the Company’s financial condition, results of operations, changes in shareholder’s equity and cash flows for the periods presented.

Remediation of Material Weaknesses

Since the Company has not yet completed all of its planned remediation activities, no assurance can be given that the material weaknesses that exist in the Company’s internal controls over financial reporting have been sufficiently remediated as of the date of this filing, nor can any definite assurance be given as to when and in which period the material weaknesses might be effectively remediated. Management is working closely with the Audit Committee to monitor the ongoing remediation of the material weaknesses described above.

To address the material weakness in internal controls related to revenue recognition, new processes and controls are being planned or have now been implemented. Among other control enhancements, a complete review of all contracts to verify compliance with applicable revenue recognition accounting rules has been undertaken. We have also added new personnel to assist in contract negotiations and help identify all material issues at the time contracts are executed.

To address the material weakness in internal controls related to financial reporting, new processes and controls are being planned or have now been implemented that include enhancements to the financial statement closing process. The Company is implementing sufficient controls to verify all material journal entries have been initiated, authorized, and processed on a timely basis. In addition, an updated set of formal policies and procedures will be completed that cover all material aspects of the financial closing process, including timely, effective period-end cut-off and reconciliation procedures.

We anticipate these actions will improve our internal control over financial reporting and will address the related material weaknesses and other deficiencies identified. However, because the institutionalization of the

internal control process requires repeatable process execution, and because these controls rely extensively on manual review and approval, for the successful execution of these controls, several reporting periods may be required before management is able to conclude definitively that the material weaknesses have been fully remediated.

Changes in Internal Control over Financial Reporting

We did not effect any change in our internal controls over financial reporting during the period covered by this Quarterly Report on Form 10-Q/A that has materially affected, or is reasonably likely to affect materially, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

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 in our Annual Report on Form 10-K/A for the fiscal year ended March 31, 2010 and Note 13 under “Notes to Unaudited Consolidated Financial Statements” in Part I, Item 1 of this Quarterly Report on Form 10-Q/A, 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 or results of operations.

Item 1A. Risk Factors

There have been no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K/A for the fiscal year ended March 31, 2010, which was filed with the SEC on December 17, 2010.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a) None.

(b) None.

Item 3. Defaults Upon Senior Securities

(a) None.

(b) None.

Item 4. Reserved

Item 5. Other Information

(a) None.

(b) None.

Item 6. Exhibits

A list of exhibits filed herewith is contained on the Exhibit Index immediately preceding such exhibits and is incorporated herein by reference.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	SENSUS (BERMUDA 2) LTD.

Date: December 17, 2010	By:	/s/ PETER MAINZ
		Peter Mainz Chief Executive Officer & President (Principal Executive Officer)

Date: December 17, 2010	By:	/s/ JEFFREY J. KYLE
		Jeffrey J. Kyle Chief Financial Officer (Principal Financial Officer)

Date: December 17, 2010	By:	/s/ THOMAS D. D’ORAZIO
		Thomas D. D’Orazio Senior Vice President, Finance (Principal Accounting Officer)

	SENSUS USA INC.

Date: December 17, 2010	By:	/s/ PETER MAINZ
		Peter Mainz Chief Executive Officer & President (Principal Executive Officer)

Date: December 17, 2010	By:	/s/ JEFFREY J. KYLE
		Jeffrey J. Kyle Chief Financial Officer (Principal Financial Officer)

Date: December 17, 2010	By:	/s/ THOMAS D. D’ORAZIO
		Thomas D. D’Orazio Senior Vice President, Finance (Principal Accounting Officer)

EXHIBIT INDEX


Exhibit No.		Description
10.1*		Sensus Management Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2010).

31.1		Certification of Chief Executive Officer pursuant to Rule 15d-14(a).

31.2		Certification of Chief Financial Officer pursuant to Rule 15d-14(a).

32.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350.

*	Management contracts and compensation plans.

SENSUS USA INC - FORM 10-Q/A - December 17, 2010

Attached files

SENSUS USA INC Reports