EX-13.0 5 c61152ex13-0.txt PORTIONS OF ANNUAL REPORT 1 Exhibit (13.0) Portions of Annual Report to Shareholders that are incorporated by reference. 34 2 (Page 1 of Annual Report to Shareholders) BADGER METER, INC. F I N A N C I A L H I G H L I G H T S December 31, 2000 and 1999
2000 1999 % CHANGE ---------- ---------- -------- OPERATIONS (in thousands) Net sales $ 146,389 $ 150,877 (3.0) Net earnings $ 6,941 $ 9,700 (28.4) ---------- ---------- ----- PER SHARE Net earnings: Basic $ 2.10 $ 2.78 (24.5) Diluted $ 2.00 $ 2.60 (23.1) Cash dividends declared $ .86 $ .72 19.4 Net book value $ 13.51 $ 12.88 4.9 ---------- ---------- ----- YEAR-END FINANCIAL POSITION (in thousands) Total assets $ 98,710 $ 103,086 (4.2) Total debt (long-term and short-term) $ 28,961 $ 28,082 3.1 Shareholders' equity $ 43,319 $ 43,009 .7 Debt as a percent of total debt and equity 40.1% 39.5% Net earnings as a percent of equity 16.0% 22.6% ========== ========== ===== OTHER Number of employees 956 989 (3.3) Number of shareholders: Common Stock: In employee plans 712 777 (8.4) Of record 530 550 (3.6) Shares outstanding at December 31 Common Stock 3,207,039 3,339,955 (4.0) ========== ========== =====
35 3 (Page 9 to 11 of Annual Report to Shareholders) MANAGEMENT'S DISCUSSION AND ANALYSIS BUSINESS DESCRIPTION Badger Meter is a leading marketer and manufacturer of products using flow measurement and control technologies developed both internally and with other technology companies. Its products are used to measure and control the flow of liquids in a variety of applications. The company has five primary worldwide product lines: residential and commercial/industrial water meters (with various meter reading technology systems), automotive fluid meters, small precision valves and industrial process meters (with related accessories and instrumentation). Water meters and related systems provide the majority of the company's sales. A "water meter system" generally consists of a water meter, a register (some with a digital interface technology for communicating the reading), packaging and the monitoring or computerized management system used to collect and relay the reading. Badger Meter's strategy is to solve customers' metering needs with its proprietary meter reading systems or other systems available through alliances within the marketplace. In both alternatives, the company provides the meter that generates a mechanical signal and the device that converts the signal into a digital form. That signal may then be read by either a proprietary meter reading system or systems developed by other technology companies. RESULTS OF OPERATIONS SALES Badger Meter's sales decreased $4.5 million or 3.0% for 2000 compared to 1999. This decrease was primarily due to lower domestic sales of water meters (as discussed below), lower international sales of industrial products, and lower domestic sales of certain industrial products. Sales trends are primarily affected by new product sales, water meter sales to large municipalities and general market conditions. Residential water meter sales for the past several years have been impacted by both privatizations of water services and a continued industry movement away from manual-read meters to automated meter reading technologies. However, in 2000, many water utilities delayed such conversion activities due to confusion in the marketplace resulting from the financial difficulties of several fixed-base network providers, certain new entrants into the market and various competitive pressures that have lengthened the sales cycle. Sales during the first half of 2000 were also affected by several other factors. A September 1999 fire at the facility of one of the company's principal vendors continued to negatively impact sales in the first half of 2000, although the impact of those lost sales on net income was offset by business interruption insurance proceeds. The six-month Federal Communications Commission freeze, which ended in December 1999, continued to have an impact on sales of certain automatic meter reading products due to the disruption of the sales cycle. Competitive market pressures and the stronger U.S. dollar had a negative impact on sales of certain industrial products, particularly in Europe. Increased sales of water meters to commercial/industrial and submetering customers only partially offset these negative factors. The sales increase from 1998 to 1999 was primarily attributable to increased sales of radio-frequency automated meter reading systems and commercial/industrial water meters. Badger Meter continues to improve existing products and to develop and acquire new products. To better focus its product development efforts on the core business of liquid flow measurement and to eliminate under-performing product lines, the company sold its ultrasonics product line during 2000 and its natural gas instrumentation product line during 1999. Neither sale was material to the financial results. International sales are comprised primarily of sales of automotive fluid meters and small valves in Europe, sales of water meters and related technologies in Mexico, and sales of valves and other metering products throughout the world. In Europe, sales are made in both U.S. dollars and euros. Most other international sales are made in U.S. dollars. The company is able to partially hedge its euro exposure. 36 4 GROSS MARGINS Gross margins were 36.2%, 39.2% and 39.9% for 2000, 1999 and 1998, respectively. In 1999, the company invested in additional capacity, resulting in decreased margins for 2000 and 1999 as compared to the 1998 level. In 1998, production for certain product lines neared capacity levels, enabling the company to leverage its fixed manufacturing costs over the higher volumes. Two other factors also negatively affected margins in 2000. First, margins were impacted by a higher mix of international sales of water meters with lower margins than domestic water meter sales. Also, a one-time manufacturing problem resulted in increased scrap levels and reduced margins during the second quarter of 2000. This problem was identified by the company and corrected during the second quarter. OTHER FACTORS Selling, engineering and administrative costs decreased 1.2% for 2000 compared to 1999, due primarily to reductions of incentive compensation due to lower sales and profits. This decrease was partially offset by increases in marketing and engineering expenses. For 1999 compared to 1998, these costs decreased 1.0% due primarily to cost improvement efforts and staffing reductions associated with the sale of the natural gas instrumentation product line. Interest expense increased $950,000 and $626,000 for 2000 and 1999, respectively, as a result of a new $15 million long-term debt borrowing in August of 1999, which was primarily used to repurchase the company's stock from various trusts and individual shareholders. Interest expense was also impacted by an increase in the Employee Savings and Stock Ownership Plan ("ESSOP") debt in December of 1998, as well as generally higher interest rates during 2000 and 1999. Other income and expense (net) for 2000 and 1999 included $2,230,000 and $750,000 of proceeds, respectively, from business interruption insurance, which offset lost sales and margins associated with a fire at the facility of one of the company's principal vendors during 1999. Without these proceeds, other income and expense (net) for 2000, 1999 and 1998 would have been expenses of $316,000, $495,000 and $376,000, respectively. INCOME TAXES Income tax as a percentage of earnings before income taxes was 35.3%, 38.1% and 38.3% for 2000, 1999 and 1998, respectively. The decrease in 2000 was due to increased Foreign Sales Corporation tax credits, lower taxes on foreign income, credits generated as a result of distributions of foreign subsidiary profits, and a favorable settlement of a tax audit. Most of the foreign credits impacted the fourth quarter of 2000, resulting in a 21.9% average tax rate for that quarter. NET EARNINGS AND EARNINGS PER SHARE For 2000 compared to 1999, the impacts of lower sales, lower margins and increased interest expense were only partially offset by reduced expenses, business interruption insurance proceeds and lower taxes. This resulted in a 28.4% decrease in net earnings and a slightly lower percentage decrease in earnings per share due to stock repurchases during the years. For 1999 compared to 1998, higher sales and reduced selling, engineering and administrative costs resulted in a 17.6% increase in net earnings. LIQUIDITY AND CAPITAL RESOURCES Cash provided by operations decreased 15.3% from 2000 to 1999 due to lower earnings, increased inventory and decreased payables, partially offset by lower receivables. For 1999 compared to 1998, cash provided by operations increased 4.3% due primarily to higher earnings. Receivables decreased 21.7% during 2000, due to significantly lower sales in the fourth quarter of 2000 compared to the fourth quarter of 1999, as well as lower foreign receivables due to improved collections during the year. Inventories increased 6.9% in 2000, due to the stocking of certain long lead-time electronic components. 37 5 Capital expenditures totaled $6.4 million in 2000, down from $10 million in 1999 and $17.9 million in 1998. The higher 1999 and 1998 expenditures related to the Milwaukee, Wisconsin facility expansion and the expansion of production capacity at both the Milwaukee and Nogales, Mexico facilities. Prepaid pension decreased $351,000 as a result of normal pension expense with no funding payments required in 2000 due to the overfunded status of the plan. Badger Meter has a net deferred tax asset of $1.4 million at December 31, 2000, reflecting the net temporary differences between financial reporting and tax reporting. The majority of this net deferred asset relates to deferred payments to employee benefit plans and is expected to reverse as future payments exceed expenses. The decrease in the net deferred tax asset of $817,000 from 1999 relates primarily to the use of accelerated depreciation methods for tax purposes, as well as the reduction in certain payables and accruals. Long-term debt, when combined with the current portion, decreased from $16.4 million at December 31, 1999, to $11.2 million at December 31, 2000. This $5.2 million reduction was due to regularly scheduled payments on the 1999 $15 million bank note (which was used primarily to acquire treasury stock) and a $300,000 reduction in the company's ESSOP loan. Payables decreased $3.3 million during 2000 due to decreased purchases related to the lower level of sales activity. Accrued compensation and employee benefits decreased $2.6 million due to lower incentive compensation accruals. Other accrued liabilities decreased $471,000 due primarily to lower accruals for after-sale costs. Current income taxes increased $790,000 in 2000, due to the timing of estimated tax payments. The $345,000 decrease in accrued non-pension postretirement benefits was related to normal retiree medical expenditures exceeding amounts required to be accrued under accounting rules. Other accrued employee benefits increased $342,000 due primarily to increased employee deferred compensation. Reinvested earnings increased during 2000 due to net income, partially offset by dividend payments. Common stock and capital in excess of par value both increased during 2000 due to stock issued in connection with the exercise of stock options and ESSOP transactions. Employee benefit stock decreased by $300,000 due to shares released as a result of payments made on the ESSOP loan. Treasury stock increased due to shares repurchased during the year. Badger Meter's financial condition remains strong. The company believes that its operating cash flows, available borrowing capacity and ability to raise capital through the sale of common stock provide adequate resources to fund ongoing operating requirements and future capital expenditures related to expansion of capacity and development of new products. OTHER MATTERS The company believes it is in compliance with the various environmental statutes and regulations to which the company's domestic and international operations are subject. Currently, the company is in the process of resolving issues relative to two landfill sites. The company does not believe the ultimate resolution of these issues will have a material adverse effect on the company's financial position or results of operations. Provision has been made for all known settlement costs. MARKET RISK In the ordinary course of business, the company is exposed to various market risks, including commodity prices, foreign currency rates and interest rates. The company manages these risks through a combination of foreign loans and interest rate instruments. The company does not hold or issue derivative instruments for trading purposes. Badger Meter's foreign currency risk relates to the sale of products to foreign customers, specifically European customers, as most other foreign sales are made in U.S. dollars. The company uses lines of credit with German banks to offset currency exposure related to European receivables and other monetary assets. The company's exposure to European currency fluctuations has been further reduced by the stabilization of inter-European currencies through the introduction of the euro. As of December 31, 2000 and 1999, the company's foreign currency net monetary assets were substantially offset by comparable debt, resulting in no material exposure. 38 6 During 1999, the company issued $15 million of long-term fixed-rate debt, payable monthly over a three-year period. As of December 31, 2000, comparable market rates had decreased, resulting in a market value for this debt of $8,818,000, slightly more than the $8,726,000 carrying value. Remaining debt at December 31, 2000, was all floating-rate debt with market values approximating carrying values. For this debt, future annual interest costs will fluctuate based on short-term interest rates. FORWARD LOOKING STATEMENTS Certain statements in this report, as well as other information provided from time to time by the company or its employees, may contain forward looking statements that involve risks and uncertainties that could cause actual results to differ materially from those in the forward looking statements. The words "anticipate", "believe", "estimate", "expect", "think", "should", and "objective" or similar expressions are intended to identify forward looking statements. The forward looking statements are based on the company's current views and assumptions and involve risks and uncertainties that include, among other things: the success or failure of new product developments; the actions of competitors and alliance partners; changes in domestic economic conditions, including housing starts; changes in foreign economic conditions, including currency fluctuations; changes in laws and regulations; changes in customer demand and fluctuations in the prices of and availability of purchased raw materials and parts. Some or all of these factors are beyond the company's control. 39 7 (Page 12 of Annual Report to Shareholders) BADGER METER, INC. C O N S O L I D A T E D S T A T E M E N T S O F O P E R A T I O N S Years ended December 31, 2000, 1999 and 1998
(In thousands except per share amounts) 2000 1999 1998 -------- -------- -------- Net sales $146,389 $150,877 $143,813 Cost of sales 93,375 91,722 86,502 -------- -------- -------- Gross margin 53,014 59,155 57,311 Selling, engineering and administration 41,995 42,495 42,941 -------- -------- -------- Operating earnings 11,019 16,660 14,370 Interest expense 2,206 1,256 630 Other expense (income), net (1,914) (255) 376 -------- -------- -------- Earnings before income taxes 10,727 15,659 13,364 Provision for income taxes 3,786 5,959 5,117 -------- -------- -------- Net earnings $ 6,941 $ 9,700 $ 8,247 ======== ======== ======== Earnings per share: Basic $ 2.10 $ 2.78 $ 2.28 Diluted $ 2.00 $ 2.60 $ 2.12 ======== ======== ======== Shares used in computation of: Basic 3,308 3,494 3,624 Impact of dilutive stock options 162 234 272 -------- -------- -------- Diluted 3,470 3,728 3,896 ======== ======== ========
See accompanying notes. 40 8 (Page 13 of Annual Report to Shareholders) BADGER METER, INC. C O N S O L I D A T E D B A L A N C E S H E E T S December 31, 2000 and 1999
(Dollars in thousands) 2000 1999 --------- --------- ASSETS Current assets: Cash $ 4,237 $ 3,752 Receivables (Note 3) 19,006 24,278 Inventories: Finished goods 4,221 4,077 Work in process 8,428 8,347 Raw materials 7,673 6,582 --------- --------- Total inventories 20,322 19,006 Prepaid expenses 952 943 --------- --------- Total current assets 44,517 47,979 Property, plant and equipment: Land and improvements 2,619 2,763 Buildings and improvements 20,533 19,547 Machinery and equipment 66,564 65,423 --------- --------- 89,716 87,733 Less accumulated depreciation (47,122) (45,617) --------- --------- Net property, plant and equipment 42,594 42,116 Intangible assets, at cost less accumulated amortization 1,097 1,095 Prepaid pension (Note 7) 5,440 5,791 Deferred income taxes (Note 8) 1,396 2,213 Other assets 3,666 3,892 --------- --------- Total assets $ 98,710 $ 103,086 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term debt (Note 4) $ 17,769 $ 11,702 Current portion of long-term debt (Note 9) 5,248 4,887 Payables 7,188 10,499 Accrued compensation and employee benefits 3,344 5,914 Other accrued liabilities 3,245 3,716 Income and other taxes 901 111 --------- --------- Total current liabilities 37,695 36,829 Accrued non-pension postretirement benefits (Note 7) 6,669 7,014 Other accrued employee benefits 5,083 4,741 Long-term debt (Note 7 and 9) 5,944 11,493 Shareholders' equity: (Notes 2, 5 and 7) Common Stock, $1.00 par; authorized 40,000,000 shares; issued 4,610,140 shares in 2000 and 4,531,307 shares in 1999 4,610 4,531 Capital in excess of par value 14,713 13,382 Reinvested earnings 50,536 46,445 Less: Employee benefit stock (2,300) (2,600) Treasury stock, at cost, 1,403,101 shares in 2000 and 1,191,352 shares in 1999 (24,240) (18,749) --------- --------- Total shareholders' equity 43,319 43,009 --------- --------- Total liabilities and shareholders' equity $ 98,710 $ 103,086 ========= =========
See accompanying notes. 41 9 (Page 14 of Annual Report to Shareholders) BADGER METER, INC. C O N S O L I D A T E D S T A T E M E N T S O F C A S H F L O W S Years ended December 31, 2000, 1999 and 1998
(Dollars in thousands) 2000 1999 1998 ------- -------- -------- Operating activities: Net earnings $ 6,941 $ 9,700 $ 8,247 Adjustments to reconcile net earnings to net cash provided by operations: Depreciation 5,925 5,276 4,499 Amortization 148 357 176 Tax benefit on stock options 387 258 323 Noncurrent employee benefits 648 611 1,088 Deferred income taxes 817 717 (666) Changes in: Receivables 5,272 (4,464) (621) Inventories (1,316) 3,397 (805) Current liabilities other than short-term debt (5,562) (321) 3,137 Prepaid expenses and other (9) 121 (371) -------- -------- -------- Total adjustments 6,310 5,952 6,760 -------- -------- -------- Net cash provided by operations 13,251 15,652 15,007 -------- -------- -------- Investing activities: Property, plant and equipment (6,403) (9,981) (17,926) Other -- net 76 (654) 1,893 -------- -------- -------- Net cash used for investing activities (6,327) (10,635) (16,033) -------- -------- -------- Financing activities: Net increase (decrease) in short-term debt 6,067 (2,585) 2,842 Issuance of long-term debt 0 15,396 0 Repayments of long-term debt (5,188) (1,644) 0 Dividends (2,850) (2,453) (2,106) Stock options and ESSOP 1,023 1,461 4,263 Purchase of treasury stock (5,491) (13,811) (2,657) -------- -------- -------- Net cash provided by (used for) financing activities (6,439) (3,636) 2,342 -------- -------- -------- Increase in cash 485 1,381 1,316 Cash -- beginning of year 3,752 2,371 1,055 -------- -------- -------- Cash -- end of year $ 4,237 $ 3,752 $ 2,371 ======== ======== ======== Supplemental disclosures of cash flow information: Cash paid during the year for: Income taxes $ 1,839 $ 5,442 $ 6,466 Interest (including $208 of interest capitalized during facility construction in 1998) $ 2,255 $ 1,257 $ 864 ======== ======== ========
See accompanying notes. 42 10 (Page 15 of Annual Report to Shareholders) BADGER METER, INC. C O N S O L I D A T E D S T A T E M E N T S O F S H A R E H O L D E R S' E Q U I T Y Years ended December 31, 2000, 1999 and 1998
Class B Capital in Common Common excess of Reinvested Employee Treasury (In thousands except per share amounts) Stock Stock par value earnings benefit stock stock Total ------ -------- ---------- ---------- ------------- --------- -------- Balance, December 31, 1997 $ 3,240 $ 112 $ 8,315 $ 33,057 $ (917) $ (2,340) $ 41,467 Net earnings 8,247 8,247 Cash dividends, $.60 per Common share (1,501) (1,501) Cash dividends, $.54 per Class B Common share (605) (605) Restricted stock transactions 109 11 120 Stock options exercised (Note 5) 54 564 618 Tax benefit on stock options and dividends 323 323 ESSOP transactions 98 3,437 100 3,635 Treasury stock purchased (1) (2,657) (2,658) Treasury stock issued (16) 18 2 ESSOP loan (1,800) (1,800) -------- -------- -------- -------- -------- -------- -------- Balance, December 31, 1998 3,392 111 12,732 39,198 (2,606) (4,979) 47,848 -------- -------- -------- -------- -------- -------- -------- Net earnings 9,700 9,700 Cash dividends, $.72 per Common share (2,104) (2,104) Cash dividends, $.32 per Class B Common share (349) (349) Restricted stock transactions 62 6 68 Stock options exercised (Note 5) 51 569 620 Tax benefit on stock options and dividends 258 258 ESSOP transactions 21 758 779 Treasury stock purchased (13,811) (13,811) Exchange of Class B for Common shares 1,067 (111) (997) 41 0 -------- -------- -------- -------- -------- -------- -------- Balance, December 31, 1999 4,531 0 13,382 46,445 (2,600) (18,749) 43,009 -------- -------- -------- -------- -------- -------- -------- Net earnings 6,941 6,941 Cash dividends, $.86 per Common share (2,850) (2,850) Stock options exercised (Note 5) 75 895 970 Tax benefit on stock options and dividends 387 387 ESSOP transactions 4 5 300 309 Treasury stock purchase (5,491) (5,491) Other 44 44 -------- -------- -------- -------- -------- -------- -------- Balance, December 31, 2000 $ 4,610 $ 0 $ 14,713 $ 50,536 $ (2,300) $(24,240) $ 43,319 ======== ======== ======== ======== ======== ======== ========
See accompanying notes. 43 11 (Page 16 to 22 of Annual Report to Shareholders) BADGER METER, INC. N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S December 31, 2000, 1999 and 1998 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PROFILE Badger Meter (the company) is a leading marketer and manufacturer of products using flow measurement and control technology developed both internally and with other technology companies. Its products are used to measure and control the flow of liquids in a variety of applications. The company's products include water meters and associated systems, wastewater meters, industrial process meters, automotive fluid meters and small valves. CONSOLIDATION The consolidated financial statements include the accounts of the company and its wholly owned subsidiaries. REVENUE RECOGNITION Revenues are recognized upon shipment of product, which corresponds with the transfer of title. The company estimates and records provisions for warranties and other after-sale costs in the period the sale is reported. Such provisions are included in other accrued liabilities. INVENTORIES Inventories are valued at the lower of cost (first-in, first-out method) or market. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. Depreciation is provided over the estimated useful lives of the respective assets, principally by the straight-line method. INTANGIBLE ASSETS Costs of purchased patents are amortized over the lives of the patents. Accumulated amortization at December 31, 2000 and 1999, was $741,000 and $593,000, respectively. RESEARCH AND DEVELOPMENT Research and development costs are charged to expense as incurred and amounted to $6,562,000, $6,012,000 and $6,105,000 in 2000, 1999 and 1998, respectively. OTHER EXPENSE (INCOME), NET Other income and expense includes foreign currency gains and losses, which are recognized as incurred. The company's functional currency for all of its foreign subsidiaries is the U.S. dollar. Other income for 2000 and 1999 also includes $2,230,000 and $750,000, respectively, of business interruption insurance proceeds related to lost sales and margins as a result of a fire at a vendor's facility in 1999. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities," which will become effective for the company in 2001. SFAS 133 in its amended form will not have a material effect on the company's results of operations, financial position or disclosures. RECLASSIFICATIONS Certain reclassifications have been made to the 1999 and 1998 consolidated financial statements to conform to the 2000 presentation. 44 12 BADGER METER, INC. N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S December 31, 2000, 1999 and 1998 2 COMMON STOCK During 1999, the holders of Class B Common Stock converted all shares held into Common Stock, resulting in only one class of stock for the company. The company also has a Shareholder Rights Plan, which grants certain rights to existing holders of Common Stock. Subject to certain conditions, the rights are redeemable by the Board of Directors and are exchangeable for shares of Common Stock. The rights have no voting power and expire on May 26, 2008. 3 TRANSACTIONS WITH AFFILIATED COMPANY The company carries its 15% interest in a Mexican company, Medidores Azteca, S.A. (Azteca) at cost ($75,000). During 2000, 1999 and 1998, the company sold $654,000, $2,602,000 and $996,000 of product to Azteca. Trade receivables from Azteca at December 31, 2000 and 1999, were $755,000 and $1,209,000, respectively. 4 SHORT-TERM DEBT AND CREDIT LINES Short-term debt at December 31, 2000 and 1999, consisted of:
(In thousands) 2000 1999 ------- ------- Notes payable to banks $ 2,048 $ 1,907 Commercial paper 15,721 9,795 ------- ------- Total $17,769 $11,702 ======= =======
The company has $39,762,000 of short-term credit lines with domestic and foreign banks which include a $31,000,000 commercial paper line of credit. At December 31, 2000, $21,993,000 was unused and available to the company under the lines. The weighted-average interest rate on the outstanding balance was 6.92% and 6.13% at December 31, 2000 and 1999. 45 13 BADGER METER, INC. N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S December 31, 2000, 1999 and 1998 5 STOCK OPTION PLANS The company has five stock option plans which provide for the issuance of options to key employees and directors of the company. Each plan authorizes the issuance of options to purchase up to an aggregate of 200,000 shares of Common Stock, with vesting periods of up to ten years and maximum option terms of ten years. As of December 31, 2000, options to purchase 185,160 shares are available for issue. The following table summarizes the transactions of the company's stock option plans for the three-year period ended December 31, 2000:
Weighted-Average Number of Shares Exercise Price ---------------- ---------------- Unexercised options outstanding -- December 31, 1997 520,086 $14.68 Options granted 32,600 $35.56 Options exercised (53,486) $11.54 Options forfeited (4,600) $19.97 ------- ------ Unexercised options outstanding -- December 31, 1998 494,600 $16.35 Options granted 72,200 $40.25 Options exercised (50,852) $12.34 Options forfeited (7,228) $26.90 ------- ------ Unexercised options outstanding -- December 31, 1999 508,720 $19.99 Options granted 35,200 $32.15 Options exercised (74,168) $13.07 Options forfeited (11,500) $25.90 ------- ------ Unexercised options outstanding -- December 31, 2000 458,252 $21.90 ======= ====== Price range $8.38 -- $12.38 (weighted-average contractual life of 3.2 years) 173,400 $10.40 Price range $14.81 -- $24.13 (weighted-average contractual life of 6.2 years) 152,652 $21.74 Price range $31.75 -- $40.25 (weighted-average contractual life of 8.5 years) 132,200 $37.17 ======= ====== Exercisable options -- December 31, 1998 319,040 $12.50 December 31, 1999 383,287 $14.46 December 31, 2000 397,733 $17.88 ======= ======
46 14 BADGER METER, INC. N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S December 31, 2000, 1999 and 1998 As allowed by SFAS 123, "Accounting for Stock-Based Compensation", the company has elected to continue to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), in accounting for its stock option plans. Under APB 25, the company does not recognize compensation expense upon the issuance of its stock options because the option terms are fixed and the exercise price equals the market price of the underlying stock on the grant date. The company has determined the pro-forma information as if the company had accounted for stock options granted since January 1, 1995, under the fair value method of SFAS 123. The Black-Scholes option pricing model was used with the following weighted-average assumptions for options issued in each year:
2000 1999 1998 --------- --------- --------- Risk-free interest rate 6.8% 5.6% 5.7% Dividend yield 3% 3% 1% Volatility factor 30% 38% 34% Weighted-average expected life 6.6 years 5.0 years 5.0 years ========= ========= =========
The weighted-average fair values of options granted in 2000, 1999 and 1998 were $10.12, $12.84 and $12.89 per share, respectively. If the company had recognized compensation expense based on these values, the company's pro-forma net earnings and both basic and diluted earnings per share would have been reduced by approximately $368,000 or $.11 per share for 2000, $306,000 or $.09 per share for 1999, and $336,000 or $.09 per share for 1998. These pro-forma calculations only include the effects of options granted since January 1, 1995. As such, the impacts are not necessarily indicative of the effects on net income of future years. 6 COMMITMENTS AND CONTINGENCIES A. COMMITMENTS The company leases equipment and facilities under operating leases, some of which contain renewal options and certain computer equipment under capital lease. Future minimum lease payments consisted of the following at December 31, 2000:
Operating Capital Total (In thousands) Leases Lease Leases --------- ------- ------ 2001 $ 655 $ 135 $ 790 2002 332 33 365 2003 275 0 275 2004 161 0 161 2005 and thereafter 213 0 213 ------ ----- ------ Total minimum lease payments 1,636 168 1,804 Less: amount representing interest 0 (2) (2) ------ ----- ------ Present value of net minimum lease payments 1,636 166 1,802 Less: current portion 0 (133) (133) ------ ----- ------ Lease obligations $1,636 $ 33 $1,669 ====== ===== ======
Total rental expense charged to operations under all operating leases was $1,586,000, $1,510,000 and $1,561,000 in 2000, 1999 and 1998, respectively. 47 15 BADGER METER, INC. N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S December 31, 2000, 1999 and 1998 B. CONTINGENCIES In the normal course of business, the company is named in legal proceedings. There are currently no material legal proceedings pending with respect to the company. The company is subject to contingencies relative to environmental laws and regulations. Currently the company is in the process of resolving issues relative to two landfill sites. The company does not believe the ultimate resolution of these claims will have a material adverse effect on the company's financial position or results of operations. Provision has been made for all known settlement costs. The company makes commitments in the normal course of business. At December 31, 2000, these commitments were not significant individually or in the aggregate. The company has evaluated its worldwide operations to determine if any risks and uncertainties exist that could severely impact its operations in the near term. The company does not believe that there are any significant risks. However, the company does rely on single suppliers for certain castings and components in several of its product lines. Although alternate sources of supply exist for these items, loss of certain suppliers could temporarily disrupt operations. The company attempts to mitigate these risks by working closely with key suppliers and by purchasing business interruption insurance where appropriate. The company reevaluates its exposures on a periodic basis and makes adjustments to reserves as appropriate. 48 16 BADGER METER, INC. N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S December 31, 2000, 1999 and 1998 7 EMPLOYEE BENEFIT PLANS A. PENSION PLAN The company maintains a non-contributory defined benefit pension plan for its employees. The following table sets forth the components of net periodic pension expense for the years ended December 31, 2000, 1999 and 1998:
(In thousands) 2000 1999 1998 ------- ------- ------- Service cost -- benefits earned during the year $ 1,758 $ 1,793 $ 1,734 Interest cost on projected benefit obligations 2,816 2,648 2,659 Expected return on plan assets (3,700) (3,617) (3,532) Net amortization and deferral (522) (353) (373) ------- ------- ------- Net periodic pension cost $ 352 $ 471 $ 488 ======= ======= =======
The following table provides a reconciliation of benefit obligations, plan assets and funded status:
(In thousands) 2000 1999 ------- ------- Change in benefit obligation: Benefit obligation at beginning of year $37,549 $37,833 Service cost 1,758 1,793 Interest cost 2,816 2,648 Plan amendments 558 0 Actuarial gain (148) (1,167) Benefits paid (5,212) (3,558) ------- ------- Projected benefit obligation as of September 30 $37,321 $37,549 ------- ------- Change in plan assets: Fair value of plan assets as of beginning of year $41,076 $40,979 Actual return on plan assets 4,466 3,655 Company contributions 0 0 Benefits paid (5,212) (3,558) ------- ------- Fair value of plan assets as of September 30 $40,330 $41,076 ------- ------- Reconciliation: Funded status as of September 30 $3,009 $3,527 Unrecognized net transition asset 0 (423) Unrecognized prior service cost (1,629) (2,349) Unrecognized net actuarial loss 4,060 5,036 ------- ------- Prepaid pension asset as of September 30 and December 31 $ 5,440 $ 5,791 ======= =======
Actuarial assumptions used in the preparation of the above data:
2000 1999 ---- ---- Discount rate 7.5% 7.5% Expected return on plan assets 9.0% 9.0% Rate of compensation increase 5.0% 5.0% ==== ====
49 17 BADGER METER, INC. N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S December 31, 1999, 1998 and 1997 B. OTHER POSTRETIREMENT BENEFITS The company has certain postretirement plans that provide medical benefits for retirees and eligible dependents. The following table sets forth the components of net periodic postretirement benefit cost for the years ended December 31, 2000, 1999 and 1998:
(In thousands) 2000 1999 1998 ----- ----- ----- Service cost, benefits attributed for service of active employees for the period $ 96 $ 105 $ 100 Interest cost on the accumulated postretirement benefit obligation 491 456 501 Unrecognized prior service credit (236) (236) (236) Unrecognized net loss 67 53 57 ----- ----- ----- Net periodic postretirement benefit cost $ 418 $ 378 $ 422 ===== ===== =====
The following table provides a reconciliation of benefit obligations. It is the company's policy to fund health care benefits on a cash basis. Since there are no plan assets, the plan is unfunded.
(In thousands) 2000 1999 ------- ------- Change in benefit obligation: Benefit obligation at beginning of year $ 6,884 $ 6,833 Service cost 96 105 Interest cost 491 456 Actuarial (gain) loss (67) 260 Benefits paid (775) (770) ------- ------- Projected benefit obligation and unfunded status as of December 31 6,629 6,884 Unrecognized prior service credit 1,590 1,826 Unrecognized net actuarial loss (1,550) (1,696) ------- ------- Accrued postretirement benefit cost as of December 31 $ 6,669 $ 7,014 ======= =======
The discount rate used to measure the accumulated postretirement benefit obligation was 7.5% for 2000 and 1999. Since the company has established fixed company contribution amounts for retiree health care benefits, future health care cost trends do not impact the company's accruals or provisions. 50 18 BADGER METER, INC. N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S December 31, 2000, 1999 and 1998 C. BADGER METER EMPLOYEE SAVINGS AND STOCK OWNERSHIP PLAN The Badger Meter Employee Savings and Stock Ownership Plan (the ESSOP) has used proceeds from loans, guaranteed by the company, to purchase Common Stock of the company from shares held in treasury. The company is obligated to contribute sufficient cash to the ESSOP to enable it to repay the loan principal and interest. The principal amount of the loan was $2,300,000 as of December 31, 2000 and $2,600,000 as of December 31, 1999. This principal amount has been recorded as long-term debt and a like amount of unearned compensation has been recorded as a reduction of shareholders' equity in the accompanying Consolidated Balance Sheets. The company made principal payments of $300,000, $0 and $200,000 in 2000, 1999 and 1998, respectively. These payments released shares of Common Stock (14,591 in 2000 and 22,856 in 1998) for allocation to participants in the ESSOP. The ESSOP held unreleased shares of 111,844, 126,435 and 126,435 as of December 31, 2000, 1999 and 1998, respectively. Unreleased shares are not considered outstanding for purposes of computing earnings per share. The ESSOP includes a voluntary 401(k) savings plan which allows domestic employees to defer up to 15% of their income on a pretax basis. The company matches 25% of each employee's contribution, with the match percentage applying to a maximum of 7% of the employee's salary. The match is paid using company stock released through the ESSOP loan payments. For ESSOP shares purchased prior to 1993, compensation expense is recognized based on the original purchase price of the shares released and dividends on unreleased shares are used to reduce interest expense on the ESSOP loans. For shares purchased after 1992, expense is based on the market value of the shares on the date released and dividends on unreleased shares are accounted for as additional interest expense. Compensation expense of $291,000, $274,000 and $200,000 was recognized for the match for 2000, 1999, and 1998, respectively. 51 19 BADGER METER, INC. N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S December 31, 2000, 1999 and 1998 8 INCOME TAX EXPENSE Details of earnings before income taxes and the related provision for income taxes are as follows:
(In thousands) 2000 1999 1998 ------- ------- ------- Earnings before income taxes: Domestic $10,200 $15,126 $13,107 Foreign 527 533 257 ------- ------- ------- Total $10,727 $15,659 $13,364 ======= ======= ======= Income taxes: Current: Federal $ 2,292 $ 3,837 $ 4,180 State 535 923 878 Foreign 142 148 167 Deferred: Federal 653 787 (60) State 223 163 (18) Foreign (59) 101 (30) ------- ------- ------- Total $ 3,786 $ 5,959 $ 5,117 ======= ======= =======
The components of the net deferred tax asset as of December 31, were as follows (in thousands):
DEFERRED TAX ASSETS: 2000 1999 ------ ------ Receivables $ 242 $ 177 Inventories 137 336 Accrued compensation 667 787 Other payables 1,629 2,242 Non-pension postretirement benefits 2,605 2,730 Accrued employee benefits 2,065 1,919 ------ ------ Total deferred tax assets 7,345 8,191 DEFERRED TAX LIABILITIES: ------ ------ Depreciation 3,636 3,099 Prepaid pension 2,125 2,254 Other 188 625 ------ ------ Total deferred tax liabilities 5,949 5,978 ------ ------ Net deferred tax asset included in balance sheet $1,396 $2,213 ====== ======
52 20 BADGER METER, INC. N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S December 31, 2000, 1999 and 1998 The provision for income tax differs from the amount which would be provided by applying the statutory U.S. corporate income tax rate in each year due to the following items:
(In thousands) 2000 1999 1998 ------ ------ ------ Provision at statutory rate $3,648 $5,355 $4,544 State income taxes, net of federal tax benefit 500 715 568 Foreign income taxes (97) 67 50 Tax benefit of FSC (68) (32) (78) Other (197) (146) 33 ------ ------ ------ Actual provision $3,786 $5,959 $5,117 ====== ====== ======
No provision for federal income taxes is made on the earnings of foreign subsidiaries that are considered permanently invested or that would be offset by foreign tax credits upon distribution. Such undistributed earnings at December 31, 2000, were $947,000. 9 LONG-TERM DEBT AND FAIR VALUE OF FINANCIAL INSTRUMENTS Long-term debt consists of the following:
(In thousands) 2000 1999 ------- ------- ESSOP debt (Note 7C) $ 2,300 $ 2,600 Capital lease (Note 6A) 166 298 Bank note 8,726 13,482 ------- ------- Total debt 11,192 16,380 Less: current maturities 5,248 4,887 ------- ------- Net long-term debt $ 5,944 $11,493 ======= =======
Interest on the ESSOP debt may be charged at either Prime Rate or at LIBOR plus 1.5%. As of December 31, 2000, the LIBOR-based loan had an interest rate of 8.1%. The terms of the loan allow variable payments of principal with the final principal and interest payment due December 31, 2005. The interest expense on the ESSOP debt was $125,000, $121,000 and $5,000 which was net of dividends on unallocated ESSOP shares of $57,000, $51,000 and $45,000 for 2000, 1999 and 1998, respectively. In August of 1999, the company borrowed $15,000,000 of long-term, unsecured debt from a local bank. The debt bears interest at 7.15% and is due in monthly installments through August, 2002. Principal payments total $5,115,000 for 2001 and $3,611,000 for 2002. Cash, receivables and payables are reflected in the financial statements at fair value. Short-term debt is comprised of notes payable drawn against the company's lines of credit and commercial paper. Because of the short-term nature of these instruments, the carrying value approximates the fair value. Long-term debt related to the company's guarantee of the ESSOP debt is offset by a similar amount in shareholders' equity. The estimated fair value of the company's $8,726,000 long-term bank note was $8,818,000 at December 31, 2000, based on quoted market rates. 53 21 BADGER METER, INC. N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S December 31, 2000, 1999 and 1998 10 INDUSTRY SEGMENT The company is a marketer and manufacturer of flow measurement and control instruments, which comprise one reportable segment due to similarities in the nature of the products, production processes, customers and methods of distribution. Information regarding geographic areas is as follows:
(In thousands) 2000 1999 1998 -------- -------- -------- Revenues: United States $124,402 $132,924 $127,371 Foreign $ 21,987 $ 17,953 $ 16,442 Long-Lived Assets: United States $ 51,060 $ 51,504 $ 46,899 Foreign $ 1,737 $ 1,390 $ 1,464 ======== ======== ========
54 22 BADGER METER, INC. N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S December 31, 2000, 1999 and 1998 11 QUARTERLY RESULTS OF OPERATIONS (UNAUDITED), COMMON STOCK PRICE AND DIVIDENDS
QUARTER ENDED -------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- ------- ------------ ----------- (IN THOUSANDS EXCEPT PER SHARE DATA) 2000 Net sales $36,907 $35,845 $39,508 $34,129 Gross margin $14,289 $11,994 $14,479 $12,252 Net earnings $ 2,357 $ 1,534 $ 1,948 $ 1,102 Earnings per share: Basic $ .71 $ .46 $ .59 $ .34 Diluted $ .67 $ .44 $ .56 $ .32 Dividends declared: Common $ .22 $ .22 $ .22 $ .22 Stock price: High $ 36.63 $ 37.38 $ 29.50 $ 28.01 Low $ 30.00 $ 25.00 $ 25.38 $ 23.00 Quarter-end close $ 36.25 $ 25.50 $ 27.63 $ 23.00 ------- ------- ------- ------- 1999 Net sales $38,397 $38,512 $37,551 $36,417 Gross margin $14,774 $15,470 $14,891 $14,020 Net earnings $ 2,151 $ 2,834 $ 2,420 $ 2,295 Earnings per share: Basic $ .58 $ .77 $ .70 $ .70 Diluted $ .55 $ .73 $ .65 $ .65 Dividends declared: Common $ .18 $ .18 $ .18 $ .18 Class B $ .16 $ .16 $ 0 $ 0 Stock price: High $ 37.63 $ 37.25 $ 41.00 $ 39.50 Low $ 30.63 $ 29.50 $ 34.25 $ 29.38 Quarter-end close $ 30.69 $ 34.75 $ 34.25 $ 30.13 ------- ------- ------- -------
Badger Meter, Inc. Common Stock is listed on the American Stock Exchange under the symbol BMI. Earnings per share is computed independently for each quarter. As such, the annual per share amount may not equal the sum of the quarterly amounts due to rounding. Shareholders of record as of December 31, 2000 and 1999, totaled 530 and 550, respectively, for Common Stock. Voting trusts are counted as single shareholders for this purpose. 55 23 BADGER METER, INC. R E P O R T O F I N D E P E N D E N T A U D I T O R S REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Shareholders Badger Meter, Inc. We have audited the accompanying consolidated balance sheets of Badger Meter, Inc. as of December 31, 2000 and 1999, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Badger Meter, Inc. at December 31, 2000 and 1999, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. Ernst & Young LLP Milwaukee, Wisconsin January 30, 2001 56 24 (Page 23 of Annual Report to Shareholders) BADGER METER, INC. T E N Y E A R S U M M A R Y O F S E L E C T E D D A T A Years ended December 31 (in thousands except per share data)
2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 --------- -------- -------- -------- -------- -------- -------- -------- -------- -------- OPERATING RESULTS Net sales $ 146,389 150,877 143,813 130,771 116,018 108,644 99,155 84,497 82,106 78,417 Research and development $ 6,562 6,012 6,105 4,397 3,851 3,858 3,278 3,642 4,119 4,046 Earnings before income taxes $ 10,727 15,659 13,364 10,205 8,167 5,911 4,974 3,306 1,160 2,419 Earnings before changes in accounting $ 6,941 9,700 8,247 6,522 5,127 3,719 3,216 2,164 802 1,648 Cumulative effect of changes in accounting $ 0 0 0 0 0 0 0 0 (4,684) 0 Net earnings (loss) $ 6,941 9,700 8,247 6,522 5,127 3,719 3,216 2,164 (3,882) 1,648 Earnings to sales * 4.7% 6.4% 5.7% 5.0% 4.4% 3.4% 3.2% 2.6% 1.0% 2.1% --------- -------- -------- -------- -------- -------- -------- -------- -------- -------- PER COMMON SHARE Basic earnings before changes in accounting $ 2.10 2.78 2.28 1.83 1.46 1.06 .93 .64 .24 .49 Cumulative effect of changes in accounting $ 0 0 0 0 0 0 0 0 (1.38) 0 Basic earnings (loss) $ 2.10 2.78 2.28 1.83 1.46 1.06 .93 .64 (1.14) .49 Cash dividends declared: Common Stock $ .86 .72 .60 .48 .43 .39 .35 .32 .30 .30 Class B Common Stock $ 0 .32 .54 .44 .39 .36 .32 .29 .28 .28 Price range -- high $ 37.38 41.00 40.63 57.50 20.81 13.50 14.00 11.00 8.88 9.00 Price range -- low $ 23.00 29.38 25.00 18.13 12.38 11.06 9.50 8.88 7.38 6.81 Closing price $ 23.00 30.13 35.63 40.75 19.19 13.25 11.94 9.56 8.75 7.69 Book value $ 13.51 12.88 13.13 11.62 10.32 9.16 8.38 7.66 7.31 8.61 --------- -------- -------- -------- -------- -------- -------- -------- -------- -------- SHARES OUTSTANDING Common Stock 3,207 3,340 2,538 2,444 2,426 2,387 2,377 2,281 2,282 2,280 Class B Common Stock 0 0 1,108 1,126 1,126 1,126 1,126 1,126 1,126 1,126 --------- -------- -------- -------- -------- -------- -------- -------- -------- -------- FINANCIAL POSITION Working capital $ 6,822 11,150 10,776 13,870 17,645 16,178 14,569 12,010 9,876 9,842 Current ratio 1.2 to 1 1.3 to 1 1.3 to 1 1.5 to 1 2.0 to 1 2.1 to 1 1.7 to 1 1.6 to 1 1.6 to 1 1.6 to 1 Net cash provided by operations $ 13,251 15,652 15,007 5,178 9,878 12,026 6,342 2,969 3,833 5,410 Capital expenditures $ 6,403 9,981 17,926 8,349 5,382 4,493 3,553 3,121 3,496 3,335 Total assets $ 98,710 103,086 96,945 82,297 66,133 60,527 61,993 57,627 53,895 51,199 Long-term debt $ 5,944 11,493 2,600 928 1,091 1,000 1,200 1,400 1,700 1,900 Shareholders' equity $ 43,319 43,009 47,848 41,467 36,638 32,163 29,351 26,074 24,894 29,303 Debt to total capitalization 40.1% 39.5% 26.1% 22.7% 9.2% 16.8% 28.4% 34.9% 34.2% 28.7% Return on shareholders' equity * 16.0% 22.6% 17.2% 15.7% 14.0% 11.6% 11.0% 8.3% 3.2% 5.6% Price/earnings ratio * 11.0 10.8 15.6 22.3 13.1 12.5 12.8 15.1 37.2 15.9 --------- -------- -------- -------- -------- -------- -------- -------- -------- --------
* PRIOR TO ACCOUNTING CHANGES 57