-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GFA1L58usUOS94v22tCtb1BtZaDr2H8v+RNcNTXFYM2iJVcgFPEbkPPsko0JxIkZ RViDtdLDuivAie7dl9BgaA== 0000950137-04-001509.txt : 20040305 0000950137-04-001509.hdr.sgml : 20040305 20040305152323 ACCESSION NUMBER: 0000950137-04-001509 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040305 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BADGER METER INC CENTRAL INDEX KEY: 0000009092 STANDARD INDUSTRIAL CLASSIFICATION: TOTALIZING FLUID METERS & COUNTING DEVICES [3824] IRS NUMBER: 390143280 STATE OF INCORPORATION: WI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-06706 FILM NUMBER: 04651924 BUSINESS ADDRESS: STREET 1: 4545 WEST BROWN DEER ROAD CITY: MILWAUKEE STATE: WI ZIP: 53223 BUSINESS PHONE: 4143715702 MAIL ADDRESS: STREET 1: 4545 W BROWN DEER RD CITY: MILWAUKEE STATE: WI ZIP: 53223 FORMER COMPANY: FORMER CONFORMED NAME: BADGER METER MANUFACTURING CO DATE OF NAME CHANGE: 19710729 10-K 1 c83420e10vk.txt ANNUAL REPORT - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003 ------------------------ BADGER METER, INC. 4545 W. BROWN DEER ROAD MILWAUKEE, WISCONSIN 53223 (414) 355-0400 A WISCONSIN CORPORATION IRS EMPLOYER IDENTIFICATION NO. 39-0143280 COMMISSION FILE NO. 1-6706 The Company has the following classes of securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of class: on which registered: Common Stock American Stock Exchange Common Share Purchase Rights American Stock Exchange
The Company does not have any securities registered pursuant to Section 12(g) of the Act. The Company 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, and has been subject to such filing requirements for the past 90 days. The Company includes a disclosure of delinquent filers pursuant to Item 405 of Regulation S-K in the definitive Proxy Statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. The Company is an accelerated filer (as defined in Rule 12b-2 of the Act). The aggregate market value of the Common Stock held by non-affiliates of the Company as of February 29, 2004 was $77,809,908. For purposes of this calculation only, (i) shares of Common Stock are deemed to have a market value of $25.75 per share, the closing price of the Common Stock as reported on the American Stock Exchange on June 30, 2003, and (ii) each of the executive officers and directors is deemed to be an affiliate. As of February 29, 2004, there were 3,300,823 shares of Common Stock outstanding. Portions of the Company's Proxy Statement for the Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission under Regulation 14A within 120 days after the end of the registrant's fiscal year, are incorporated by reference from the definitive Proxy Statement into Part III. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS Certain statements contained in this Form 10-K and accompanying 2003 Annual 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 then current views and assumptions and involve risks and uncertainties that include, among other things: - the continued shift in the Company's business from lower cost, local-read meters towards more expensive, value-added automatic meter reading (AMR) systems; - the success or failure of new Company products, including the Orion radio frequency drive-by AMR meter, the advanced digital encoder (ADE) and the proposed Galaxy fixed base AMR system; - changes in competitive pricing and bids in the marketplace, and particularly continued intense price competition on government bid contracts for lower cost, local read meters; - the actions (or lack thereof) of the Company's competitors; - the Company's relationships with its alliance partners, particularly its alliance partners that provide AMR connectivity solutions; - the general health of the United States economy, particularly including housing starts and the overall industrial activity; - changes in foreign economic conditions, including currency fluctuations such as the recent increase in the euro versus the United States dollar; - changes in laws and regulations, particularly laws dealing with the use of lead (which can be used in the manufacture of certain meters incorporating brass housings) and Federal Communications Commission rules affecting the use and/or licensing of radio frequencies necessary for AMR products; and - increases in the cost and/or availability of needed raw materials and parts, including recent increases in the cost of brass housings as a result of increases in the commodity prices for copper and zinc at the supplier level. Some or all of these factors are beyond the Company's control. Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward looking statements and are cautioned not to place undue reliance on such forward looking statements. The forward looking statements made in this document are made only as of the date of this document and the Company undertakes no obligation to publicly update such forward looking statements to reflect subsequent events or circumstances. PART I ITEM 1. BUSINESS Badger Meter, Inc. (the "Company") is a leading marketer and manufacturer of products, and a provider of services, using flow measurement and control technologies serving markets worldwide. The Company was incorporated in 1905. AVAILABLE INFORMATION The Company's Internet address is http://www.badgermeter.com. The Company makes available free of charge (other than an investor's own Internet access charges) through its Internet website its Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, on the same day they are electronically filed with, or furnished to, the Securities and Exchange Commission. The 1 Company is not including the information contained on or available through its website as a part of, or incorporating such information by reference into, this Annual Report on Form 10-K. MARKETS AND PRODUCTS 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's product lines fall into two general categories, utility and industrial. Two product lines, residential and commercial water meters (with various meter reading technology systems), are generally sold to water utilities. Industrial sales comprise the remainder of the sales and include automotive fluid meters and systems, small precision valves, electromagnetic meters, impeller flow meters and industrial process meters (all with related accessories and instrumentation). Residential and commercial water meters and related systems provide the majority of the Company's sales. Sales are classified as local (or manual) read meters or automatic meter reading (AMR) products. Local read meters consist of a water meter and a register. If the device is automatic, the register digitally encodes the mechanical reading and has a radio frequency transmitter communicating to a computerized system that collects the data, which in turn is sent to specific utility computerized programs. Net sales and the corresponding net income depend on unit volume and mix of products, with generally higher margins on AMR products. There is a base level of annual business driven by replacement units, and to a lesser extent, housing starts. It is the Company's belief that conversion from local read meters to AMR products can accelerate replacements of meters and result in growth. 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. The industrial products generally serve niche markets and have in the past utilized technology derived from utility products to serve industrial uses. As these markets evolve, these products are becoming more specialized to meet industrial flow measurement and communication protocol requirements. Serving these markets allows the Company to expand its technologies into other areas of flow measurement and control, as well as utilizing existing capacity and spreading fixed costs over a larger sales base. The Company's products are primarily manufactured and assembled in the Company's Milwaukee, Wisconsin; Tulsa, Oklahoma; Rio Rico, Arizona; Nogales, Mexico and Brno, Czech Republic facilities. Products are also assembled in the Company's Stuttgart, Germany and Nancy, France facilities. The Company's products are sold throughout the world through various distribution channels including direct sales representatives, distributors and independent sales representatives. There is a moderate seasonal impact on sales, primarily relating to slightly higher sales of certain utility products during the spring and summer months. No single customer accounts for more than 10% of the Company's sales. COMPETITION There are several competitors in each of the markets in which the Company sells its products, and the competition varies from moderate to intense. Major competitors include Sensus Metering Systems, Inc. (formerly Invensys, Inc.), Neptune Technologies (formerly Neptune Technology Group, Inc.) and AMCO Water Metering Systems (formerly ABB-Kent Meters, Inc.). A number of the Company's competitors in certain markets have greater financial resources. The Company believes it currently provides the leading technology in water meters and associated automatic meter reading systems for water utilities. As a result of significant research and development activities, the Company enjoys favorable patent positions for several of its products. BACKLOG The dollar amount of the Company's total backlog of unshipped orders at December 31, 2003 and 2002 was $24,800,000 and $21,200,000, respectively. At December 31, 2003, backlog is comprised of firm orders and signed contractual commitments, or portions of such commitments, that call for shipment in 2004. Backlog can be significantly affected by the timing of orders for large utility projects. 2 RAW MATERIALS Raw materials used in the manufacture of the Company's products include metal or alloys (such as bronze, aluminum, stainless steel, cast iron, brass and stellite), plastic resins, glass, microprocessors and other electronic subassemblies and components. There are multiple sources for these raw materials, but the Company purchases some bronze castings and certain electronic subassemblies from single suppliers. The Company believes these items would be available from other sources, but that the loss of its current suppliers would result in higher cost of materials, delivery delays, short-term increases in inventory and higher quality control costs in the short term. The Company carries business interruption insurance on key suppliers. Prices may also be affected by world commodity markets. RESEARCH AND DEVELOPMENT Expenditures for research and development activities relating to the development of new products, the improvement of existing products and manufacturing process improvements were $6,070,000 in 2003, compared to $5,658,000 during 2002, and $5,422,000 during 2001. Research and development activities are primarily sponsored by the Company. The Company also engages in some joint research and development with other companies. INTANGIBLE ASSETS The Company owns or controls many patents, trademarks, trade names and license agreements in the United States and other countries that relate to its products and technologies. No single patent, trademark, trade name or license is material to the Company's business as a whole. ENVIRONMENTAL PROTECTION The Company is subject to contingencies relative to compliance with federal, state and local provisions and regulations relating to the protection of the environment. Currently, the Company is in the process of resolving an issue relative to a landfill site. The Company does not believe the ultimate resolution of this issue will have a material adverse effect on the Company's financial position or results of operations, either from a cash flow perspective or on the financial statements as a whole. Expenditures during 2003, 2002 and 2001 for compliance with environmental control provisions and regulations were not material and the Company does not anticipate any material future expenditures. To ensure compliance with environmental regulations at Company sites, the Board of Directors has directed the Audit and Compliance Committee to monitor the Company's compliance with various regulatory authorities with regard to environmental matters, among other things. EMPLOYEES The Company and its subsidiaries employed 1,065 persons at December 31, 2003, of which 226 employees are covered by a collective bargaining agreement with District 10 of the International Association of Machinists. The Company is currently operating under a four-year contract with the union, which expires October 31, 2004. The Company believes it has good relations with the union and all of its employees. FOREIGN OPERATIONS AND EXPORT SALES The Company has distributors and sales representatives throughout the world. Additionally, the Company has a sales, assembly and distribution facility in Stuttgart, Germany; sales and customer service offices in Mexico and Singapore; a manufacturing facility in Nogales, Mexico; a manufacturing and sales facility in Brno, Czech Republic; and a sales and assembly facility in Nancy, France. The Company exports products from the United States that are manufactured in Milwaukee, Wisconsin; Tulsa, Oklahoma; and Rio Rico, Arizona. Information about the Company's foreign operations and export sales is included in Note 10 "Industry Segment and Geographic Areas" in the Notes to Consolidated Financial Statements in Part II, Item 8 of this 2003 Annual Report on Form 10-K. 3 FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS The Company operates in one industry segment as a marketer and manufacturer of flow measurement and control products as described in Note 10 "Industry Segment and Geographic Areas" in the Notes to Consolidated Financial Statements in Part II, Item 8 of this 2003 Annual Report on Form 10-K. ITEM 2. PROPERTIES The principal facilities utilized by the Company at December 31, 2003 are listed below. Except as indicated, the Company owns all of such facilities in fee simple. The Company believes that its facilities are generally well maintained and have sufficient capacity for its current needs.
APPROXIMATE AREA LOCATION PRINCIPAL USE (SQUARE FEET) - -------- ------------- ---------------- Milwaukee, Wisconsin..................... Manufacturing and offices 323,000 Tulsa, Oklahoma.......................... Manufacturing and offices 59,500 Rio Rico, Arizona........................ Manufacturing and offices 36,000 Nogales, Mexico.......................... Manufacturing and offices 41,700(1) Mattapoisett, Massachusetts.............. Manufacturing and offices 23,000(2) Stuttgart, Germany....................... Assembly and offices 23,000(3) Brno, Czech Republic..................... Manufacturing and offices 24,300 Nancy, France............................ Assembly and offices 52,500
- --------------- (1) Leased facility. Lease term expires January 31, 2006. (2) Leased facility. Lease term expired February 28, 2004 and the facility was closed. (3) Leased facility. Lease term expires December 31, 2005. ITEM 3. LEGAL PROCEEDINGS There are currently no material legal proceedings pending with respect to the Company. The more significant legal proceedings are discussed below. The Company is a defendant in several multi-party asbestos suits generally as a result of its membership in certain trade organizations. The cases are pending in state courts in Mississippi, Texas and Illinois. 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, either from a cash flow perspective or on the financial statements as a whole. The Company is subject to contingencies relative to the protection of the environment. Information about the Company's compliance with environmental regulations is included in Part I, Item 1 under the heading "Environmental Protection." ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's shareholders during the quarter ended December 31, 2003. 4 EXECUTIVE OFFICERS OF THE COMPANY The following table sets forth certain information regarding the executive officers of the Company.
AGE AT NAME POSITION 2/29/2004 - ---- -------- --------- Richard A. Meeusen........... President and Chief Executive Officer 49 Robert M. Bullis............. Vice President -- Manufacturing 54 Ronald H. Dix................ Senior Vice President -- Administration/Human 59 Resources and Secretary Horst E. Gras................ Vice President -- International Operations 48 Richard E. Johnson........... Senior Vice President -- Finance, Chief Financial 49 Officer and Treasurer Beverly L.P. Smiley.......... Vice President -- Controller 54 Kenneth E. Smith............. Vice President -- Sales and Marketing 55 Dennis J. Webb............... Vice President -- Engineering 56 Daniel D. Zandron............ Vice President -- Business Development 55
There are no family relationships between any of the executive officers. All of the officers are elected annually at the first meeting of the Board of Directors held after each annual meeting of the shareholders. Each officer holds office until his successor has been elected or until his death, resignation or removal. There is no arrangement or understanding between any executive officer and any other person pursuant to which he was elected as an officer. Mr. Meeusen was elected President and Chief Executive Officer in April 2002. Mr. Meeusen served as President from November 2001 to April 2002, and as Executive Vice President -- Administration from February 2001 to November 2001. From November 1995 until February 2001, Mr. Meeusen served as Vice President -- Finance, Chief Financial Officer and Treasurer. Mr. Bullis was elected Vice President -- Manufacturing in February 2001. He served as Vice President -- Operations from November 1999 to February 2001. Prior to that date, Mr. Bullis served as Vice President -- Operations -- Utility for more than five years. Mr. Dix was elected Senior Vice President -- Administration/Human Resources in May 2003 and Secretary in August 2003. Mr. Dix served as Vice President -- Administration and Human Resources from November 2001 to May 2003, and as Vice President -- Human Resources from February 2001 to November 2001. Prior to that date, Mr. Dix served as Vice President -- Administration and Human Resources for more than five years. Mr. Gras was elected Vice President -- International Operations in November 2001. Prior to that date, Mr. Gras served as Vice President -- Badger Meter Europe for more than five years. Mr. Johnson was elected Senior Vice President -- Finance, Chief Financial Officer and Treasurer in May 2003. Mr. Johnson served as Vice President -- Finance, Chief Financial Officer and Treasurer from February 2001 to May 2003. Prior to joining the Company, Mr. Johnson served as Director of Business Support for the Energy Delivery Business of Wisconsin Electric Power Company from 1999 to December 2000. Ms. Smiley was elected Vice President -- Controller in November 1999. From April 1997 to November 1999, Ms. Smiley served as Corporate Controller. Mr. Smith was elected Vice President -- Sales and Marketing in November 2001. Mr. Smith served as Vice President -- Industrial Products and International from November 2000 to November 2001. Mr. Smith served as Vice President -- Industrial and Commercial Products from January 2000 to November 2000. Prior to joining the Company in January 2000, Mr. Smith served as President of Peek Measurement Group for more than five years. 5 Mr. Webb was elected Vice President -- Engineering in November 2001. Mr. Webb served as Vice President -- Customer Solutions from April 2000 to November 2001, and as Vice President -- Engineering and Quality from November 1999 to April 2000. Prior to that date, Mr. Webb served as Vice President -- Engineering and Quality -- Utility for more than five years. Mr. Zandron was elected Vice President -- Business Development in November 2001. Mr. Zandron served as Vice President -- Utility Products from November 2000 to November 2001, and as Vice President -- Commercial and Industrial Products, and a number of similar capacities, from January 2000 to November 2000. From May 1999 to January 2000, Mr. Zandron served as Vice President -- Commercial and Industrial Products -- Utility. Prior to that date, Mr. Zandron served as Vice President -- Commercial and Industrial and Marketing for more than five years. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Information required by this Item is set forth in Part II, Item 8 under the heading "Financial Statements and Supplementary Data" of this 2003 Annual Report on Form 10-K, under Note 11 "Unaudited: Quarterly Results of Operations, Common Stock Price and Dividends" of the Notes to Consolidated Financial Statements. 6 ITEM 6. SELECTED FINANCIAL DATA BADGER METER, INC. TEN YEAR SUMMARY OF SELECTED DATA
YEARS ENDED DECEMBER 31 ---------------------------------------------------- 2003 2002 2001 2000 1999 -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) OPERATING RESULTS Net sales.................... $183,989 167,317 138,537 146,389 150,877 Research and development..... $ 6,070 5,658 5,422 6,562 6,012 Earnings before income taxes...................... $ 13,351 11,437 5,010 10,727 15,659 Net earnings................. $ 7,577 7,271 3,364 6,941 9,700 Earnings to sales............ 4.1% 4.3% 2.4% 4.7% 6.4% -------- -------- -------- -------- -------- PER COMMON SHARE Basic earnings............... $ 2.35 2.30 1.06 2.10 2.78 Diluted earnings............. $ 2.30 2.20 1.03 2.00 2.60 Cash dividends declared: Common Stock............... $ 1.06 1.02 1.00 .86 .72 Class B Common Stock....... $ n/a n/a n/a n/a .32 Price range -- high.......... $ 39.75 34.00 33.22 37.38 41.00 Price range -- low........... $ 24.50 22.08 19.76 23.00 29.38 Closing price................ $ 38.15 32.10 22.43 23.00 30.13 Book value................... $ 16.76 14.93 13.52 13.51 12.88 -------- -------- -------- -------- -------- SHARES OUTSTANDING Common Stock................. 3,292 3,221 3,180 3,207 3,340 Class B Common Stock......... n/a n/a n/a n/a 0 -------- -------- -------- -------- -------- FINANCIAL POSITION Working capital.............. $ 25,946 6,825 23,170 6,822 11,150 Current ratio................ 1.7 to 1 1.1 to 1 2.0 to 1 1.2 to 1 1.3 to 1 Net cash provided by operations................. $ 14,088 12,234 8,587 13,251 15,652 Capital expenditures......... $ 7,053 5,914 5,007 6,403 9,981 Total assets................. $133,851 126,463 101,375 98,023 102,186 Short-term and current portion of long-term debt....................... $ 9,188 26,334 8,264 23,017 16,589 Long-term debt............... $ 24,450 13,046 20,498 5,944 11,493 Shareholders' equity......... $ 55,171 48,095 43,002 43,319 43,009 Debt to total capitalization............. 37.9% 45.0% 40.1% 40.1% 39.5% Return on shareholders' equity..................... 13.7% 15.1% 7.8% 16.0% 22.6% Price/earnings ratio......... 16.2 14.0 21.2 11.0 10.8 -------- -------- -------- -------- -------- YEARS ENDED DECEMBER 31 ---------------------------------------------------- 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) OPERATING RESULTS Net sales.................... 143,813 130,771 116,018 108,644 99,155 Research and development..... 6,105 4,397 3,851 3,858 3,278 Earnings before income taxes...................... 13,364 10,205 8,167 5,911 4,974 Net earnings................. 8,247 6,522 5,127 3,719 3,216 Earnings to sales............ 5.7% 5.0% 4.4% 3.4% 3.2% -------- -------- -------- -------- -------- PER COMMON SHARE Basic earnings............... 2.28 1.83 1.46 1.06 .93 Diluted earnings............. 2.12 1.65 1.39 1.06 .93 Cash dividends declared: Common Stock............... .60 .48 .43 .39 .35 Class B Common Stock....... .54 .44 .39 .36 .32 Price range -- high.......... 40.63 57.50 20.81 13.50 14.00 Price range -- low........... 25.00 18.13 12.38 11.06 9.50 Closing price................ 35.63 40.75 19.19 13.25 11.94 Book value................... 13.13 11.62 10.32 9.16 8.38 -------- -------- -------- -------- -------- SHARES OUTSTANDING Common Stock................. 2,538 2,444 2,426 2,387 2,377 Class B Common Stock......... 1,108 1,126 1,126 1,126 1,126 -------- -------- -------- -------- -------- FINANCIAL POSITION Working capital.............. 10,776 13,870 17,645 16,178 14,569 Current ratio................ 1.3 to 1 1.5 to 1 2.0 to 1 2.1 to 1 1.7 to 1 Net cash provided by operations................. 15,007 5,178 9,878 12,026 6,342 Capital expenditures......... 17,926 8,349 5,382 4,493 3,553 Total assets................. 96,945 82,297 66,133 60,527 61,993 Short-term and current portion of long-term debt....................... 14,315 11,245 2,634 5,515 10,437 Long-term debt............... 2,600 928 1,091 1,000 1,200 Shareholders' equity......... 47,848 41,467 36,638 32,163 29,351 Debt to total capitalization............. 26.1% 22.7% 9.2% 16.8% 28.4% Return on shareholders' equity..................... 17.2% 15.7% 14.0% 11.6% 11.0% Price/earnings ratio......... 15.6 22.3 13.1 12.5 12.8 -------- -------- -------- -------- --------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BUSINESS DESCRIPTION AND OVERVIEW - --------------------------------- 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's product lines fall into two general categories, utility and industrial. Two product lines, residential and commercial water meters (with various meter reading technology systems), are generally sold to water utilities. Industrial sales comprise the remainder of the sales and include automotive fluid meters and systems, small precision valves, electromagnetic meters, impeller flow meters and industrial process meters (all with related accessories and instrumentation). Residential and commercial water meters and related systems provide the majority of the Company's sales. Sales are classified as local (or manual) read meters or automatic meter reading (AMR) products. Local read meters consist of a water meter and a register. If the device is automatic, the register digitally encodes the mechanical reading and has a radio frequency transmitter communicating to a computerized system that collects 7 the data, which in turn is sent to specific utility computerized programs. Net sales and the corresponding net income depend on unit volume and mix of products, with generally higher margins on AMR products. There is a base level of annual business driven by replacement units, and to a lesser extent, housing starts. It is the Company's belief that conversion from local read meters to AMR products can accelerate replacements of meters and result in growth. 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. The industrial products generally serve niche markets and have in the past utilized technology derived from utility products to serve industrial uses. As these markets evolve, these products are becoming more specialized to meet industrial flow measurement and communication protocol requirements. Serving these markets allows the Company to expand its technologies into other areas of flow measurement and control, as well as utilizing existing capacity and spreading fixed costs over a larger sales base. RESULTS OF OPERATIONS - --------------------- In the second quarter of 2002, the Company completed two acquisitions, Data Industrial Corporation (DIC) and MecaPlus Equipements SA (MPE). Through the acquisition of DIC, the Company acquired an impeller flow meter allowing it to serve a market not previously served. The acquisition of MPE allowed the Company to expand into the lubrication system market in France while continuing to have a market for its automotive fluid meters. These acquisitions were accounted for under the purchase accounting method, and as a result, some of the variances shown since December 31, 2002 were attributable to having a full year's results in 2003 versus a partial year in 2002. The acquisitions are further discussed in Part II, Item 8 under the heading "Financial Statements and Supplementary Data" of this 2003 Annual Report on Form 10-K, under Note 3 B "Acquisitions" of the Notes to Consolidated Financial Statements. NET SALES Badger Meter's net sales increased nearly $16.7 million, or 10.0%, for 2003 compared to 2002. The increase was the net result of the acquisitions and increases in net sales of the Company's products as further discussed below. Net sales in 2003 included $21.7 million of sales related to the acquired companies compared to $11.0 million in 2002, with the latter amount representing sales only from the dates of the acquisitions. Without the acquisitions, net sales increased $6.0 million, or 3.9%, over 2002 net sales. Overall, Company sales trends are primarily affected by water meter demand by municipalities (both residential and commercial), new product introduction and general market conditions. Water meter sales are influenced by a continued industry movement away from manual-read meters to automatic meter reading technologies, the lengthening of the sales cycle and financial budget conditions of the various water utilities served. Customers include independent distributors, large cities, private water companies and numerous smaller municipal water utilities. One group of the Company's sales representatives focuses on distributors, another on large accounts (public and private), and a third group focuses on the remaining customers. Residential and commercial water meter net sales represented 72.3% of total sales in 2003 compared with 77.1% in 2002. These sales increased $4.1 million in 2003 to $133.1 million compared to $129.0 million in 2002. While the number of units utilizing the Company's principal automatic meter reading technologies increased, overall unit volume declined due to lower volumes of local (or manual) read water meters. The automatic meter reading technologies carry a higher price, which contributed to the increase in net sales. In addition, the increase in net sales included sales of the newly introduced Orion AMR system. Sales for the year were negatively influenced by longer sales cycles, particularly early in 2003 as water utilities evaluated the requirements and costs of increased security resulting from concerns over the war in Iraq and terrorism. Industrial sales are affected by economic conditions, domestically and internationally, in each of the markets served by the various product lines. In total, the industrial products represented 27.7% of total net sales in 2003 compared with 22.9% in 2002. Industrial product sales increased 32.7% to $50.9 million in 2003 compared with $38.3 million in 2002. Much of this increase is attributable to the two acquisitions completed in the second 8 quarter of 2002 and to the effect of the stronger euro on sales in Europe. Without the acquisitions, the net change would be an increase of $1.9 million, or 7.0%, primarily due to the strengthening of the euro resulting in higher sales of automotive fluid meters and electromagnetic flow meters. International net sales are comprised primarily of sales of automotive fluid meters and small valves in Europe, sales of water meters and related technologies in Latin America, 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 by holding euro-denominated debt. International sales, excluding the effects of the prior year acquisition, increased 5.0% to $11.2 million from $10.6 million in 2002 due to increased sales into Latin America. The 2002 net sales included $11.0 million, or 6.6%, related to the acquired companies. Without the acquisitions, net sales increased $17.8 million, or 14.2%, over sales in 2001. In addition, the sales for 2001 included approximately $1.4 million of net sales from product lines that were discontinued. Residential and commercial water meter sales increased nearly $20.6 million over 2001 due to increased volumes of both plastic and bronze local-read meters as well as increased sales of AMR technologies. GROSS MARGINS Gross margins were 32.9%, 33.5% and 32.1% for 2003, 2002 and 2001, respectively. The decrease between 2003 and 2002 was primarily due to lower unit volumes resulting in higher absorbed factory costs, the inability to increase prices for higher incurred costs due to market conditions, and to a lesser extent, the addition of MPE which has lower margins as an assembly operation. Somewhat offsetting these decreased volumes were increased volumes of AMR products, which carry higher margins. The increase in gross margin between 2002 and 2001 was due to increased sales volumes, which absorbed factory capacity costs, as well as continuing efforts to reduce product costs. Margins in 2002 were also affected by higher sales of automatic meter reading products. OPERATING EXPENSES Selling, engineering and administration costs increased 8.4% in 2003 over 2002 levels. Some of the increase was attributable to the full year effects in 2003 of the prior year acquisitions, and to the severance costs of headcount reductions at MPE to better position it in the market. Without the effects of the acquisitions and the headcount reduction costs, these expenses increased 1.4% primarily due to increased health care expenses offset somewhat by continuing cost control efforts. Selling, engineering and administration costs increased 11.4% in 2002 over 2001 levels. Much of this increase was attributable to the newly acquired companies, as well as increased incentive compensation as a result of meeting sales and earnings targets. INTEREST EXPENSE Interest expense decreased $112,000 in 2003 compared to 2002. This was primarily due to continuing favorable rates on the commercial paper the Company used to finance its operations in 2003, as well as the reduction in overall debt. Interest expense increased $468,000 in 2002 compared to 2001. This increase was due primarily to the increased borrowing needs as a result of the Company's acquisition of two new companies and the payment of $9.4 million into the Company's pension plan in 2002. These factors were offset somewhat by a decrease in interest rates during 2002. OTHER INCOME, NET Other income, net in 2003, 2002 and 2001 related primarily to foreign exchange gains, particularly in 2003 due to the strengthening of the euro against the U.S. dollar. The Company has euro-based receivables on its corporate ledger that relate to its foreign subsidiaries, for which translation gain was recognized through the income statement while the offsetting translation loss on the corresponding subsidiary's debt was recognized as a component of other comprehensive income (loss). The significant strengthening of the euro in 2003 resulted in a translation gain of $781,000. During the second quarter, the Company borrowed euro-based debt domestically to hedge the euro-based receivable exposure. 9 INCOME TAXES Income taxes as a percentage of earnings before income taxes was 43.2%, 36.4% and 32.9% for 2003, 2002 and 2001, respectively. The increase in 2003 from 2002 was primarily due to recording a valuation reserve on the operating losses of certain of the Company's foreign subsidiaries, as further described below. The increase in 2002 from 2001 was due primarily to a higher level of pre-tax earnings compared to 2001 that reduced the percentage effects of certain permanent items on book-tax differences. In 2002, the Company determined that there were excess reserves for prior year taxes, and accordingly reduced tax expense by $675,000. At the same time, the Company concluded that it was not certain that net operating loss carryforwards for certain foreign subsidiaries would be realized through future profits, and as such a $475,000 valuation reserve was created by increasing the tax expense. The net result of these transactions did not significantly affect the effective tax rate for 2002. In 2003, the valuation reserve was further increased to $1,225,000 due to continued realization uncertainties for foreign net operating loss carryforwards. The increase in the reserve was recorded as additional tax expense, which significantly increased the Company's effective rate for 2003. At December 31, 2003, the Company had foreign net operating loss carryforwards at certain European subsidiaries totaling $6.2 million. The carryforwards have unlimited carryforward periods, which can be used to offset future taxable income at these locations. NET EARNINGS AND EARNINGS PER SHARE As a result of the above-mentioned items, net earnings were $7,577,000, $7,271,000 and $3,364,000 in 2003, 2002 and 2001, respectively. On a diluted basis, earnings per share were $2.30, $2.20 and $1.03, respectively, for the same periods. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- The main sources of liquidity for the Company are cash from operations and borrowing capacity. Cash provided by operations in 2003 increased $1.9 million, or 15.2%, compared to 2002 primarily as a result of increased earnings and no required payment to the pension plan, offset by increases in receivables and inventories. Cash provided by operations increased $3.6 million, or 42.5%, for 2002 compared to 2001 primarily as a result of increased earnings, deferral of income taxes, higher current liabilities, and lower receivables (net of acquired companies). Offsetting these items somewhat in 2002 was a $9.4 million payment to the Company's pension plan to maintain full funding status. Receivables increased 18.8% between December 31, 2002 and 2003 due primarily to higher fourth quarter sales in 2003 versus 2002. Inventories increased 17.8% due primarily to the introduction of several new products in 2003 as well as longer lead-time on certain electronic components associated with the increased sales of AMR products. The increases in both receivables and inventories were also affected to a lesser extent by the strength of the euro on foreign subsidiaries' balances. Capital expenditures totaled $7.1 million in 2003, $5.9 million in 2002 and $5.0 million in 2001. These amounts vary due to the timing of capital expenditures. The Company believes it will be able to increase production with minimal additional capital expenditures. Prepaid pension decreased $1.2 million at the end of 2003 compared to the same date in 2002. This was the result of pension expense during 2003 and a partial refund from prior year's overfunding. Assumptions for determining pension liability, expected return on assets and annual expense are reviewed and, if appropriate, adjusted annually. The impacts of hypothetical changes in certain assumptions is difficult to determine as economic factors can often impact multiple assumptions and inputs at the same time. The Company believes its current assumptions are reasonable. At December 31, 2003, the market value of the assets in the Company's pension plan was $43.9 million. Included in the Company's December 31, 2003 prepaid pension balance was $17 million of unrecognized net actuarial losses. The amount of net goodwill recorded at December 31, 2003 and 2002 was $7,089,000 and $5,697,000, respectively. The increase included $635,000 due to the translation effect resulting from changes in the euro exchange rate for two of the Company's subsidiaries with euro based functional currency. In addition, the increase included $757,000 for the amount of severance costs related to the termination of several MPE 10 employees in connection with management's initial assessment at the date of acquisition. The amount of the severance cost was not estimable until the first quarter of 2003. As of December 31, 2003, $277,000 associated with the severance remains accrued on the balance sheet. Short-term debt decreased $16.8 million in 2003. This decrease was offset by proceeds from long-term debt obtained at year end, the proceeds of which were used to repay much of the existing short- and long-term debt. The increase in payables between years is primarily the result of the timing of purchases. Accrued compensation and employee benefits increased $0.6 million due to increased incentive costs associated with improved sales and earnings levels. Income and other taxes increased $1.0 million as a result of increased earnings during 2003 and the timing of tax payments. Total outstanding long-term debt (both the current and long-term portions) increased $11.1 million, which was the net result of new long-term instruments obtained in late 2003, offset by regular debt payments. None of the Company's debt carries financial covenants or is collateralized. Common Stock and capital in excess of par value both increased during 2003 due to stock issued in connection with the exercise of stock options and treasury stock issuances. Employee benefit stock decreased by $250,000 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 including $33,166,000 of unused credit lines, and its ability to raise capital provide adequate resources to fund ongoing operating requirements, future capital and development of new products. OFF-BALANCE SHEET ARRANGEMENTS - ------------------------------ The Company guarantees the debt of the Badger Meter Officers' Voting Trust (BMOVT), from which the trust obtained loans from a bank on behalf of the officers of the Company in order to purchase shares of the Company's Common Stock. The officers' loan amounts are collateralized by the Company's shares that were purchased with the loans' proceeds. There have been no loans made to officers by the BMOVT since July 2002. The amount of such debt that the Company guaranteed was $1,754,000 and $2,380,000 at December 31, 2003 and 2002, respectively. The current loan was renewed in April 2003 with an expiration date of April 2004, at which time it is expected to be renewed. The fair market value of this guarantee at December 31, 2003 continues to be insignificant because the collateral value of the shares exceeds the loan amount. The Company has no other undisclosed off-balance sheet arrangements. CONTRACTUAL OBLIGATIONS - ----------------------- The Company guarantees the outstanding debt of the Badger Meter Employee Savings and Stock Ownership Plan (ESSOP) that is recorded in long-term debt, offset by a similar amount of unearned compensation that has been recorded as a reduction of shareholders' equity. The loan amount is collateralized by shares of the Company's Common Stock. Payments of $250,000 and $365,000 in 2003 and 2002, respectively, reduced the loan to $1,285,000 at December 31, 2003. The terms of the loan allow variable payments of principal with the final principal and interest payment due in June 2004, at which time it is expected to be renewed. 11 The following table includes the Company's significant contractual obligations as of December 31, 2003. There are no other undisclosed guarantees.
PAYMENTS DUE BY PERIOD ------------------------------ LESS THAN 1-3 TOTAL 1 YEAR YEARS ------- --------- -------- (IN THOUSANDS) Current portion and long-term debt.......................... $28,705 $5,557 $23,148 Capital lease obligations................................... 105 88 17 ESSOP....................................................... 1,285 1,285 -- Royalty commitments......................................... 600 150 450 Minimum product purchases................................... 3,915 1,380 2,535 Operating leases............................................ 575 324 251 Other distribution rights, investment and research and development commitments................................... 600 250 350 ------- ------ ------- Total contractual obligations............................... $35,785 $9,034 $26,751 ======= ====== =======
As of December 31, 2003, the Company had no material purchase obligations other than those created in the ordinary course of business related to inventory and property, plant and equipment, which generally have terms of less than 90 days. The Company also has long-term obligations related to its pension and postretirement plans which are discussed in detail in Note 7 of the Notes to Consolidated Financial Statements. As of the most recent actuarial measurement date, no pension plan contributions are anticipated in 2004 and postretirement medical claims are paid as they are submitted. Postretirement medical claims are anticipated to be $1,276,000 in 2004. CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES - ------------------------------------------------- The Company's accounting policies are more fully described in Note 1 of the Notes to Consolidated Financial Statements. As discussed in Note 1, 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. The Company's more significant estimates relate primarily to several judgmental reserves: allowance for doubtful accounts, allowance for obsolete inventories, warranty reserve, and the health care reserve. Each of these judgmental reserves is evaluated quarterly and is reviewed with the Company's Disclosure Committee and the Audit and Compliance Committee of the Board of Directors. The basis for the reserve amounts is determined by analyzing the minimum and maximum amount of anticipated exposure for each account, and then selecting the most appropriate amount within the range based upon historical experience and on various other assumptions that are believed to be reasonable under the circumstances. This method has been used for all years in the presented financials and has been used consistently throughout each year. Actual results may differ from these estimates under different assumptions or conditions. The criteria used for calculating each of the reserve amounts varies by type of reserve. For the allowance for doubtful accounts reserve, significant past due receivable balances are reviewed in conjunction with applying historical write-off ratios to the remaining balances. The calculation for the allowance for obsolete inventories reserve is determined by analyzing the relationship between the age and quantity of items on hand versus estimated usage to determine if excess quantities exist. The calculation for warranty and after-sale costs reserve uses criteria that includes known potential problems on past sales as well as historical claims ratios for current sales. The health care reserve is determined by using medical cost trend analyses, reviewing subsequent payments made and estimating unbilled amounts. The changes in the balances of these reserves at December 31, 2003 compared to the prior year were not material. 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 12 resolving an issue relative to a landfill site. Provision has been made for all known settlement costs, which are not material. The Company is also a defendant in several multi-party asbestos suits generally as a result of its membership in certain trade organizations. The cases are pending in state courts in Mississippi, Texas and Illinois. 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, either from a cash flow perspective or on the financial statements as a whole. On January 1, 2003, the Company changed the functional currency of one of its European subsidiaries to the euro from the U.S. dollar as a result of being sold by a subsidiary whose functional currency is the U.S. dollar to another subsidiary of the Company where the majority of their activities are euro-based. This change resulted in a credit of $479,000 to other comprehensive income, offset by a similar amount to the subsidiary's inventory and property, plant and equipment balances. The impact to the Company in the long-term is not expected to be significant. MARKET RISKS - ------------ 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 typically does not hold or issue derivative instruments and has a policy specifically prohibiting the use of such instruments for trading purposes. Commodity risk is managed by keeping abreast of economic conditions and locking in purchase prices for quantities that correspond to the Company's forecasted usage. The Company's foreign currency risk relates to the sales 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 U.S. and European banks to offset currency exposure related to European receivables and other monetary assets. As of December 31, 2003 and 2002, the Company's foreign currency net monetary assets were substantially offset by comparable debt resulting in no material exposure. The Company's short-term debt on December 31, 2003 was floating rate debt with market values approximating carrying value. Fixed rate debt was principally a U.S. dollar term loan with a 4.8% interest rate and a euro dollar revolving term loan with a 4% interest rate. For the floating rate debt, future annual interest costs will fluctuate based upon short-term interest rates. For the short-term debt on hand on December 31, 2003, the effect of a 1% change in interest rates is approximately $35,000 before income tax. ITEM 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK Information required by this Item is set forth in Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the heading "Market Risks" in this 2003 Annual Report on Form 10-K. 13 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA BADGER METER, INC. REPORT OF INDEPENDENT AUDITORS 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. (the Company) as of December 31, 2003 and 2002, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2003. 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, 2003 and 2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States. As discussed in Note 1 to the Consolidated Financial Statements, effective January 1, 2002, the Company changed its method of accounting for goodwill. /s/ Ernst & Young LLP Milwaukee, Wisconsin February 4, 2004 14 BADGER METER, INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31, --------------------- 2003 2002 --------- --------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) ASSETS Current assets: Cash...................................................... $ 2,089 $ 3,779 Receivables............................................... 26,304 22,139 Inventories: Finished goods......................................... 8,010 7,569 Work in process........................................ 8,494 8,308 Raw materials.......................................... 13,150 9,305 -------- -------- Total inventories.................................... 29,654 25,182 Prepaid expenses.......................................... 1,193 1,219 Deferred income taxes..................................... 3,758 3,061 -------- -------- Total current assets................................. 62,998 55,380 Property, plant and equipment, at cost: Land and improvements..................................... 3,360 2,992 Buildings and improvements................................ 28,069 24,578 Machinery and equipment................................... 72,652 71,226 -------- -------- 104,081 98,796 Less accumulated depreciation............................. (61,243) (55,328) -------- -------- Net property, plant and equipment...................... 42,838 43,468 Intangible assets, at cost less accumulated amortization.... 1,336 1,112 Prepaid pension............................................. 16,236 17,454 Other assets................................................ 3,354 3,352 Goodwill.................................................... 7,089 5,697 -------- -------- Total assets................................................ $133,851 $126,463 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term debt........................................... $ 3,543 $ 20,355 Current portion of long-term debt......................... 5,645 5,979 Payables.................................................. 14,895 11,040 Accrued compensation and employee benefits................ 6,619 6,017 Warranty and after-sale costs............................. 3,767 3,597 Income and other taxes.................................... 2,583 1,567 -------- -------- Total current liabilities.............................. 37,052 48,555 Deferred income taxes....................................... 5,699 4,710 Accrued non-pension postretirement benefits................. 5,069 5,512 Other accrued employee benefits............................. 6,410 6,545 Long-term debt.............................................. 24,450 13,046 Commitments and contingencies (Note 6) Shareholders' equity: Common Stock, $1.00 par; authorized 40,000,000 shares; issued 4,846,314 shares in 2003 and 4,762,398 shares in 2002................................................... 4,846 4,762 Capital in excess of par value............................ 20,079 18,169 Reinvested earnings....................................... 58,928 54,776 Accumulated other comprehensive income (loss)............. 1,280 (61) Less: Employee benefit stock.............................. (1,285) (1,535) Treasury stock, at cost; 1,553,889 shares in 2003 and 1,541,791 shares in 2002........................ (28,677) (28,016) -------- -------- Total shareholders' equity............................. 55,171 48,095 -------- -------- Total liabilities and shareholders' equity.................. $133,851 $126,463 ======== ========
See accompanying notes. 15 BADGER METER, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, ------------------------------ 2003 2002 2001 -------- -------- -------- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Net sales................................................... $183,989 $167,317 $138,537 Cost of sales............................................... 123,470 111,317 94,042 -------- -------- -------- Gross margin................................................ 60,519 56,000 44,495 Selling, engineering and administration..................... 46,419 42,805 38,430 -------- -------- -------- Operating earnings.......................................... 14,100 13,195 6,065 Interest expense............................................ 1,737 1,849 1,381 Other income, net........................................... (988) (91) (326) -------- -------- -------- Earnings before income taxes................................ 13,351 11,437 5,010 Provision for income taxes.................................. 5,774 4,166 1,646 -------- -------- -------- Net earnings................................................ $ 7,577 $ 7,271 $ 3,364 ======== ======== ======== Earnings per share: Basic..................................................... $ 2.35 $ 2.30 $ 1.06 Diluted................................................... $ 2.30 $ 2.20 $ 1.03 Shares used in computation of: Basic..................................................... 3,225 3,165 3,163 Impact of dilutive stock options.......................... 74 139 112 -------- -------- -------- Diluted................................................... 3,299 3,304 3,275 ======== ======== ========
See accompanying notes. 16 BADGER METER, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ------------------------------ 2003 2002 2001 -------- -------- -------- (DOLLARS IN THOUSANDS) Operating activities: Net earnings.............................................. $ 7,577 $ 7,271 $ 3,364 Adjustments to reconcile net earnings to net cash provided by operations: Depreciation........................................... 7,683 7,882 6,477 Amortization........................................... 149 98 324 Tax benefit on stock options........................... 585 307 232 Deferred income tax.................................... 323 1,986 1,347 Noncurrent employee benefits........................... 1,317 1,214 1,118 Refund from (contributions to) pension plan............ 702 (9,393) (4,441) Changes in: Receivables.......................................... (3,846) 1,323 306 Inventories.......................................... (4,152) (344) (1,852) Current liabilities other than debt.................. 3,719 2,242 1,527 Prepaid expenses..................................... 26 (352) 185 -------- -------- -------- Total adjustments......................................... 6,506 4,963 5,223 -------- -------- -------- Net cash provided by operations............................. 14,083 12,234 8,587 -------- -------- -------- Investing activities: Property, plant and equipment............................. (7,053) (5,914) (5,007) Acquisitions, net of cash acquired........................ -- (8,564) -- Other -- net.............................................. (301) (168) 105 -------- -------- -------- Net cash used for investing activities...................... (7,354) (14,646) (4,902) -------- -------- -------- Financing activities: Net increase (decrease) in short-term debt................ (16,812) 15,226 (12,640) Issuance of long-term debt................................ 27,970 -- 21,700 Repayments of long-term debt.............................. (16,900) (9,656) (9,259) Dividends paid............................................ (3,425) (3,231) (3,164) Stock options............................................. 1,207 976 832 Treasury stock purchases.................................. (1,066) (1,595) (2,439) Issuance of treasury stock................................ 607 1,061 458 -------- -------- -------- Net cash provided by (used for) financing activities........ (8,419) 2,781 (4,512) -------- -------- -------- Increase (decrease) in cash................................. (1,690) 369 (827) Cash -- beginning of year................................... 3,779 3,410 4,237 -------- -------- -------- Cash -- end of year......................................... $ 2,089 $ 3,779 $ 3,410 ======== ======== ======== Supplemental disclosures of cash flow information: Cash paid during the year for: Income taxes........................................... $ 4,134 $ 757 $ 624 Interest............................................... $ 2,071 $ 1,664 $ 1,390
See accompanying notes. 17 BADGER METER, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 ------------------------------------------------------------------------------ OTHER COMPRE- CAPITAL IN HENSIVE EMPLOYEE COMMON EXCESS OF REINVESTED INCOME BENEFIT TREASURY STOCK PAR VALUE EARNINGS (LOSS) STOCK STOCK TOTAL ---------- ---------- ---------- ------- -------- -------- ------- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Balance, December 31, 2000.................. $4,610 $14,713 $50,536 $ -- $(2,300) $(24,240) $43,319 ------ ------- ------- ------ ------- -------- ------- Net earnings................................ 3,364 3,364 Cash dividends of $1.00 per share........... (3,164) (3,164) Stock options exercised..................... 44 788 832 Tax benefit on stock options and dividends................................. 232 232 ESSOP transactions.......................... 400 400 Treasury stock purchases.................... (2,439) (2,439) Issuance of treasury and common stock....... 23 435 458 ------ ------- ------- ------ ------- -------- ------- Balance, December 31, 2001.................. 4,677 16,168 50,736 -- (1,900) (26,679) 43,002 ------ ------- ------- ------ ------- -------- ------- Comprehensive income: Net earnings.............................. 7,271 7,271 Other comprehensive income (loss): Minimum employee benefit liability (net of $288 tax effect)................... (453) (453) Foreign currency translation............ 392 392 ------- Comprehensive income........................ 7,210 Cash dividends of $1.02 per share........... (3,231) (3,231) Stock options exercised..................... 61 915 976 Tax benefit on stock options and dividends................................. 307 307 ESSOP transactions.......................... 365 365 Treasury stock purchases.................... (1,595) (1,595) Issuance of treasury and common stock....... 24 779 258 1,061 ------ ------- ------- ------ ------- -------- ------- Balance, December 31, 2002.................. 4,762 18,169 54,776 (61) (1,535) (28,016) 48,095 ------ ------- ------- ------ ------- -------- ------- Comprehensive income: Net earnings.............................. 7,577 7,577 Other comprehensive income (loss): Minimum employee benefit liability (net of $31 tax effect)....................... (49) (49) Foreign currency translation............ 1,390 1,390 ------- Comprehensive income........................ 8,918 Cash dividends of $1.06 per share........... (3,425) (3,425) Stock options exercised..................... 84 1,123 1,207 Tax benefit on stock options and dividends................................. 585 585 ESSOP transactions.......................... 250 250 Treasury stock purchases.................... (1,066) (1,066) Issuance of treasury stock.................. 202 405 607 ------ ------- ------- ------ ------- -------- ------- Balance, December 31, 2003.................. $4,846 $20,079 $58,928 $1,280 $(1,285) $(28,677) $55,171 ====== ======= ======= ====== ======= ======== =======
See accompanying notes. 18 BADGER METER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Profile 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's product lines fall into two general categories, utility and industrial. Two product lines, residential and commercial water meters (with various meter reading technology systems), are generally sold to water utilities. Industrial sales comprise the remainder of the sales and include automotive fluid meters and systems, small precision valves, electromagnetic meters, impeller flow meters and industrial process meters (all with related accessories and instrumentation). Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Receivables Receivables consists primarily of trade receivables. The Company evaluates the collectibility of its receivables based on a number of factors. An allowance for doubtful accounts is recorded for significant past due receivable balances based on a review of the past due items, as well as applying a historical write-off ratio to the remaining balances. Changes in the Company's allowance for doubtful accounts are as follows:
BALANCE AT ADDITIONS CHARGED WRITE-OFFS RESERVE BALANCE AT BEGINNING OF YEAR TO EARNINGS LESS RECOVERIES ACQUIRED END OF YEAR ----------------- ----------------- --------------- -------- ----------- (IN THOUSANDS) 2003......................... $1,016 $405 $ (86) $ -- $1,335 2002......................... $ 632 $246 $ (53) $191(a) $1,016 2001......................... $ 626 $ 23 $ (17) $ -- $ 632
- --------------- (a) In 2002, the reserve increased $41,000 and $150,000 related to the acquisition of Data Industrial Corporation (DIC) and MecaPlus Equipements SA (MPE), respectively. Refer to Note 3 B "Acquisitions" for a description of the acquisitions. Inventories Inventories are valued at the lower of cost (first-in, first-out method) or market. The Company estimates and records provisions for obsolete inventories. Changes to the Company's obsolete inventories reserve are as follows:
BALANCE AT ADDITIONS CHARGED DEDUCTIONS RESERVE BALANCE AT BEGINNING OF YEAR TO EARNINGS FROM RESERVE ACQUIRED END OF YEAR ----------------- ----------------- --------------- -------- ----------- (IN THOUSANDS) 2003......................... $1,003 $528 $(417) $ -- $1,114 2002......................... $ 757 $429 $(507) $324(a) $1,003 2001......................... $ 734 $347 $(324) $ -- $ 757
- --------------- (a) In 2002, the reserve increased $90,000 and $234,000 related to the acquisition of DIC and MPE, respectively. Refer to Note 3 B "Acquisitions" for a description of the acquisitions. 19 BADGER METER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2003, 2002 AND 2001 Property, Plant and Equipment Property, plant and equipment are stated at cost. Depreciation is provided over the estimated useful lives of the respective assets, principally by the straight-line method. The estimated useful lives of assets are: for land improvements, 15 years; for buildings and improvements, 10 - 39 years; and, for machinery and equipment, 3 - 20 years. Long-Lived Assets Property, plant and equipment and identifiable intangible assets are reviewed for impairment, in accordance with Financial Accounting Standards Board (FASB) Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected undiscounted cash flows is less than the carrying value of the related asset or group of assets, a loss is recognized for the difference between the fair value and carrying value of the asset or group of assets. Intangible Assets Intangible assets are amortized on a straight line basis over their estimated useful lives ranging from 5.5 to 10 years. The Company does not have any intangible assets deemed to have indefinite lives. Accumulated amortization at December 31, 2003 and 2002 was $384,000 and $226,000, respectively. Amortization expense expected to be recognized for each of the next three years beginning with 2004 is $176,000, and $171,000 in 2007 and $117,000 in 2008. The carrying value and accumulated amortization by major class of intangible assets are as follows:
DECEMBER 31, 2003 DECEMBER 31, 2002 ----------------------------- ----------------------------- GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED AMOUNT AMORTIZATION AMOUNT AMORTIZATION -------------- ------------ -------------- ------------ (IN THOUSANDS) Technologies.............................. $ 715 $234 $ 691 $149 Noncompete covenants...................... 155 72 155 62 Licenses.................................. 350 27 50 5 Customer lists............................ 207 15 173 -- Trademarks................................ 293 36 269 10 ------ ---- ------ ---- Total intangibles......................... $1,720 $384 $1,338 $226 ====== ==== ====== ====
Goodwill FASB Statement No. 142, "Goodwill and Other Intangible Assets," became effective for the Company on January 1, 2002. This statement required companies to stop amortizing goodwill and to test for impairment at least annually. During 2003 and 2002, the Company tested its goodwill balance for impairment in accordance with FASB Statement No. 142 and no adjustments were recorded to goodwill as a result of those reviews. Prior to 2002, goodwill was amortized on a straight-line basis. The amount of net goodwill recorded at December 31, 2003 and 2002 was $7,089,000 and $5,697,000, respectively. The increase included $635,000 due to the translation effect resulting from changes in the euro exchange rate for two of the Company's subsidiaries with euro based functional currency, and a $757,000 increase for the accrual of severance costs related to MPE, which is further discussed in Note 3B "Acquisitions." 20 BADGER METER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2003, 2002 AND 2001 Revenue Recognition Revenues are generally recognized upon shipment of product, which corresponds with the transfer of title. The costs of shipping are billed to the customer upon shipment and are included in cost of sales. A small portion of the Company's sales include shipments of products combined with services, such as meters sold with installation. The product and installation components of these multiple deliverable arrangements are considered separate units of accounting. The value of these separate units of accounting are determined based on their relative fair values determined on a stand-alone basis. Revenue is recognized when the last element is delivered, which generally corresponds with installation. Warranty and After-Sale Costs The Company estimates and records provisions for warranties and other after-sale costs in the period the sale is recorded. After-sale costs represent a variety of activities outside of the written warranty policy, such as investigation of unanticipated problems after the customer has installed the product, or analysis of water quality issues. Changes in the Company's warranty and after-sale costs reserve are as follows:
BALANCE AT ADDITIONS CHARGED RESERVE BALANCE AT BEGINNING OF YEAR TO EARNINGS COSTS INCURRED ACQUIRED END OF YEAR ----------------- ----------------- -------------- ---------------- ----------- (IN THOUSANDS) 2003................... $3,597 $1,771 $(1,601) $ -- $3,767 2002................... $3,453 $1,086 $(1,167) $225(a) $3,597 2001................... $3,245 $1,837 $(1,629) $ -- $3,453
- --------------- (a) In 2002, the reserve increased $30,000 and $195,000 related to the acquisition of DIC and MPE, respectively. Refer to Note 3 B "Acquisitions" for a description of the acquisitions. Research and Development Research and development costs are charged to expense as incurred and amounted to $6,070,000, $5,658,000, and $5,422,000 in 2003, 2002 and 2001, respectively. Other Income, Net Included in other income, net are 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, with the exception of Badger Meter France (the French parent holding company of MPE), MPE and Badger Meter Czech Republic, whose functional currency is the euro. Foreign currency gains of $781,000 were reported in 2003 compared to $267,000 and $99,000 in 2002 and 2001, respectively, primarily related to the strengthening of the euro versus the U.S. dollar. Stock Option Plans The Company has six stock option plans which provide for the issuance of options to key employees and directors of the Company. Refer to Note 5 "Stock Option Plans" for a description of the plans. As allowed by FASB Statement No. 123, "Accounting for Stock-Based Compensation," and Statement No. 148, "Accounting for Stock-based Compensation - -- Transition and Disclosure," the Company has elected 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. Pro forma information regarding net earnings and earnings per 21 BADGER METER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2003, 2002 AND 2001 share required by FASB Statement No. 123 has been determined as if the Company had accounted for stock options granted since January 1, 1995 under the fair value method of that Statement. The Black-Scholes option pricing model was used to determine the fair value of options with the following weighted-average assumptions for options issued in each year:
2003 2002 2001 --------- --------- --------- Risk-free interest rate..................................... 2.9% 4.2% 5.0% Dividend yield.............................................. 3.6% 4.3% 4.0% Volatility factor........................................... 30% 29% 29% Weighted-average expected life.............................. 6.1 years 6.1 years 5.0 years
The weighted-average fair values of options granted in 2003, 2002 and 2001 were $6.03, $4.79 and $6.28 per share, respectively. The following table illustrates the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123 to stock-based employee compensation. 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 earnings of future years.
2003 2002 2001 ------ ------ ------ (IN THOUSANDS EXCEPT PER SHARE DATA) Net earnings, as reported................................... $7,577 $7,271 $3,364 Deduct: Total stock-based compensation determined under fair value based method for all awards since January 1, 1995, net of related tax effects................................ (354) (285) (385) ------ ------ ------ Pro forma net earnings...................................... $7,223 $6,986 $2,979 ====== ====== ====== Earnings per share: Basic, as reported........................................ $ 2.35 $ 2.30 $ 1.06 Basic, pro forma.......................................... $ 2.24 $ 2.21 $ .95 Diluted, as reported...................................... $ 2.30 $ 2.20 $ 1.03 Diluted, pro forma........................................ $ 2.19 $ 2.12 $ .91
Comprehensive Income Comprehensive income is comprised of net income and other comprehensive income, which includes foreign currency translation adjustments and minimum employee benefit liability adjustments. Total comprehensive income was $8,918,000 and $7,210,000 for 2003 and 2002, respectively. Components of accumulated other comprehensive income (loss) at December 31, are as follows:
2003 2002 ------ ----- (IN THOUSANDS) Cumulative foreign currency translation adjustment.......... $1,782 $ 392 Minimum employee benefit liability adjustment............... (502) (453) ------ ----- Accumulated other comprehensive income (loss)............... $1,280 $ (61) ====== =====
The $1,390,000 increase in foreign currency translation adjustments is due to both the strengthening of the euro versus the U.S. dollar and a $479,000 increase related to the effect of the Company's Czech Republic subsidiary changing its functional currency from the U.S. dollar to the euro, effective January 1, 2003. 22 BADGER METER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2003, 2002 AND 2001 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. Reclassifications Certain reclassifications have been made to the 2002 Notes to Consolidated Financial Statements to conform to the 2003 presentation. Accounting Pronouncements In January 2003, the FASB issued Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51," which expands upon and strengthens existing accounting guidance concerning when a company should include in its financial statements the assets, liabilities and activities of another entity. A Variable Interest Entity (VIE) does not share economic risk and reward through typical equity ownership arrangements, but by contractual or other relationships that redistribute economic risks and rewards among equity holders and other parties. Once an entity is determined to be a VIE, the party with the controlling financial interest, the primary beneficiary, is required to consolidate it. FIN 46 also requires disclosure about VIEs that a company is not required to consolidate but in which it has a significant variable interest. The adoption of applicable provisions of FIN 46 in 2003 did not have an impact on the Company's financial position, results of operations or cash flows. Further, the adoption of the remaining provisions of FIN 46 in 2004 is not anticipated to have a material impact on the Company's financial position, results of operations or cash flows. NOTE 2 COMMON STOCK The Company has Common Stock, and also a Common Shares Rights Agreement, which grants certain rights to existing holders of Common Stock. Subject to certain conditions, the rights are redeemable by the Company and are exchangeable for shares of Common Stock. The rights have no voting power and expire on May 26, 2008. NOTE 3 AFFILIATED COMPANY AND ACQUISITIONS A. AFFILIATED COMPANY In 2003, the Company sold its 15% interest in a Mexican company, Medidores Azteca, S.A. (Azteca) for the original cost of $75,000. During 2003, 2002 and 2001, the Company sold $512,000, $1,201,000 and $689,000, respectively, of product to Azteca. Receivables from Azteca at December 31, 2003 and 2002 were $617,000 and $621,000, respectively. B. ACQUISITIONS On May 1, 2002, the Company acquired 100% of the outstanding common stock of Data Industrial Corporation (DIC) of Mattapoisett, Massachusetts for $5.1 million net of cash acquired. This amount included direct acquisition costs. DIC manufactures and markets a line of impeller flow meters that are sold to commercial and industrial markets. On June 1, 2002, the Company acquired 100% of the outstanding common stock of MecaPlus Equipements SA (MPE) of Nancy, France, for $3.5 million net of cash acquired. This amount included direct acquisition costs. MPE purchases lubrication meters, oil tanks, hoses, reels and other equipment for assembly into lubrication systems for use in measuring and dispensing automotive fluids such as oil, grease and transmission fluid. 23 BADGER METER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2003, 2002 AND 2001 The Company finalized the allocation of the purchase price of DIC and MPE during 2003. There were no adjustments recorded for DIC after the preliminary allocations at December 31, 2002. During 2003, goodwill relating to MPE increased $757,000 from the December 31, 2002 amount to reflect the accrual of severances related to the termination of several MPE employees in connection with management's initial assessment at the date of acquisition. The amount of the severance cost was not estimable until the first quarter of 2003. As of December 31, 2003, $277,000 associated with the severances remains reserved. The following table shows the final purchase price allocation for each acquisition.
DIC MPE ------ ------- (IN THOUSANDS) Receivables................................................. $ 722 $ 4,040 Inventories................................................. 1,092 2,259 Prepaid expenses and other.................................. 100 70 Property, plant and equipment............................... 1,038 3,274 Intangible assets........................................... 250 350 Goodwill.................................................... 2,600 3,037 ------ ------- Total purchased assets...................................... $5,802 $13,030 ====== ======= Payables.................................................... $ 276 $ 2,765 Accrued liabilities and other............................... 414 1,298 Accrued compensation........................................ -- 467 Bank debt................................................... -- 5,048 ------ ------- Total acquired liabilities.................................. $ 690 $ 9,578 ====== ======= Cash paid, net of cash acquired............................. $5,112 $ 3,452 ====== =======
The acquisitions of DIC and MPE were accounted for under the purchase method and the results of both have been included in the Company's consolidated results from the date of acquisition. These acquisitions are part of the Company's strategy to broaden its line of meters for niche industrial markets. The following pro forma information combines historical results, as if DIC and MPE had been owned by the Company for the years ended December 31, 2002 and 2001.
2002 2001 ----------- ----------- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Net sales................................................... $175,553 $159,086 Net earnings................................................ $ 7,286 $ 3,643 Diluted earnings per share.................................. $ 2.21 $ 1.11
The pro forma amounts include the results of the stand-alone operations of DIC and MPE, plus the impact of purchase accounting entries, which include amortization of acquired intangibles, depreciation of the step up basis of the fixed assets, and interest expense on debt incurred to finance the purchases. The pro forma results are not necessarily indicative of what would have occurred if the acquisitions had been completed as of the beginning of each fiscal period presented, nor are they necessarily indicative of future consolidated results. In 2003, DIC was dissolved and the production of the DIC impeller flow meter product line was transferred from the Company's facility in Mattapoisett, Massachusetts to its facility in Tulsa, Oklahoma in order to better utilize existing capacity. The lease on the Massachusetts facility expired in early 2004. Expenses associated with this decision included severance costs and the disposal of leasehold improvements of $119,000 and $67,000, respectively, of which $173,000 was expensed during 2003. 24 BADGER METER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2003, 2002 AND 2001 NOTE 4 SHORT-TERM DEBT AND CREDIT LINES Short-term debt at December 31, 2003 and 2002, consisted of:
2003 2002 ------ ------- (IN THOUSANDS) Notes payable to banks...................................... $3,293 $ 2,720 Commercial paper............................................ 250 17,635 ------ ------- Total short-term debt....................................... $3,543 $20,355 ====== =======
The Company has $36,709,000 of short-term credit lines with domestic and foreign banks, which includes a $20,000,000 line of credit that can also support the issuance of commercial paper. At December 31, 2003, $3,543,000 was outstanding under these lines with a weighted-average interest rate on the outstanding balance of 3.50% and 2.12% at December 31, 2003 and 2002, respectively. NOTE 5 STOCK OPTION PLANS As discussed in Note 1 "Summary of Significant Accounting Policies" under the heading "Stock Option Plans," the Company has six 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, 2003, options to purchase 159,822 shares are available for grant. 25 BADGER METER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2003, 2002 AND 2001 The following table summarizes the transactions of the Company's stock option plans for the three-year period ended December 31, 2003:
WEIGHTED-AVERAGE NUMBER OF SHARES EXERCISE PRICE ---------------- ----------------- Options outstanding -- December 31, 2000......................................... 458,252 $21.90 Options granted............................................. 91,000 $28.50 Options exercised........................................... (43,504) $12.13 Options forfeited........................................... (12,052) $27.18 ------- ------ Options outstanding -- December 31, 2001......................................... 493,696 $23.85 Options granted............................................. 77,300 $22.99 Options exercised........................................... (61,831) $15.81 Options forfeited........................................... (17,911) $37.13 ------- ------ Options outstanding -- December 31, 2002......................................... 491,254 $24.24 Options granted............................................. 102,200 $28.52 Options exercised........................................... (83,916) $13.88 Options forfeited........................................... (25,727) $29.82 ------- ------ Options outstanding -- December 31, 2003......................................... 483,811 $26.64 ======= ====== Price range $11.13 - $12.38 (weighted-average contractual life of 1.4 years).......... 45,800 $11.49 Price range $14.81 - $24.13 (weighted-average contractual life of 5.4 years).......... 160,031 $22.34 Price range $28.00 - $40.25 (weighted-average contractual life of 7.3 years).......... 277,980 $31.62 ------- ------ Exercisable options -- December 31, 2001......................................... 288,937 $20.65 December 31, 2002......................................... 258,407 $21.72 December 31, 2003......................................... 223,097 $26.06
NOTE 6 COMMITMENTS AND CONTINGENCIES A. COMMITMENTS The Company leases equipment and facilities under non-cancelable operating leases, some of which contain renewal options. Total future minimum lease payments consisted of the following at December 31, 2003:
TOTAL LEASES -------------- (IN THOUSANDS) 2004........................................................ $324 2005........................................................ 251 ---- Total lease obligations..................................... $575 ====
Total rental expense charged to operations under all operating leases was $1,670,000, $1,337,000 and $1,447,000 in 2003, 2002 and 2001, respectively. 26 BADGER METER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2003, 2002 AND 2001 The Company makes commitments in the normal course of business. At December 31, 2003, the Company had various contractual obligations, including royalty commitments, minimum product purchases, other distribution rights, investment, and research and development commitments, that were $5,115,000, of which $1,780,000 is due in 2004 and the remainder due from 2005 through 2007. 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 more significant legal proceedings are discussed below. The Company is subject to contingencies relative to environmental laws and regulations. Currently, the Company is in the process of resolving an issue relative to a landfill site. Provision has been made for all known settlement costs, which are not material. The Company is also a defendant in several multi-party asbestos suits generally as a result of its membership in certain trade organizations. The cases are pending in state courts in Mississippi, Texas and Illinois. 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, either from a cash flow perspective or on the financial statements as a whole. 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 in the short term. The Company attempts to mitigate these risks by working closely with key suppliers, purchasing minimal amounts from alternative 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. NOTE 7 EMPLOYEE BENEFIT PLANS A. PENSION PLANS The Company maintains a non-contributory defined benefit pension plan for its employees. The following table sets forth the components of net periodic pension cost for the years ended December 31, 2003, 2002 and 2001 based on a September 30 measurement date:
2003 2002 2001 ------- ------- ------- (IN THOUSANDS) Service cost -- benefits earned during the year............. $ 1,577 $ 1,797 $ 1,798 Interest cost on projected benefit obligations.............. 2,630 2,606 2,799 Expected return on plan assets.............................. (3,963) (3,500) (3,593) Amortization of prior service cost.......................... (136) (117) (122) Amortization of net loss.................................... 408 117 34 ------- ------- ------- Net periodic pension cost................................... $ 516 $ 903 $ 916 ======= ======= =======
27 BADGER METER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2003, 2002 AND 2001 Actuarial assumptions used in the determination of the net periodic pension cost of the above data:
2003 2002 2001 ---- ---- ---- Discount rate............................................... 7.0% 7.5% 7.5% Expected long-term return on plan assets.................... 8.5% 9.0% 9.0% Rate of compensation increase............................... 5.0% 5.0% 5.0%
The following table provides a reconciliation of benefit obligations, plan assets and funded status based on a September 30 measurement date:
2003 2002 ------- ------- (IN THOUSANDS) Change in benefit obligation: Benefit obligation at beginning of plan year.............. $39,569 $37,001 Service cost.............................................. 1,577 1,797 Interest cost............................................. 2,630 2,606 Actuarial loss............................................ 926 1,598 Benefits paid............................................. (4,134) (3,433) ------- ------- Projected benefit obligation at September 30................ $40,568 $39,569 ------- ------- Change in plan assets: Fair value of plan assets at beginning of plan year....... $39,203 $31,187 Actual return on plan assets.............................. 6,629 (2,385) Company contribution...................................... (702) 13,834 Benefits paid............................................. (4,134) (3,433) ------- ------- Fair value of plan assets at September 30................... $40,996 $39,203 ------- ------- Reconciliation: Funded status at September 30............................. $ 428 $ (366) Unrecognized prior service cost........................... (1,221) (1,357) Unrecognized net actuarial loss........................... 17,029 19,177 ------- ------- Prepaid pension asset at September 30 and December 31....... $16,236 $17,454 ======= =======
Actuarial assumptions used in the determination of the benefit obligation of the above data:
2003 2002 ---- ---- Discount rate............................................... 6.5% 7.0% Expected long-term return on plan assets.................... 8.5% 8.5% Rate of compensation increase............................... 5.0% 5.0%
The fair value of the pension plan assets was $43,877,000 at December 31, 2003 and $38,815,000 at December 31, 2002. The variation in the fair value of the assets between September and December of each year is primarily from the change in the market value of the underlying investments. The Company does not expect to contribute funds to its pension plan in 2004. The Company employs a total return investment approach whereby a mix of equities and fixed income investments are used to maximize the long-term return of plan assets for a prudent level of risk. Risk tolerance is established through careful consideration of short- and long-term plan liabilities, plan funded status and corporate financial condition. The investment portfolio contains a diversified blend of equity and fixed-income investments. Furthermore, equity investments are diversified across U.S. and non-U.S. stocks, as well as growth, value, and 28 BADGER METER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2003, 2002 AND 2001 small and large capitalizations. Investment risk is measured and monitored on an ongoing basis through quarterly investment portfolio reviews, annual liability measurements and periodic asset/liability studies. The Company's pension plan weighted-average asset allocations by asset category at December 31 are as follows:
2003 2002 ---- ---- Stocks...................................................... 62% 55% Fixed income funds.......................................... 33 35 Cash and cash equivalents................................... 5 10 --- --- Total....................................................... 100% 100% === ===
The pension plan has a separately determined accumulated benefit obligation which is the actuarial present value of benefits based on service rendered and current and past compensation levels. This differs from the projected benefit obligation in that it includes no assumption about future compensation levels. The accumulated benefit obligation was $39,642,000 and $38,501,000 at September 30, 2003 and 2002, respectively. The Company also maintains a supplemental non-qualified unfunded pension plan for certain officers and other key employees. In both 2003 and 2002, the Company recorded an additional minimum liability to recognize the difference between amounts originally recorded and the accumulated benefit obligation as of the September 30 measurement date. A charge was recorded in other comprehensive income (loss), net of the tax effect, for $49,000 and $453,000 in 2003 and 2002, respectively. Pension expense for this plan was $429,000 and $583,000 at December 31, 2003 and 2002, respectively, and the amount accrued was $2,706,000 and $2,949,000 as of the end of the same periods. B. OTHER POSTRETIREMENT BENEFITS The Company has certain postretirement plans that provide medical benefits for certain retirees and eligible dependents. The following table sets forth the components of net periodic postretirement benefit cost for the years ended December 31, 2003, 2002 and 2001:
2003 2002 2001 ----- ----- ----- (IN THOUSANDS) Service cost, benefits attributed for service of active employees for the period.................................. $ 104 $ 95 $ 97 Interest cost on the accumulated postretirement benefit obligation................................................ 501 459 474 Amortization of prior service credit........................ (173) (236) (236) Recognized net actuarial loss............................... 119 69 61 ----- ----- ----- Net periodic postretirement benefit cost.................... $ 551 $ 387 $ 396 ===== ===== =====
The discount rate used to measure the accumulated postretirement benefit cost was 7.0% for 2003 and 7.5% for 2002 and 2001. It is the Company's policy to fund health care benefits on a cash basis. Since the plan is 29 BADGER METER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2003, 2002 AND 2001 unfunded, there are no plan assets. The following table provides a reconciliation of the benefit obligation at the Company's December 31 measurement date.
2003 2002 ------- ------- (IN THOUSANDS) Change in benefit obligation: Benefit obligation at beginning of year................... $ 7,532 $ 6,446 Service cost.............................................. 104 95 Interest cost............................................. 501 459 Plan amendments........................................... -- 589 Actuarial loss............................................ 310 914 Plan participants contributions........................... 166 -- Benefits paid............................................. (1,160) (971) ------- ------- Projected benefit obligation and unfunded status at December 31........................................................ 7,453 7,532 Unrecognized prior service credit......................... 356 529 Unrecognized net actuarial loss........................... (2,740) (2,549) ------- ------- Accrued postretirement benefit cost......................... $ 5,069 $ 5,512 ======= =======
The discount rate used to measure the accumulated postretirement benefit obligation was 6.5% for 2003 and 7.0% for 2002. Because the plan requires the Company to establish fixed Company contribution amounts for retiree health care benefits, future health care cost trends do not impact the Company's accruals or provisions. The Company estimates that it will pay $1,276,000 in other postretirement benefits in 2004. In January 2004, the FASB issued Financial Staff Position No. FAS 106-1, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003" (the Act), to address the impact of the Act enacted in December 2003. The Act provides a prescription drug benefit for Medicare eligible employees starting in 2006. The impact of the Act on the Company is not yet known. 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 $1,285,000 as of December 31, 2003, and $1,535,000 as of December 31, 2002. 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 $250,000, $365,000 and $400,000 in 2003, 2002 and 2001, respectively. These payments released shares of Common Stock (12,157 in 2003, 17,749 in 2002 and 19,451 in 2001) for allocation to participants in the ESSOP. The ESSOP held unreleased shares of 62,487, 74,644 and 92,393 as of December 31, 2003, 2002 and 2001, respectively, with the fair value of $2,384,000, $2,396,000 and $2,072,000 as of December 31, 2003, 2002 and 2001, 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 certain employees to defer up to 20% of their income on a pretax basis subject to limits on maximum amounts. 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 30 BADGER METER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2003, 2002 AND 2001 dividends on unreleased shares are charged to retained earnings. 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. At December 31, 2003, the Company intends to contribute $220,000 to the ESSOP in 2004 to be used to pay down the existing loan. This commitment releases shares to satisfy the 401(k) match for 2003. Compensation expense of $231,000, $234,000 and $268,000 was recognized for the match for 2003, 2002 and 2001, respectively. NOTE 8 INCOME TAX EXPENSE Details of earnings before income taxes and the related provision for income taxes are as follows:
2003 2002 2001 ------- ------- ------ (IN THOUSANDS) Earnings (loss) before income taxes: Domestic.................................................. $16,058 $12,845 $4,656 Foreign................................................... (2,707) (1,408) 354 ------- ------- ------ Total....................................................... $13,351 $11,437 $5,010 ======= ======= ====== Provision for income taxes: Current: Federal................................................ $ 4,855 $ 1,783 $ 379 State.................................................. 622 336 (96) Foreign................................................ (26) 61 16 Deferred: Federal................................................ 118 1,468 847 State.................................................. 80 499 354 Foreign................................................ 125 19 146 ------- ------- ------ Total....................................................... $ 5,774 $ 4,166 $1,646 ======= ======= ======
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:
2003 2002 2001 ------ ------ ------ (IN THOUSANDS) Provision at statutory rate................................. $4,539 $3,889 $1,703 State income taxes, net of federal tax benefit.............. 463 551 170 Foreign income taxes........................................ 404 83 (11) Foreign sales corporation................................... (68) (53) (57) Reversal of prior liabilities............................... -- (675) (150) Valuation allowance......................................... 615 475 -- Other....................................................... (179) (104) (9) ------ ------ ------ Actual provision............................................ $5,774 $4,166 $1,646 ====== ====== ======
31 BADGER METER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2003, 2002 AND 2001 The components of the net deferred taxes as of December 31 were as follows (in thousands):
2003 2002 ------- ------- Deferred tax assets: Receivables................................................. $ 356 $ 316 Inventories................................................. 680 945 Accrued compensation........................................ 627 698 Payables.................................................... 1,688 1,647 Non-pension postretirement benefits......................... 1,977 2,139 Accrued employee benefits................................... 2,576 2,696 Net operating loss carryforwards............................ 1,225 600 Valuation reserve........................................... (1,225) (475) ------- ------- Total deferred tax assets................................. 7,904 8,566 ------- ------- Deferred tax liabilities: Depreciation................................................ 3,012 3,581 Prepaid pension............................................. 6,303 6,325 Other....................................................... 530 309 ------- ------- Total deferred tax liabilities............................ 9,845 10,215 ------- ------- Deferred tax liabilities, net............................... $(1,941) $(1,649) ======= =======
The valuation reserve relates primarily to net operating loss carryforwards in certain foreign entities where there is uncertainty regarding the realization of the deferred tax benefit through future earnings. At December 31, 2003, the Company had foreign net operating loss carryforwards at certain European subsidiaries totaling $6.2 million. The carryforwards have unlimited carryforward periods, which can be used to offset future taxable income from these subsidiaries. No provision for federal income taxes was 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, 2003 were $608,000. NOTE 9 LONG TERM DEBT AND FAIR VALUE OF FINANCIAL INSTRUMENTS Long-term debt consists of the following:
2003 2002 ------- ------- (IN THOUSANDS) ESSOP debt (Note 7C)........................................ $ 1,285 $ 1,535 Capital lease............................................... 105 189 Term loans.................................................. 28,705 17,301 ------- ------- Total debt.................................................. 30,095 19,025 Less: current maturities.................................... (5,645) (5,979) ------- ------- Long-term debt.............................................. $24,450 $13,046 ======= =======
Interest on the ESSOP debt may be charged at either prime rate or at LIBOR plus 1.5%. As of December 31, 2003, the LIBOR-based loan had an interest rate of 2.7%. The terms of the loan allow variable payments of principal with the final principal and interest payment due June 20, 2004, at which time it is expected to be renewed. The interest expense on the ESSOP debt was $27,000, $31,000 and $76,000, which was net of dividends on unallocated ESSOP shares of $39,000, $45,000 and $54,000 for 2003, 2002 and 2001, respectively. 32 BADGER METER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2003, 2002 AND 2001 In July 2001, the Company borrowed $1,700,000 in connection with the construction of a new manufacturing facility in the Czech Republic, of which $734,000 and $1,214,000 was outstanding at December 31, 2003 and 2002, respectively. The debt bears interest at LIBOR plus 1.75% and the rate is set daily with a rate of 2.9% at December 31, 2003. Payments are due in quarterly installments through April 2005. Principal payments total $486,000 for 2004, with a final principal payment of $248,000 in 2005. In December 2003, the Company obtained two long-term, unsecured loans to replace existing short- and long-term debt. The Company secured a $16,000,000, 3-year term loan that bears interest at 4.8% with annual principal payments of $5,071,000, $5,331,000 and $5,598,000 in 2004, 2005 and 2006, respectively. In addition, the Company secured a $12,000,000 euro-based, revolving loan facility that bears interest at 4% and expires in April 2007. Borrowings under this revolving loan facility were $11,970,000 at December 31, 2003. 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. The $734,000 outstanding bank debt in the Czech Republic is a term loan with variable interest based upon daily LIBOR rates; accordingly, carrying value approximates the fair value. The $16,000,000 term loan and $11,970,000 outstanding under the euro-based revolving loan facility were obtained in December 2003 at current interest rates and therefore carrying value approximates fair value. The Company guarantees the debt of the Badger Meter Officers' Voting Trust (BMOVT), from which the trust obtained loans on behalf of the officers of the Company from a bank in order to purchase shares of the Company's Common Stock. The officers' loan amounts are collateralized by the Company's shares that were purchased with the loans' proceeds. There have been no loans made to officers by the BMOVT since July 2002. The amount that the Company guaranteed was $1,754,000 and $2,380,000 at December 31, 2003 and 2002, respectively. The current loan was renewed in April 2003 with an expiration date of April 2004, at which time it is expected to be renewed. The fair market value of this guarantee at December 31, 2003 continues to be insignificant because the collateral value of the shares exceeds the loan amount. NOTE 10 INDUSTRY SEGMENT AND GEOGRAPHIC AREAS The Company is a marketer and manufacturer of flow measurement and control instruments, which comprise one reportable segment. The Company manages and evaluates its operations as one segment primarily due to similarities in the nature of the products, production processes, customers and methods of distribution. Information regarding revenues by geographic area is as follows.
2003 2002 2001 -------- -------- -------- (IN THOUSANDS) Revenues: United States............................................. $152,818 $142,104 $120,811 Foreign: Europe................................................. $ 23,564 $ 13,974 $ 6,835 Mexico................................................. $ 3,262 $ 6,495 $ 6,910 Other.................................................. $ 4,345 $ 4,744 $ 3,981
33 BADGER METER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2003, 2002 AND 2001 Information regarding assets by geographic area is as follows.
2003 2002 ------- ------- (IN THOUSANDS) Long-lived assets (all non-current assets): United States............................................. $57,065 $60,642 Foreign: Europe................................................. $13,768 $10,407 Mexico................................................. $ 20 $ 34 Net assets: United States............................................. $99,896 $99,356 Foreign: Europe................................................. $31,915 $26,071 Mexico................................................. $ 2,040 $ 1,036
NOTE 11 UNAUDITED: QUARTERLY RESULTS OF OPERATIONS, COMMON STOCK PRICE AND DIVIDENDS
QUARTER ENDED -------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- ------- ------------ ----------- (IN THOUSANDS EXCEPT PER SHARE DATA) 2003 Net sales................................... $39,575 $47,516 $48,613 $48,285 Gross margin................................ $12,943 $16,024 $16,097 $15,455 Net earnings................................ $ 706 $ 2,606 $ 2,644 $ 1,621 Earnings per share: Basic..................................... $ .22 $ .81 $ .82 $ .50 Diluted................................... $ .21 $ .78 $ .80 $ .48 Dividends declared.......................... $ .26 $ .26 $ .27 $ .27 Stock price: High...................................... $ 33.67 $ 31.87 $ 33.49 $ 39.75 Low....................................... $ 29.77 $ 24.50 $ 27.31 $ 31.45 Quarter-end close......................... $ 30.74 $ 25.75 $ 32.00 $ 38.15 2002 Net sales................................... $37,454 $43,586 $45,952 $40,325 Gross margin................................ $12,760 $14,818 $15,667 $12,755 Net earnings................................ $ 1,607 $ 2,320 $ 2,307 $ 1,037 Earnings per share: Basic..................................... $ .51 $ .73 $ .73 $ .33 Diluted................................... $ .49 $ .70 $ .70 $ .31 Dividends declared.......................... $ .25 $ .25 $ .26 $ .26 Stock price: High...................................... $ 27.60 $ 33.73 $ 34.00 $ 33.73 Low....................................... $ 22.08 $ 27.29 $ 26.54 $ 27.03 Quarter-end close......................... $ 27.50 $ 27.50 $ 30.50 $ 32.10
Net sales and gross margin related to a contract for meters and installations were recorded in the third quarter 2003 prior to the meters being installed. Under the Company's revenue recognition policy (Note 1), net sales and gross margins should not have been recorded until the fourth quarter 2003 when the meters were 34 BADGER METER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2003, 2002 AND 2001 installed. This resulted in net sales and margins for the third quarter being overstated by $488,000 and $306,000, respectively, or $ .06 per diluted share, and the fourth quarter being understated by the same amounts. Accordingly, amounts for the full year of 2003 were correctly recorded. Fourth quarter 2002 adjustments, primarily related to the determination of the functional currency of MPE, resulted in an increase in net earnings of $187,000 or $ .06 per diluted share. These adjustments represent reversals of amounts recorded in previous quarters. 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. The Company currently anticipates continuing to pay cash dividends. Shareholders of record as of December 31, 2003 and 2002 totaled 535 and 494, respectively, for Common Stock. Voting trusts are counted as single shareholders for this purpose. 35 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES (a) Evaluation of disclosure controls and procedures. In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), the Company's management evaluated, with the participation of the Company's President and Chief Executive Officer and the Company's Senior Vice President -- Finance, Chief Financial Officer and Treasurer, the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the year ended December 31, 2003. Based upon their evaluation of these disclosure controls and procedures, the Company's President and Chief Executive Officer and the Company's Senior Vice President -- Finance, Chief Financial Officer and Treasurer concluded that the Company's disclosure controls and procedures were effective as of the end of the year ended December 31, 2003 to ensure that material information relating to the Company, including its consolidated subsidiaries, was made known to them by others within those entities, particularly during the period in which this Annual Report on Form 10-K was being prepared. (b) Changes in internal controls over financial reporting. There was no change in the Company's internal control over financial reporting that occurred during the quarter ended December 31, 2003 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information required by this Item with respect to directors is included under the headings "Nomination and Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held on April 23, 2004, and is incorporated herein by reference. Information concerning the executive officers of the Company is included in Part I of this Form 10-K. The Company has adopted the Badger Meter, Inc. Code of Conduct for Financial Executives that applies to the Company's President and Chief Executive Officer, the Company's Senior Vice President -- Finance, Chief Financial Officer and Treasurer and other persons performing similar functions. A copy of the Badger Meter, Inc. Code of Conduct for Financial Executives is posted on the Company's website at www.badgermeter.com. The Badger Meter, Inc. Code of Conduct for Financial Executives is also available in print to any shareholder who requests it in writing from the Secretary of the Company. The Company intends to satisfy the disclosure requirements under Item 10 of Form 8-K regarding amendments to, or waivers from, the Badger Meter, Inc. Code of Conduct for Financial Executives by posting such information on the Company's website at www.badgermeter.com. The Company is not including the information contained on its website as part of, or incorporating it by reference into, this annual Report on Form 10-K. ITEM 11. EXECUTIVE COMPENSATION Information required by this Item is included under the headings "Nomination and Election of Directors -- Director Compensation" and "Executive Compensation" in the Company's definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held on April 23, 2004, and is incorporated herein by reference; provided, however, that the subsection entitled "Corporate Governance Committee Report on Executive Compensation" shall not be deemed to be incorporated herein by reference. 36 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required by this Item is included under the heading "Stock Ownership of Management and Others" in the Company's definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held on April 23, 2004, and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by this Item is included under the headings "Corporate Governance Committee Interlocks and Insider Participation" and "Certain Transactions" in the Company's definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held on April 23, 2004, and is incorporated herein by reference. PART IV ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information required by this Item is included under the heading "Principal Accounting Firm Fees" in the Company's definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held on April 23, 2004, and is incorporated herein by reference. ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K (a) Documents filed 1. Financial Statements. See the financial statements included in Part II, Item 8 "Financial Statements and Supplementary Data" in this 2003 Annual Report on Form 10-K, under the headings "Consolidated Balance Sheets," "Consolidated Statements of Operations," "Consolidated Statements of Cash Flows" and "Consolidated Statements of Shareholders' Equity." 2. Financial Statement Schedules. Financial statement schedules are omitted because they are not applicable. 3. Exhibits. See the Exhibit Index included in this Form 10-K which is incorporated herein by reference. (b) Reports on Form 8-K A current report was furnished on October 14, 2003 under Item 7 and 12 of Form 8-K to disclose the full contents of the Company's press release that reported the results of the three and nine-month periods ended September 30, 2003. A current report was also furnished on February 5, 2004 under Item 7 and 12 of Form 8-K to disclose the full contents of the Company's press release that reported the results of the three and twelve-month periods ended December 31, 2003. 37 SIGNATURE 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. BADGER METER, INC. Dated: March 1, 2004 By /s/ RICHARD A. MEEUSEN ------------------------------------ Richard A. Meeusen President and Chief Executive Officer By /s/ RICHARD E. JOHNSON ------------------------------------ Richard E. Johnson Senior Vice President -- Finance, Chief Financial Officer and Treasurer By /s/ BEVERLY L.P. SMILEY ------------------------------------ Beverly L.P. Smiley Vice President -- Controller 38 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: /S/ JAMES L. FORBES /S/ ULICE PAYNE, JR. - ------------------------------------ ------------------------------------ James L. Forbes Ulice Payne, Jr. Chairman Director March 1, 2004 March 1, 2004 /S/ RICHARD A. MEEUSEN /S/ ANDREW J. POLICANO - ------------------------------------ ------------------------------------ Richard A. Meeusen Andrew J. Policano President and Chief Executive Director Officer and Director March 1, 2004 March 1, 2004 /S/ THOMAS J. FISCHER /S/ STEVEN J. SMITH - ------------------------------------ ------------------------------------ Thomas J. Fischer Steven J. Smith Director Director March 1, 2004 March 1, 2004 /S/ KENNETH P. MANNING /S/ JOHN J. STOLLENWERK - ------------------------------------ ------------------------------------ Kenneth P. Manning John J. Stollenwerk Director Director March 1, 2004 March 1, 2004
39 EXHIBIT INDEX
EXHIBIT NO. EXHIBIT DESCRIPTION - ----------- ------------------- (3.0) Restated Articles of Incorporation effective September 30, 1999. [Incorporated by reference from Exhibit (3.0) (i) to the Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 1999]. (3.1) Restated By-Laws as amended February 14, 2003. [Incorporated by reference from Exhibit (3.1) to the Registrant's Annual Report on Form 10-K for the period ended December 31, 2002]. (4.0) Loan Agreement dated December 29, 2003 between the Registrant and the M&I Marshall & Ilsley Bank relating to the Registrant's revolving credit loan. (4.1) Loan Agreement between Bank One, N.A. and the Badger Meter Employee Savings and Stock Ownership Plan and Trust, dated June 20, 2003. [Incorporated by reference from Exhibit (4) to the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2003]. (4.2) Rights Agreement, dated May 26, 1998, between the Registrant and Firstar Trust Company. [Incorporated by reference to Exhibit (4.1) to the Registrant's Registration Statement on Form 8-A (Commission File No. 1-6706)]. (4.3) Agreement of Substitution and Amendment of Common Shares Rights Agreement, dated August 16, 2002, between the Registrant and American Stock Transfer and Trust Company [Incorporated by reference to Exhibit (4.2) to the Registrant's Registration Statement on Form S-3 (Registration No. 333-102057)]. (4.4) Loan Agreement dated December 29, 2003 between the Registrant and the M&I Marshall & Ilsley Bank relating to the Registrant's business note. (4.5) Loan Agreement dated December 29, 2003 between the Registrant and the M&I Marshall & Ilsley Bank relating to the Registrant's euro note. (9.1) Badger Meter Officers' Voting Trust Agreement dated December 18, 1991. [Incorporated by reference from Exhibit (9.1) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991]. (10.1)* Badger Meter, Inc. 1989 Stock Option Plan. [Incorporated by reference from Exhibit (4.1) to the Registrant's Form S-8 Registration Statement (Registration No. 33-27650)]. (10.2)* Badger Meter, Inc. 1993 Stock Option Plan. [Incorporated by reference from Exhibit (4.3) to the Registrant's Form S-8 Registration Statement (Registration No. 33-65618)]. (10.3)* Badger Meter, Inc. 1995 Stock Option Plan. [Incorporated by reference from Exhibit (4.1) to the Registrant's Form S-8 Registration Statement (Registration No. 33-62239)]. (10.4)* Badger Meter, Inc. 1997 Stock Option Plan. [Incorporated by reference from Exhibit (4.1) to the Registrant's Form S-8 Registration Statement (Registration No. 333-28617)]. (10.5)* Badger Meter, Inc. Deferred Compensation Plan. [Incorporated by reference from Exhibit (10.5) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993]. (10.6) Badger Meter, Inc. Employee Savings and Stock Ownership Plan. [Incorporated by reference from Exhibit (4.1) to the Registrant's Form S-8 Registration Statement (Registration No. 33-62241)]. (10.7)* Long-Term Incentive Plan. [Incorporated by reference from Exhibit (10.6) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995]. (10.8)* Badger Meter, Inc. Supplemental Non-Qualified Unfunded Pension Plan. [Incorporated by reference from Exhibit (10.7) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995]. (10.9)* Forms of the Key Executive Employment and Severance Agreements between Badger Meter, Inc. and the applicable executive officers. [Incorporated by reference from Exhibit (10.0) to the Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 1999]. (10.10)* Badger Meter, Inc. 1999 Stock Option Plan. [Incorporated by reference from Exhibit (4.1) to the Registrant's Form S-8 Registration Statement (Registration No. 333-73228)]. (10.11)* Badger Meter, Inc. Amendment to Deferred Compensation Plan. [Incorporated by reference from Exhibit (10.11) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000].
40
EXHIBIT NO. EXHIBIT DESCRIPTION - ----------- ------------------- (10.12)* Badger Meter, Inc. 2002 Director Stock Grant Plan. [Incorporated by reference from Exhibit (10.0) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002]. (10.13)* Badger Meter, Inc. 2003 Stock Option Plan. [Incorporated by reference from Exhibit (4.1) to the Registrant's Form S-8 Registration Statement (Registration No. 333-107850)]. (21.0) Subsidiaries of the Registrant. (23.0) Consent of Ernst & Young LLP, Independent Auditors. (31.1) Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (31.2) Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (32.0) Certification of Periodic Financial Report by the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (99.0) Definitive Proxy Statement for the Annual Meeting of Shareholders to be held April 23, 2004. To be filed with the Securities and Exchange Commission under Regulation 14A within 120 days after the end of the Registrant's fiscal year. With the exception of the information incorporated by reference into Items 10, 11, 12, 13 and 14 of this Form 10-K, the definitive Proxy Statement is not deemed filed as part of this report.
- --------------- * A management contract or compensatory plan or arrangement. 41 EX-4.0 3 c83420exv4w0.txt LOAN AGREEMENT Exhibit (4.0) REVOLVING BUSINESS NOTE M&I BANK BADGER METER. INC. DECEMBER 29, 2003 $20.000.000.00 - ------------------ ----------------- -------------- Customer Date Amount The undersigned ("Customer", whether one or more) promises to pay to the order of M&I Marshall & Ilsley Bank ("Lender") at 770 North Water Street, Milwaukee, Wisconsin 53202, the principal sum of $20.000.000.00 or, if less, the aggregate unpaid principal amount of all loans made under this Note, plus interest, as set forth below. Lender will disburse loan proceeds to Customer's deposit account number ___[omitted]___or by other means acceptable to Lender. Interest is payable on JANUARY 30, 2004, and on the same date of each consecutive month thereafter and at maturity. Principal is payable APRIL 30, 2004. This Note bears interest on the unpaid principal balance before maturity (whether upon demand, acceleration or otherwise) at the rates set forth on Exhibit A attached hereto. Interest is computed on the basis of a 360-day year on the actual number of days principal is unpaid. Unpaid principal and interest bear interest after maturity (whether by acceleration or lapse of time) until paid at the prime rate of interest adopted by Lender as its base rate determinations from time to time which may or may not be the lowest rate charged by Lender ("Prime Rate") (with the rate changing as and when that Prime Rate changes) plus 3%. If any payment is not paid when due, if a default occurs under any other obligation of any Customer to Lender or if Lender deems itself insecure, the unpaid balance shall, at the option of Lender, and without notice mature and become immediately payable. The unpaid balance shall automatically mature and become immediately payable in the event any Customer, surety, or guarantor becomes the subject of bankruptcy or other insolvency proceedings. Lender's receipt of any payment on this Note after the occurrence of an event of default shall not constitute a waiver of the default or Lender's rights and remedies upon such default. The acceptance of this Note, the making of any loan, or any other action of Lender does not constitute an obligation or commitment of Lender to make loans; and any loans may be made solely in the discretion of Lender. This Note may be prepaid in full or in part without penalty. Lender is authorized to automatically charge payments due under this Note to account number ___[omitted]___ at M&I Marshall & Ilsley Bank (See reverse side regarding Notice of Transfers Varying in Amount.) ____ check here only if this Note is to be secured by a first lien mortgage or equivalent security interest on a one-to-four family dwelling used as Customer's principal place of residence. This Note includes additional provisions on reverse side. BADGER METER, INC. 4545 W. BROWN DEER ROAD Street Address Milwaukee. WI 53223 City/State/Zip By: /s/ Richard A. Meeusen ---------------------------------------- By: /s/ Richard E. Johnson ---------------------------------------- 43 ADDITIONAL PROVISIONS This Note is secured by all existing and future security agreements, assignments and mortgages between Lender and Customer, between Lender and any guarantor of this Note, and between Lender and any other person providing collateral security for Customer's obligations, and payment may be accelerated according to any of them. Unless a lien would be prohibited by law or would render a nontaxable account taxable, Customer grants to Lender a security interest and lien in any deposit account Customer may at any time have with Lender. Lender may, at any time after an occurrence of an event of default, without notice or demand, setoff against any deposit balances or other money now or hereafter owed any Customer by Lender any amount unpaid under this Note. Lender is authorized to make book entries evidencing loans and payments and the aggregate of all loans as evidenced by those entries is presumptive evidence that those amounts are outstanding and unpaid to Lender. Customer covenants that all loans shall be used solely for business and not personal purposes. Customer agrees to pay all costs of administration and collection before and after judgment, including reasonable attorneys' fees (including those incurred in successful defense or settlement of any counterclaim brought by Customer or incident to any action or proceeding involving Customer brought pursuant to the United States Bankruptcy Code) and waives presentment, protest, demand and notice of dishonor. Customer agrees to indemnify and hold harmless Lender, its directors, officers, employees and agents, from and against any and all claims, damages, judgments, penalties, and expenses, including reasonable attorneys' fees, arising directly or indirectly from credit extended under this Note or the activities of Customer. This indemnity shall survive payment of this Note. Customer acknowledges that Lender has not made any representations or warranties with respect to, and that Lender does not assume any responsibility to Customer for, the collectability or enforceability of this Note or the financial condition of any Customer. Customer authorizes Lender to disclose financial and other information about Customer to others. Each Customer has independently determined the collectability and enforceability of this Note. Without affecting the liability of any Customer, surety, or guarantor, Lender may, without notice, accept partial payments, release or impair any collateral security for the payment of this Note or agree not to sue any party liable on it. Without affecting the liability of any surety or guarantor, Lender may from time to time, without notice, renew or extend the time for payment. The obligations of all Customers under this Note are joint and several. To the extent not prohibited by law, Customer consents that venue for any legal proceeding relating to collection of this Note shall be, at Lender's option, the county in which Lender has its principal office in this state, the county in which any Customer resides or the county in which this Note was executed. This Note shall be construed and enforced in accordance with the internal laws of Wisconsin. This Note is intended by Customer and Lender as a final expression of this Note and as a complete and exclusive statement of its terms, there being no conditions to the enforceability of this Note. This Note may not be supplemented or modified except in writing, except as set forth in Exhibit A attached hereto. PREAUTHORIZED TRANSFER DISCLOSURE When Customer authorizes Lender to obtain payment of amounts becoming due Lender by initiating charges to Customer's account, Customer also requests and authorizes remitting financial institution to alert and honor same and to charge same to Customer's account. This authorization will remain in effect until Customer notifies Lender and the remitting financial institution in writing to terminate this authorization and Lender and remitting financial institution have a reasonable time to act on the termination. NOTICE OF TRANSFERS VARYING IN AMOUNT: If Lender and remitting financial institution are not the same, Customer is an individual, the account was established primarily for personal, family or household purposes and the regular payments may vary in amount, Customer has the right to receive a notice from Lender 10 days before each payment of how much the payment will be; however, by signing this Note, Customer elects to receive notice only when current payment would differ by more than 100% from previous payment. EXHIBIT A TO REVOLVING BUSINESS NOTE This Note bears interest on the unpaid principal balance before maturity (whether upon demand, acceleration or otherwise) at an annual rate equal to the Adjusted Interbank Rate (as defined below) plus 75 basis points, which rate will change as of 44 the first day of each calendar month. If the first day of any calendar month is not a regular Business Day, the Adjusted Interbank Rate shall be established on the preceding Business Day. "Business Day" shall mean any day other than a Saturday, Sunday, public holiday or other day when commercial banks in Wisconsin are authorized or required by law to close. Customer may, from time to time and without premium or penalty, borrow and repay the Loans in whole or in part; provided requests for advances or repayments occur prior to 3:00 P.M. on any Business Day. "Adjusted Interbank Rate" means an annual rate for all loans evidenced by this Note (the "Loans") (rounded upwards, if necessary, to the nearest 1/100 of 1%), determined pursuant to the following formula: Adjusted Interbank Rate = Interbank Rate ---------------------- 1 - Interbank Reserve Requirement "Interbank Rate" means with respect to any Loan, the rate per annum equal to the rate (rounded upwards, if necessary, to the nearest 1/16 of 1%) quoted as the rate at which dollar deposits in immediately available funds are offered on the first day of each calendar month in the interbank Eurodollar market on or about 9:00 A.M., Milwaukee time, for a period of one (1) calendar month. If the first day of any calendar month is not a regular Business Day, the Interbank Rate shall be established on the preceding Business Day. Lender currently uses the Reuters Information Service to provide information with respect to the interbank Eurodollar market, but Lender may change the service providing such information at any time. Each such determination shall be conclusive and binding upon the parties hereto in the absence of demonstrable error. "Interbank Reserve Requirement" means a percentage (expressed as a decimal) equal to the aggregate reserve requirements in effect on the first day of each calendar month (including all basic, supplemental, marginal and other reserves and taking into account any transitional adjustments or other scheduled changes in reserve requirements during each calendar month) specified for "Eurocurrency Liabilities. Under Regulation D of the Board of Governors of the Federal Reserve System, or any other regulation of the Board of Governors which prescribes reserve requirements applicable to "Eurocurrency Liabilities" as presently defined in Regulation D, as then in effect, as applicable to the class or classes of banks of which Lender is a member. As of the date of this Note, the Interbank Reserve Requirement is 0%. INCREASED COSTS. If, Regulation D of the Board of Governors of the Federal Reserve System, or the adoption of any applicable law, rule or regulation of general application, or any change therein, or any interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by Lender with any request or directive of general application (whether or not having the force of law) of any such authority, central bank or comparable agency: (a) shall subject Lender to any tax, duty or other charge with respect to the Loans, the Note or its obligation to make Loans, or shall change the basis of taxation of payments to Lender of the principal of or interest on the Loans or any other amounts due under this Note in respect of the Loans or its obligation to make Loans (except for changes in the rate of tax on the overall net income of Lender); or (b) shall impose, modify or deem applicable any reserve (including, without limitation, any reserve imposed by the Board of Governors of the Federal Reserve System, but excluding any reserve included in the determination of interest rates pursuant to this Note), special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, Lender; or (c) shall affect the amount of capital required or expected to be maintained by Lender or any corporation controlling Lender: or (d) shall impose on Lender any other condition affecting the Loans, the Note or its obligation to make Loans; and the result of any of the foregoing is to increase the cost to (or in the case of Regulation D referred to above, to impose a cost on) Lender of making or maintaining any Loans, or to reduce the amount of any sum received or receivable by Lender under this Note with respect thereto, then within ten (10) days after demand by Lender (which demand shall be accompanied by a statement setting forth the basis of such demand), Customer shall pay directly to Lender such additional amount or amounts as will compensate Lender for such increased cost or such reduction. Determinations by Lender for purposes of this section of the effect of any change in applicable laws or regulations or of any interpretations, directives or requests thereunder on its costs of making or maintaining Loans or sums receivable by it in respect of Loans, 45 and of the additional amounts required to compensate Lender in respect thereof, shall be conclusive, absent manifest error. DEPOSITS UNAVAILABLE OR INTEREST RATE UNASCERTAINABLE. (a) If Lender is advised that deposits in dollars (in the applicable amount) are not being offered to banks in the relevant market for a period of one (1) calendar month, or Lender otherwise determines (which determination shall be binding and conclusive on all parties) that by reason of circumstances affecting the interbank Eurodollar market adequate and reasonable means do not exist for ascertaining the applicable Interbank Rate; or (b) If lenders similar to Lender have determined that the Interbank Rate will not adequately and fairly reflect the cost to such lenders of maintaining or funding loans based on the Interbank Rate, or that the making or funding of such Interbank Rate loans has become impracticable as a result of an event occurring after the date of this Note which in the opinion of Lender materially affects such Interbank Rate loans; then so long as such circumstances shall continue, Lender shall not be under any obligation to make or continue Loans based on the Interbank Rate and on the first Business Day of the next calendar month, such Loans shall bear interest at the prime rate of interest adopted by Lender as its base rate for interest rate determinations from time to time which mayor may not be the lowest rate charged by Lender ("Prime Rate") (with the rate changing as and when that Prime Rate changes) plus 0%. If such an agreement cannot be reached, such Loans shall be repaid in full by Customer. CHANGE IN LAW RENDERING INTERBANK RATE LOANS UNLAWFUL. In the event that any change in (including the adoption of any new) applicable laws or regulations, or any change in the interpretation of applicable laws or regulations by any governmental or other regulatory body charged with the administration thereof, should make it unlawful for any lender to make, maintain or fund Loans based on the Interbank Rate, then: (a) Lender shall promptly notify Customer; (b) the obligation of Lender to make or continue Loans based on the Interbank Rate shall be suspended for the duration of such unlawfulness; and (c) on the first Business Day of the following calendar month, such Loans shall bear interest at the Prime Rate plus 0%, with the interest rate to change on each day that the Prime Rate changes. Dated as of December 29, 2003 Badger Meter, Inc. M&I Marshall & Ilsley Bank By: /s/ Richard A. Meeusen By: /s/ James P. McMullen ---------------------------------- ---------------------------------- James P. McMullen, Vice President By: /s/ Richard E. Johnson ---------------------------------- 46 EX-4.4 4 c83420exv4w4.txt LOAN AGREEMENT Exhibit (4.4) Boxes not checked are inapplicable. BUSINESS NOTE (Use only for business purpose loans) BADGER METER, INC. (MAKER) [Check (a), (b), (c) or (d); only one shall apply.] (a) [ ] SINGLE PAYMENT. In one payment on N/A, plus interest payable as set forth below unless interest is shown on line 4 at the bottom of this Note. (b) [X] INSTALLMENTS OF PRINCIPAL AND INTEREST. In 36 equal payments of $ 478,743.95 due on January 30,2004 and on [X] the same day(s) of each CONSECUTIVE month thereafter [ ] every 7th day thereafter [ ] every 14th day thereafter, with the final payment of the unpaid balance and accrued interest due on December 30, 2006, all subject to modification as set forth in 2(b) below, if applicable. All payments include principal and interest. (c) [ ] INSTALLMENTS OF PRINCIPAL. In N/A equal payments of principal of $ N/A due on N/A and on [ ] the same day(s) of each N/A month thereafter [ ] every 7th day thereafter [ ] every 14th day thereafter, PLUS a final payment of the unpaid principal due on N/A, PLUS interest payable as set forth below. (d) [ ] OTHER. N/A 2. INTEREST CALCULATION. If the amount of interest is not shown on line 4 below, this Note bears interest on the unpaid principal balance before maturity: [Check (a) or (b) or complete line 4 below; only one shall apply.] (a) [X] FIXED RATE. At the rate of 4.809% per year. (b) [ ] VARIABLE RATE. At the annual rate which is equal to the following Index Rate, [ ] plus [ ] minus N/A percentage points ("Note Rate"), and the Note Rate shall be adjusted as provided below. The Index Rate is: [ ] The prime rate [ ] The reference rate [ ] The base rate adopted by [ ] lender [ ] N/A from time to time as its base or reference rate for interest rate determinations. The Index Rate may or may not be the lowest rate charged by lender. [ ] N/A The initial Note Rate is N/A% per year and shall not at any time be less than N/A% per year. An adjustment in the Note Rate will result in an increase or decrease in (1) [ ] the amount of each payment of interest, (2) [ ] the amount of the final payment, (3) [ ] the number of scheduled periodic payments sufficient to repay this Note in substantially equal payments, (4) [ ] the amount of each remaining payment of principal and interest so that those remaining payments will be substantially equal and sufficient to repay this Note by its scheduled maturity date, (5) [ ] the amount of each remaining payment of principal and interest (other than the final payment) so that those remaining payments will be substantially equal and sufficient to repay this Note by its scheduled maturity date based on the original amortization schedule used by Lender, plus the final payment of principal and interest, or (6) [ ] N/A In addition, Lender is authorized to change the amount of periodic payments if and to the extent necessary to pay in full all accrued interest owing on this Note. The Maker agrees to pay any resulting payments or amounts. The Note Rate shall be adjusted only on the following change dates: [ ] the first day of each month [ ] each scheduled payment date [ ] as and when the Index Rate changes [ ] N/A Interest is computed: (c) [X] For the actual number of days principal is unpaid on the basis of [X] a 360 day year [ ] a 365 day year. (d) [ ] For the number of days principal is unpaid on the basis of a 360 day year, counting each day as 1/30th of a month and disregarding differences in lengths of months and years. Unpaid principal and interest bear interest after maturity until paid (whether by acceleration or lapse of time) at the rate [X] which would otherwise be applicable plus 3 percentage points [ ] of N/A% per year, computed on the same basis as the interest rate before maturity. 3. INTEREST PAYMENT. Interest is payable on N/A, and on [ ] the same day of each N/A month thereafter, [ ] every 7th day thereafter, [ ] every 14th day thereafter, and at maturity, or, if box 1(b) is checked, at the times so indicated. 47 4. OTHER CHARGES. If any payment (other than the final payment) is not made on or before the 10TH day after its due date, Lender may collect a delinquency charge of 5% of the unpaid amount. Maker agrees to pay a charge of $ 15.00 for each check presented for payment under this Note which is returned unsatisfied. 5. PREPAYMENT. Full or partial prepayment of this Note [ ] is permitted at any time without penalty {X} SEE ATTACHED EXHIBIT A FOR PREPAYMENT PENALTY. IN THE EVENT THIS NOTE IS RENEWED, A LOAN ADMINISTRATION FEE MAY BE ASSESSED. THIS NOTE INCLUDES ADDITIONAL PROVISIONS ON REVERSE SIDE. BADGER METER. INC. (SEAL) CORPORATION ---------------------------------------- (Type of organization) By: /s/ Richard A. Meeusen (SEAL) ---------------------------------------- By: /s/ Richard E. Johnson (SEAL) ---------------------------------------- 48 December 29, 2003 Mr. James P. McMullen Vice President M&I Marshall & Ilsley Bank 770 North Water Street Milwaukee, Wisconsin Dear Mr. McMullen: The undersigned covenants that as long as any obligation is owed M&I Marshall & Ilsley Bank, ("Lender") under the terms and conditions of a promissory note dated December 29, 2003 in the amount of $16.000.000, (the "Note"), and all extensions, renewals or modifications of the Note, the undersigned will not sell or encumber in any of its assets and all obligations to Lender shall become due and payable upon the sale, lease or other disposition of the assets of Badger Meter, Inc. A breach of this covenant shall constitute an additional event of default under the Note and Lender may, at its option, declare the Note due and payable, and may pursue all remedies available to it with regard to the Note. The undersigned shall reimburse Lender for all expenses incurred by it in protecting or enforcing its rights under this letter agreement, including without limitation reasonable attorneys' fees and legal expenses. Dated this 29th day of December, 2003. Badger Meter, Inc. By: /s/ Richard A. Meeusen ---------------------------------------- Title: President/CEO ---------------------------------------- By: /s/ Richard E. Johnson ---------------------------------------- Title: Senior V.P. Finance, CFO & Treasurer ---------------------------------------- 49 PREPAYMENT FEE OPTIONS Standard - -------- YIELD MAINTENANCE - LIBOR/Swap The Yield Maintenance Fee, as hereinafter provided, shall be immediately due and payable by Maker upon a full or partial prepayment of this Note at any time prior to the final scheduled payment due date on the Note. Yield Maintenance Fee: "Yield Maintenance Fee" means an amount equal to the excess, if any, of the amount of: (i) monthly interest which would otherwise be payable on the prepaid principal amount of this Note from the date of prepayment through the final schedule payment due date on the Note, over the (ii) monthly interest Lender would earn if the prepaid principal amount were reinvested for the period from the date of prepayment through the final scheduled payment due date on the Note, at the Reinvestment Rate (as hereinafter defined) plus 1.50%, Such difference shall be discounted to present value at the Reinvestment Rate. REINVESTMENT RATE: If the remaining term of the Note is less than one year, "Reinvestment Rate" means: the yield in percent per annum on Eurodollar Deposits (London) as of the Reinvestment Rate Determination Date (as hereinafter defined) which has a maturity equal to the remaining term of the Note; if the remaining term of the Note is one year or more, "Reinvestment Rate" means: the yield in percent per annum on Interest Rate Swaps as of the Reinvestment Rate Determination Date which has a maturity equal to the remaining term of the Note; or, in the event there is no rate available for a term that is equal to the remaining term of the Note, "Reinvestment Rate" means: the linearly interpolated yield between the two yields (Eurodollar Deposits and/or Interest Rate Swaps, as applicable), one for the closest maturity less than the remaining term of the Note, and the other for the closest maturity greater than the remaining term of the Note. REINVESTMENT RATE DETERMINATION DATE: "Reinvestment Rate Determination Date" means the date which is five (5) banking days prior to the scheduled prepayment date. PUBLISHED YIELDS: Yields on Eurodollar Deposits (London) and Interest Rate Swaps shall be the applicable rates available and published most recently by the Board of Governors of the Federal Reserve System as of such Reinvestment Rate Determination Date. (Release H.15, available at www.federalreserve.gov/releases/h15/update) PREPAYMENT CALCULATION NOTICE TO MAKER: Promptly after the Reinvestment Rate Determination Date, Lender shall notify Maker of the amount and the basis of determination of the required Yield Maintenance Fee, and such determination and amount shall be binding on both parties absent manifest error. 50 EX-4.5 5 c83420exv4w5.txt LOAN AGREEMENT Exhibit (4.5) BADGER METER, INC. EURO NOTE Euro 10,000,000 Milwaukee, Wisconsin December 29,2003 1. FOR VALUE RECEIVED, the undersigned, BADGER METER. INC., (hereinafter "Maker"), promises to pay to the order of M&I MARSHALL & ILSLEY BANK (hereinafter "Holder") at 770 North Water Street, Milwaukee, Wisconsin, 53202, the principal sum of TEN MILLION EURO DOLLARS (Euro 10.000.000) on APRIL 30,2007. Both principal and interest are to be made in Euro Dollars at the offices of M&I Marshall & Ilsley Bank, Attention: Loan and Discount Department, 770 North Water Street, Milwaukee, Wisconsin, 53202, or at such other place as the holder shall designate in writing to the maker. Maker also agree(s) to pay interest from the date hereof on the unpaid principal balance from time to time outstanding at a rate per annum as follows: Interest shall be due and payable on the outstanding balance due or advanced hereunder at a per annum rate equal to the LIBOR INDEX RATE (EURO) plus the MARGIN. In the event and during such time as the BANK shall determine that a CHANGE IN CIRCUMSTANCE has occurred, the interest rate on the borrowings evidenced by this Note shall adjust automatically without notice to a per annum rate equal to the BANK's PRIME RATE. Notwithstanding the foregoing, after the maturity hereof, whether by acceleration, demand, default or otherwise interest shall accrue at a rate per annum, payable on demand, equal to the BANK's PRIME RATE plus five percentage points until paid in full. CHANGE IN CIRCUMSTANCE shall mean anyone or more of the following: (a) The British Bankers Association shall cease publishing "London Interbank Offered Rates (EUROS)" for a 30 day deposit period; (b) Any governmental authority, central bank or comparable agency shall make it unlawful or impossible for the BANK to make or offer loans based upon the LIBOR INDEX RATES (EUROS); or (c) The BANK shall determine any applicable law, rule, regulation, interpretation or directive applicable to the BANK has or would have the effect of reducing the rate of return to the BANK on the loan evidenced by this Note to a level below that which the BAiNK would have achieved but for the loan utilizing the LIBOR INDEX RATES (EUROS). LIBOR INDEX RATE (EURO) shall mean for any applicable funding period the rate of interest (rounded upwards, if necessary, to the next higher 1/100 of 1%) published by The British Bankers Association two business days prior to funding as the "London Interbank Offered Rate (EURO)" for Euro deposits of the applicable advance period. MARGIN shall mean 100. basis points. Interest shall be payable AT THE END OF EACH APPLICABLE ADVANCE PERIOD as billed to the Maker by the Holder hereof and shall be computed on the actual number of days on the basis of a year of 360 days. Each advance under this Note can be in 30-day increments for up to 360 days. Advances under this Note must be greater than or equal to $100,000.00 and cannot be prepaid. SHOULD MAKER CHOOSE AN ADVANCE PERIOD GREATER THAN 90 DAYS, HOLDER MAY INCREASE THE MARGIN TO ADJUST THE INTEREST RATE TO EQUATE TO THE ANNUAL COMPOUNDED RATE IF MONTHLY INTEREST PAYMENTS WERE MADE. 2. As used herein, the term "prime rate" shall mean the rate of interest announced from time to time by the Holder as its "prime rate," such term being used only as a reference rate and not necessarily representing the lowest rate charged to any customer of Holder. In the event Holder ceases to use the term "prime rate" in setting a base rate of interest for commercial loans, the term "prime rate" as used herein shall be determined by reference to the rate used by Holder as its base rate of interest for commercial loans. 3. It is agreed that time is of the essence in the performance of all obligations hereunder and under the Loan Documents. If Maker shall fail to make any payment hereunder when due, or upon the occurrence of an event of default in the performance or observance of any of the terms, agreements, covenants or conditions contained in the Loan Documents, then, or at any time thereafter, the entire principal balance of this Note, irrespective of the maturity date specified herein, together with the then accrued interest thereon, shall, at the election of the Holder hereof, and without notice of such election, become immediately due and payable. 4. All Makers, endorsers, guarantors and sureties hereof jointly and severally waive presentment, protest, notice of dishonor, and notice of intent to accelerate; and they also jointly and severally hereby consent to any and all renewals, extensions or modifications of the terms hereof, including the terms or time for payment; and further agree that any such renewal, extension or modification of the terms hereof or time for payment or of the terms of any of the Loan Documents or the release or substitution of any security for the indebtedness evidenced hereby or any other indulgences shall not otherwise affect the liability of any of said parties for the indebtedness evidenced by this Note. Any such renewals, extensions or modifications may be made without notice to any of said parties. 51 5. This Note shall be the joint and several obligation of all Makers, endorsers, guarantors, and sureties, and shall be binding upon them and their successors and assigns and shall inure to the benefit of the successors and assigns of Holder. All Makers, endorsers, guarantors, and sureties hereof agree jointly and severally to pay all costs of collection (including those incurred in any bankruptcy proceedings and regardless of whether suit is filed) and foreclosure, including reasonable attorneys' fees and costs. 6. Any forbearance of Holder in exercising any right or remedy hereunder or under the Loan Documents, or otherwise afforded by applicable law, shall not be a waiver of or preclude the exercise of any right or remedy. The acceptance by Holder of payment of any sum payable hereunder after the due date of such payment shall not be a waiver of Holder's right to either require prompt payment when due of all other sums payable hereunder or to declare a default for failure to make prompt payment. 7. This Note shall be governed by and construed in accordance with the laws of the State of Wisconsin. 8. If any payment of principal or interest due on this Note is payable on a day which is a Saturday, Sunday, or legal holiday in the State of Wisconsin, then such payment shall be due on the next business day, the amount of such payment, in such case, to include all interest accrued to the date of actual payment. 9. No setoff or counterclaim of any kind claimed by any Maker, endorser, guarantor or surety liable under this Note shall stand as a defense to the enforcement of this Note against any Maker, endorser,.guarantor or surety, it being agreed that any such setoff or counterclaim must be maintained by separate suit. 10. ORAL AGREEMENTS OR COMMITMENTS TO WAN MONEY, EXTEND CREDIT, OR TO FOREBEAR FROM ENFORCING REPAYMENT OF A DEBT INCLUDING PROMISES TO EXTEND OR RENEW SUCH DEBT ARE NOT ENFORCEABLE. TO PROTECT YOU (MAKER(S) AND US (HOLDER) FROM MISUNDERSTANDING OR DISAPPOINTMENT, ANY AGREEMENTS WE REACH COVERING SUCH MATTERS ARE CONTAINED IN THIS WRITING, WHICH IS THE COMPLETE AND EXCLUSIVE STATEMENT OF THE AGREEMENT BETWEEN US, EXCEPT AS WE MAY LATER AGREE IN WRITING TO MODIFY IT. 11. THE MAKER HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY (WHICH THE HOLDER ALSO WAIVES) IN ANY ACTION, SUIT, PROCEEDING OR COUNTERCLAIM OF ANY KIND ARISING OUT OF OR RELATING TO THIS NOTE, THE OBLIGATIONS OF THE MAKER HEREUNDER OR THE HOLDER'S CONDUCT IN RESPECT OF ANY OF THE FOREGOING. IN WITNESS WHEREOF, Maker has executed this Note as of the date first above written. BADGER METER, INC. M&I MARSHALL & ILSLEY BANK By: /s/ Richard A. Meeusen By: /s/ James P. McMullen ------------------------------ ------------------------------ Title: President/CEO Title: Vice President ------------------------------ ------------------------------ By: /s/ Richard E. Johnson Title: ------------------------------ ------------------------------ Title: Senior V.P. - Finance, Title: CFO & Treasurer ------------------------------ ------------------------------ 52 EX-21.0 6 c83420exv21w0.txt SUBSIDIARIES OF THE REGISTRANT EXHIBIT (21.0) BADGER METER, INC. SUBSIDIARIES OF THE REGISTRANT The Company's subsidiaries are listed below. All of the subsidiaries of the Company listed below are included in the Company's consolidated financial statements.
PERCENTAGE STATE OR COUNTRY IN NAME OF OWNERSHIP WHICH ORGANIZED - ---- ------------ --------------------- Badger Meter de Las Americas, S.A. de C.V. ................. 100% Mexico Badger Meter Canada, Inc. .................................. 100% Canada Badger Meter Czech Republic................................. 100% Czech Republic (a subsidiary of Badger Meter International, Inc.) Badger Meter Europe, GmbH................................... 100% Federal Republic of Germany Badger Meter Export, Inc. .................................. 100% Virgin Islands (U.S.) (a large FSC) Badger Meter France SAS..................................... 100% France (a French holding company) (Badger Meter France SAS is a subsidiary of Badger Meter International, Inc.) Badger Meter International, Inc. ........................... 100% Wisconsin (U.S.) (an international holding company) Badger Meter Limited (1).................................... 100% United Kingdom Badger Meter de Mexico, S.A. de C.V. ....................... 100% Mexico Badger Meter Slovakia (2)................................... 100% Slovakia (a subsidiary of Badger Meter Europe) MecaPlus Equipements SA..................................... 100% France (a subsidiary of Badger Meter France)
- --------------- (1) Badger Meter Limited is in the process of being dissolved and the dissolution is expected to be complete within the first quarter of 2004. (2) Badger Meter Slovakia was formed in the first quarter of 2004 and is a subsidiary of Badger Meter Europe. 53 EX-23.0 7 c83420exv23w0.txt CONSENT EXHIBIT (23.0) CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements on Form S-8 (File Nos. 33-27650, 33-65618, 33-62239, 33-62241, 333-28617, 333-73228 and 333-107850) pertaining to the Badger Meter, Inc. 1989 Stock Option Plan, Badger Meter, Inc. 1993 Stock Option Plan, Badger Meter, Inc. 1995 Stock Option Plan, Badger Meter, Inc. Employee Savings and Stock Ownership Plan, Badger Meter, Inc. 1997 Stock Option Plan, Badger Meter, Inc. 1999 Stock Option Plan, and the Badger Meter, Inc. 2003 Stock Option Plan, and to the incorporation by reference in the Registration Statement on Form S-3 (File No. 333-102057) of Badger Meter, Inc. and in the related Prospectus, of our report dated February 4, 2004, with respect to the consolidated financial statements included in this Annual Report (Form 10-K) of Badger Meter, Inc. for the year ended December 31, 2003. /s/ Ernst & Young LLP Milwaukee, Wisconsin March 5, 2004 54 EX-31.1 8 c83420exv31w1.txt CERTIFICATION EXHIBIT (31.1) CERTIFICATION OF PRESIDENT AND CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT AND RULE 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934 I, Richard A. Meeusen, certify that: 1. I have reviewed this Annual Report on Form 10-K of Badger Meter, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a. All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 5, 2004 By: /s/ RICHARD A. MEEUSEN ------------------------------------ Richard A. Meeusen President and Chief Executive Officer 55 EX-31.2 9 c83420exv31w2.txt CERTIFICATION BY THE CFO EXHIBIT (31.2) CERTIFICATION OF SENIOR VICE PRESIDENT -- FINANCE, CHIEF FINANCIAL OFFICER AND TREASURER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT AND RULE 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934 I, Richard E. Johnson, certify that: 1. I have reviewed this Annual Report on Form 10-K of Badger Meter, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a. All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 5, 2004 By: /s/ RICHARD E. JOHNSON ------------------------------------ Richard E. Johnson Senior Vice President -- Finance, Chief Financial Officer and Treasurer 56 EX-32.0 10 c83420exv32w0.txt CERTIFICATION EXHIBIT (32.0) WRITTEN STATEMENT OF THE CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER Pursuant to 18 U.S.C. sec.1350 Solely for the purpose of complying with 18 U.S.C. sec.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, we, the undersigned Chief Executive Officer and Chief Financial Officer of Badger Meter, Inc., a Wisconsin corporation (the "Company"), hereby certify, based on our knowledge, that the Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 2003 (the "Report") fully complies with the requirements of Section 13 (a) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: March 5, 2004 By: /s/ RICHARD A. MEEUSEN ------------------------------------------ Richard A. Meeusen President and Chief Executive Officer By: /s/ RICHARD E. JOHNSON ------------------------------------------ Richard E. Johnson Senior Vice President -- Finance, Chief Financial Officer and Treasurer
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. The foregoing certification is being furnished to the Securities and Exchange Commission as an exhibit to the Form 10-K and shall not be considered filed as part of the Form 10-K. 57 -----END PRIVACY-ENHANCED MESSAGE-----