-----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, Dk8nANd5zF/kaxQI7zW4SyMsy+HNMehzFEAAUiHSCvQJOKobWfAvcSw5qAhXn0KA +1O6oRUj6txw/pi6V1Pdlg== 0000950137-04-009071.txt : 20041028 0000950137-04-009071.hdr.sgml : 20041028 20041027174528 ACCESSION NUMBER: 0000950137-04-009071 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041028 DATE AS OF CHANGE: 20041027 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06706 FILM NUMBER: 041100405 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-Q 1 c89070e10vq.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended SEPTEMBER 30, 2004 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 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 is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). As of October 15, 2004, there were 3,335,465 shares of Common Stock outstanding with a par value of $1.00 per share. BADGER METER, INC. QUARTERLY REPORT ON FORM 10-Q FOR PERIOD ENDED SEPTEMBER 30, 2004 INDEX
Page No. Part I. Financial Information: Item 1 Financial Statements: Consolidated Condensed Balance Sheets -- September 30, 2004 and December 31, 2003 4 Consolidated Condensed Statements of Operations -- Three and Nine Months Ended September 30, 2004 and 2003 5 Consolidated Condensed Statements of Cash Flows -- Nine Months Ended September 30, 2004 and 2003 6 Notes to Consolidated Condensed Financial Statements 7 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3 Quantitative and Qualitative Disclosures about Market Risk 13 Item 4 Controls and Procedures 13 Part II. Other Information: Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 13 Item 6 Exhibits 14 Signatures 15 Exhibit Index 16
2 Special Note Regarding Forward Looking Statements Certain statements contained in this Form 10-Q, 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. All such 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 toward more expensive, value-added automatic meter reading (AMR) systems; - the success or failure of new Company products, including the Orion(R) radio frequency drive-by AMR meter, the absolute digital encoder (ADE) and the proposed Galaxy(TM) fixed network AMR system; - changes in competitive pricing and bids in both the domestic and foreign marketplaces, and particularly in 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 and foreign economies, particularly including housing starts in the United States and overall industrial activity; - 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; - changes in foreign economic conditions, including currency fluctuations such as the increase in the euro versus the United States dollar; and - 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. All of these factors are beyond the Company's control to varying degrees. 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 assumes no obligation, and disclaims any obligation, to update any such forward looking statements to reflect subsequent events or circumstances. 3 Part I - Financial Information Item 1 Financial Statements BADGER METER, INC. CONSOLIDATED CONDENSED BALANCE SHEETS (Dollars in Thousands)
September 30, December 31, 2004 2003 ---- ---- (Unaudited) Assets Current assets: Cash $ 2,015 $ 2,089 Receivables 31,024 26,304 Inventories: Finished goods 11,510 8,010 Work in process 9,851 8,494 Raw materials 10,854 13,150 --------- --------- Total inventories 32,215 29,654 Prepaid expenses 1,649 1,193 Deferred income taxes 3,779 3,758 --------- --------- Total current assets 70,682 62,998 Property, plant and equipment, at cost 105,784 104,081 Less accumulated depreciation (64,383) (61,243) --------- --------- Net property, plant and equipment 41,401 42,838 Intangible assets, at cost less accumulated amortization 1,215 1,336 Prepaid pension 17,526 16,236 Other assets 3,531 3,354 Goodwill 6,754 7,089 --------- --------- Total assets $ 141,109 $ 133,851 ========= ========= Liabilities and Shareholders' Equity Current liabilities: Short-term debt $ 8,910 $ 3,543 Current portion of long-term debt 5,662 5,645 Payables 13,841 14,895 Accrued compensation and employee benefits 6,593 6,619 Warranty and after-sale costs 3,888 3,767 Income and other taxes 3,499 2,583 --------- --------- Total current liabilities 42,393 37,052 Deferred income taxes 5,764 5,699 Accrued non-pension postretirement benefits 4,874 5,069 Other accrued employee benefits 6,027 6,410 Long-term debt 19,797 24,450 Commitments and contingencies Shareholders' equity: Common Stock 4,904 4,846 Capital in excess of par value 21,541 20,079 Reinvested earnings 65,043 58,928 Accumulated other comprehensive income 1,150 1,280 Less: Employee benefit stock (1,065) (1,285) Treasury stock, at cost (29,319) (28,677) --------- --------- Total shareholders' equity 62,254 55,171 --------- --------- Total liabilities and shareholders' equity $ 141,109 $ 133,851 ========= =========
See accompanying notes to consolidated condensed financial statements. 4 BADGER METER, INC. CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Dollars in Thousands Except Share and Per Share Amounts) (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ------------ ------------ 2004 2003 2004 2003 ---- ---- ---- ---- Net sales $ 53,340 $ 48,613 $ 156,492 $ 135,704 Cost of sales 35,437 32,516 104,982 90,640 ----------- ----------- ----------- ----------- Gross margin 17,903 16,097 51,510 45,064 Selling, engineering and administration 11,323 11,317 34,965 35,189 ----------- ----------- ----------- ----------- Operating earnings 6,580 4,780 16,545 9,875 Interest expense 406 423 1,288 1,391 Other expense (income), net 114 68 314 (1,154) ----------- ----------- ----------- ----------- Earnings before income taxes 6,060 4,289 14,943 9,638 Provision for income taxes 2,671 1,645 6,127 3,682 ----------- ----------- ----------- ----------- Net earnings $ 3,389 $ 2,644 $ 8,816 $ 5,956 =========== =========== =========== =========== Per share amounts: * Earnings per share: Basic $ 1.02 $ .82 $ 2.68 $ 1.85 Diluted $ .99 $ .80 $ 2.60 $ 1.81 Dividends declared: $ .28 $ .27 $ .82 $ .79 Shares used in computation of: Basic 3,306,633 3,237,605 3,290,027 3,216,267 Impact of dilutive stock options 122,006 79,873 98,917 69,699 ----------- ----------- ----------- ----------- Diluted 3,428,639 3,317,478 3,388,944 3,285,966 =========== =========== =========== ===========
*Earnings per share is computed independently for each of the periods presented. Therefore, the sum of the quarterly earnings per share does not necessarily equal the total for the year to date. See accompanying notes to consolidated condensed financial statements. 5 BADGER METER, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Dollars in Thousands) (Unaudited)
Nine Months Ended September 30, ------------- 2004 2003 ---- ---- Operating activities: Net earnings $ 8,816 $ 5,956 Adjustments to reconcile net earnings to net cash provided by (used for) operations: Depreciation 5,331 5,426 Amortization 113 88 Tax benefit on stock options 374 397 Deferred income taxes 44 (758) Noncurrent employee benefits 352 880 Contributions to pension plan (2,000) 0 Changes in: Receivables (4,670) (3,975) Inventories (2,635) (4,171) Prepaid expenses (456) (579) Current liabilities other than debt 292 5,040 ------- ------- Total adjustments (3,255) 2,348 ------- ------- Net cash provided by operations 5,561 8,304 ------- ------- Investing activities: Property, plant and equipment (4,022) (5,350) Other - net (177) 234 ------- ------- Net cash used for investing activities (4,199) (5,116) ------- ------- Financing activities: Net increase in short-term debt 5,367 5,885 Repayments of long-term debt (4,606) (5,392) Dividends paid (2,701) (2,545) Proceeds from exercise of stock options 930 533 Treasury stock purchases (917) (865) Issuance of treasury stock 491 358 ------- ------- Net cash used for financing activities (1,436) (2,026) ------- ------- Increase (decrease) in cash (74) 1,162 Cash - beginning of period 2,089 3,779 ------- ------- Cash -- end of period $ 2,015 $ 4,941 ======= =======
See accompanying notes to consolidated condensed financial statements. 6 BADGER METER, INC. NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 1. In the opinion of management, the accompanying unaudited consolidated condensed financial statements of Badger Meter, Inc. (the "Company") contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the Company's consolidated condensed financial position at September 30, 2004, results of operations for the three and nine-month periods ended September 30, 2004 and 2003, and cash flows for the nine-month periods ended September 30, 2004 and 2003. The results of operations for any interim period are not necessarily indicative of the results to be expected for the full year. 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. 2. The consolidated condensed balance sheet at December 31, 2003 was derived from amounts included in the Company's Annual Report on Form 10-K for the year ended December 31, 2003. Refer to the footnotes to the financial statements included in that report for a description of the Company's accounting policies, which have been continued without change, and additional details of the Company's financial condition. The details in those notes have not changed except as discussed below and as a result of normal adjustments in the interim. GOODWILL Goodwill decreased from $7,089,000 at December 31, 2003 to $6,754,000 at September 30, 2004 as a result of translation adjustments for goodwill denominated in foreign currencies and as a result of reversing the remaining unused severance accrual of $273,000 related to the termination of several employees in conjunction with the company's acquisition of MecaPlus Equipments SA in 2002. WARRANTY AND AFTER-SALE COSTS The Company estimates and records provisions for warranties and other after-sale costs in the period the sale is reported. 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 for the nine-month periods ended September 30, 2004 and 2003 are as follows:
Balance at Additions Balance beginning charged to Costs at (In thousands) of year earnings incurred September 30 ----------------------------------------------------------------------------------- 2004 $3,767 $ 947 $(826) $3,888 2003 $3,597 $1,086 $(923) $3,760
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 September 30, 2004, options to purchase 149,002 shares are available for grant. As allowed by Financial Accounting Standards Board Statement No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), 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. 7 The following table illustrates the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of SFAS 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.
Three months Nine months ended September 30, ended September 30, ------------------- ------------------- (In thousands except per share amounts) 2004 2003 2004 2003 -------------------------------------------------------------------------------------------------------------------- Net earnings, as reported $ 3,389 $ 2,644 $ 8,816 $ 5,956 Deduct: Total stock-based compensation determined under fair value based method for all awards since January 1, 1995, net of related tax effects 88 93 283 269 --------- --------- --------- -------- Pro forma net earnings $ 3,301 $ 2,551 $ 8,533 $ 5,687 ========= ========= ========= ========= Earnings per share: Basic, as reported $ 1.02 $ .82 $ 2.68 $ 1.85 Basic, pro forma $ 1.00 $ .79 $ 2.59 $ 1.77 Diluted, as reported $ .99 $ .80 $ 2.60 $ 1.81 Diluted, pro forma $ .96 $ .77 $ 2.47 $ 1.73
3. The Company maintains a non-contributory defined benefit pension plan for its domestic employees and a non-contributory postretirement plan that provides medical benefits for certain domestic retirees and eligible dependents. The following table sets forth the components of net periodic benefit cost for the three months ended September 30, 2004 and 2003 based on a September 30 measurement date:
Other postretirement Pension benefits benefits - ------------------------------------------------------------------------------------------------------------------- (In thousands) 2004 2003 2004 2003 -------------- ---- ---- ---- ---- Service cost $ 406 $ 395 $ 41 $ 26 Interest cost 628 657 119 126 Expected return on plan assets (928) (991) - - Amortization of prior service cost (34) (34) (43) (44) Amortization of net loss 164 102 38 30 --------- --------- ------ ------- Net periodic benefit cost $ 236 $ 129 $ 155 $ 138 ========= ========= ====== =======
The following table sets forth the components of net periodic benefit cost for the nine months ended September 30, 2004 and 2003 based on a September 30 measurement date:
Other postretirement Pension benefits benefits - ------------------------------------------------------------------------------------------------------------------- (In thousands) 2004 2003 2004 2003 -------------- ---- ---- ---- ---- Service cost $ 1,219 $ 1,184 $ 125 $ 78 Interest cost 1,883 1,972 356 377 Expected return on plan assets (2,783) (2,973) - - Amortization of prior service cost (102) (102) (130) (131) Amortization of net loss 492 306 115 90 --------- --------- ------ ------- Net periodic benefit cost $ 709 $ 387 $ 466 $ 414 ========= ========= ====== =======
The Company previously disclosed in its financial statements for the year ended December 31, 2003 that it did not expect to contribute funds to its pension plan in 2004. As the year progressed and the return on assets declined, the Company elected to make a $2 million contribution to fully fund the plan at the end of the third quarter of 2004. The Company will not make any additional contributions for the remainder of 2004. The Company also disclosed in its financial statements for the year ended December 31, 2003 that it estimated it would pay $1,276,000 in other postretirement benefits in 2004. As of September 30, 2004, $848,000 of such benefits were paid, which was less than anticipated due to the timing of payments and lower than expected benefit payment obligations. Therefore, the Company believes that its estimated payments for the full year may be slightly less than originally expected. The amount of actual benefits paid in 2004 will not impact the expense recognized for postretirement benefits for the year as that amount is based upon an actuarial valuation. 8 FASB Financial Staff Position No. FAS 106-2, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003" (the Act), addresses the impact of the Act enacted in December 2003. The Act provides a prescription drug benefit for Medicare eligible employees starting in 2006. The Company does not believe that the Act will have an impact on the Company's postretirement benefit obligation because benefit levels of the Company's plan currently do not meet the criteria set forth by the Act to qualify for the subsidy. 4. 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 Company had guaranteed $1,634,000 and $1,754,000 at September 30, 2004 and December 31, 2003, respectively. The current loan matures in April 2005, at which time it is expected to be renewed. The fair market value of this guarantee at September 30, 2004 continues to be insignificant because the collateral value of the shares exceeds the loan amount. The Company guarantees the outstanding debt of the Badger Meter Employee Savings and Stock Ownership Plan 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. A payment of $220,000 in the first quarter of 2004 reduced the loan from $1,285,000 at December 31, 2003 to $1,065,000 at September 30, 2004. 5. Total comprehensive income was $3,486,000 and $2,749,000 for the three-month periods ended September 30, 2004 and 2003, respectively. Included in the three months ended September 30, 2004 and 2003 was $97,000 and $105,000 of other comprehensive income, respectively, related to foreign currency translation adjustments. Total comprehensive income was $8,686,000 and $7,063,000 for the nine-month periods ended September 30, 2004 and 2003, respectively. Included in the nine months ended September 30, 2004 and 2003 was ($130,000) of other comprehensive loss and $1,107,000 of other comprehensive income, respectively, related to foreign currency translation adjustments. 6 In the normal course of business, the Company is named in legal proceedings from time to time. 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 relating to environmental laws and regulations. Currently, the Company is in the process of resolving an issue relating 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 lawsuits pending in various state courts. These lawsuits assert claims alleging that certain industrial products were manufactured by the defendants and were the cause of injury and harm. The Company is vigorously defending itself against these alleged claims. Although it is not possible to predict the ultimate outcome of these matters, 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 is currently involved in negotiating a collective bargaining agreement with District 10 of the International Association of Machinists for the nearly 230 employees covered by such agreement. The Company is presently operating under a four-year contract with the union that expires October 31, 2004 and believes it will successfully negotiate a new contract. The Company has evaluated its worldwide operations to determine whether 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. 9 Item 2 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 product line sales comprise the remainder of the Company's 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. With AMR meters, the register digitally encodes the mechanical reading and its radio frequency transmitter communicates the data to a computerized system that collects the data and sends it to specific utility computerized programs. Net sales and the corresponding net earnings depend on unit volume and mix of products, with the Company generally earning 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 - Three Months Ended September 30 Net sales for the three-month period ended September 30, 2004 increased $4.7 million, or 9.7%, over the same period in 2003. Residential and commercial water meter sales represented 76.3% of total sales in the third quarter of 2004 compared to 75.1% in the third quarter of 2003. These sales increased $4.2 million to $40.7 million compared to $36.5 million in the same period in 2003. While local (or manual) read water meter unit sales declined slightly compared to the same period in 2003, the third quarter of 2004 saw significant increases in the number of units utilizing AMR technologies, which carry higher prices and contributed to the increase in net sales for the quarter. Industrial sales are affected by economic conditions, domestically and internationally, in each of the markets served by the various product lines. In total, industrial products represented 23.7% of total sales for the three months ended September 30, 2004 compared to 24.9% for the same period in 2003. The change was due to a higher percentage increase in water meter sales compared to industrial product sales. Industrial sales increased $0.5 million to $12.6 million in the third quarter of 2004 compared to $12.1 million in the third quarter of 2003 as most product lines saw modest increases in sales, much of which was due to foreign exchange effects of $0.4 million. Gross margins for the second quarter of 2004 were 33.6% compared to 33.1% in the second quarter of 2003. The increase was due to the higher mix of AMR products which carry higher margins, offset somewhat by continuing price pressures due to competition, higher costs of metal alloys, and the effects of the stronger euro on certain foreign-sourced components. Margins were also negatively affected by weak economic conditions and warranty charges for the automotive systems product line, which is the primary business of the Company's French subsidiary. Selling, engineering and administration costs were comparable to the third quarter of 2003 due to continuing cost control efforts, offset somewhat by normal inflationary increases. Interest expense for the third quarter of 2004 was $17,000 lower than the same period in the prior year primarily due to lower debt balances offset somewhat by higher interest rates as a result of the Company converting lower interest rate short-term debt to higher interest rate long-term debt in late December 2003. 10 The effective tax rate for the third quarter of 2004 was 44.1% compared to 38.4%. With continuing losses of the Company's French subsidiary, it is not certain that net operating loss carry forwards generated during the quarter will be realized through future profits. As such, consistent with prior periods, a valuation reserve was established against net operating loss carry forwards, which resulted in the effective tax rate increase. As a result of the factors discussed above, net earnings for the third quarter of 2004 were $3,389,000 compared to net earnings in the third quarter of 2003 of $2,644,000. On a diluted earnings per share basis, this equated to $0.99 per share for the third quarter of 2004 compared to $0.80 for the same period in 2003. Results of Operations - Nine Months Ended September 30 Net sales for the nine months ended September 30, 2004 increased nearly $20.8 million, or 15.3%, to $156.5 million from $135.7 million for the same period in 2003. Residential and commercial water meter sales represented 73.9% of total sales in the first nine months of 2004 compared to 71.9% in the first nine months of 2003. These sales increased $18.1 million to $115.6 million compared to $97.5 million in the same period in 2003. While local (or manual) read water meter unit sales declined slightly compared to the same period in 2003, the first nine months of 2004 saw significant increases in the number of units utilizing AMR technologies, which carry higher prices and contributed to the increase in net sales for the quarter. The Company's net sales in the first quarter of 2003 were negatively influenced by the soft general economy and geopolitical concerns, including security concerns. As a result, the Company experienced longer sales cycles (and lower sales volumes) during the first quarter of 2003 as water utilities, the Company's principal customers, evaluated the requirements and costs of increased security. Industrial sales are affected by economic conditions, domestically and internationally, in each of the markets served by the various product lines. In total, industrial products represented 26.1% of total sales for the nine months ended September 30, 2004 compared to 28.1% for the same period in 2003. Industrial sales increased $2.7 million to $40.9 million in the first nine months of 2004 compared to $38.2 million in the same period in 2003 due to slightly higher volumes in most product lines. The change was due to a higher percentage increase in water meter sales compared to industrial product sales and to the effects of foreign currency exchange rates which favorably affected sales by $1.8 million. Gross margins for the first nine months of 2004 were 32.9% compared to 33.2% in the same period in 2003. The decrease was due to continuing price pressures due to competition, higher costs of metal alloys, and the effects of the stronger euro on certain foreign-sourced components, offset somewhat by the higher percentage of AMR products sold, which carry higher margins. Margins were also negatively affected by weak economic conditions and warranty charges for the automotive systems product line, which is the primary business of the Company's French subsidiary. Selling, engineering and administration costs decreased $0.2 million, or 0.6%, in the nine-month period ended September 30, 2004 compared to the same period in 2003 due to continuing cost control efforts, offset somewhat by normal inflationary increases. Interest expense for the nine months ended September 30, 2004 was $0.1 million lower due to lower debt balances offset by higher interest rates as a result of the Company converting lower interest rate short-term debt to higher interest rate long-term debt in late December 2003. Other expense (income), net, for the nine-month period ended September 30, 2004 compared to the same period in 2003 has an unfavorable variation of $1.5 million due primarily to transactions that took place in the second quarter of 2003 resulting in the recognition of income, including $0.8 million in foreign exchange gains and recognizing a gain of $0.2 million of stock received when an insurance company from which the Company purchased life insurance policies converted from a mutual structure to a public structure. There were no similar transactions in 2004. The effective tax rate for the nine months ended September 30, 2004 was 41.0% compared to 38.2% for the same period in 2003. With continuing losses of the Company's French subsidiary, it is not certain that net operating loss carry forwards generated during the nine months ended September 30, 2004 will be realized through future profits. As such, consistent with prior periods, a valuation reserve was established against net operating loss carry forwards, which resulted in the effective tax rate increase. As a result of the factors discussed above, net earnings for the first nine months of 2004 were $8,816,000 compared to net earnings for the first nine months of 2003 of $5,956,000. On a diluted earnings per share basis, this equated to $2.60 per share for the first nine months of 2004 compared to $1.81 for the same period in 2003. 11 Liquidity and Capital Resources The main sources of liquidity for the Company typically are cash from operations and borrowing capacity. For the first nine months of 2004, nearly $5.6 million of cash was provided by operations, primarily as the net result of increased earnings adjusted for depreciation and amortization, offset by increases in receivables and inventory balances associated with increased business and contributions to the pension plan. The change in the receivables balance from $26.3 million at December 31, 2003 to $31.0 million at September 30, 2004 was primarily due to increased sales and the timing of certain customer payments. Inventories at September 30, 2004 increased $2.6 million, or 8.6%. This increase was primarily due to a build up of certain longer lead-time electronic materials and stock for new product offerings (some of which was affected by the strength of the euro) as well as increased costs of certain metal alloys. Capital expenditures of $4.0 million were less than the depreciation expense of $5.3 million for the first nine months of 2004 resulting in a net decrease in net property, plant and equipment balances from December 31, 2003. Prepaid pension increased from $16.2 million at December 31, 2003 to $17.5 million at September 30, 2004 due to the Company's election to make a payment of $2.0 million into the pension plan offset by pension expense. Goodwill decreased due to reversing the remaining unused severance accrual of $273,000 related to the Company's acquisition of MecaPlus Equipements SA and the effects of foreign currency translation adjustments. Short-term debt and the current portion of long-term debt at September 30, 2004 increased to a combined $14.6 million versus a balance at the end of 2003 of $9.2 million. This increase was primarily due to cash required for increased receivables and inventory balances, capital expenditures, repayments of long-term debt and dividends. The long-term debt amounts declined as a result of regularly scheduled payments. Payables decreased to $13.8 million at September 30, 2004 from $14.9 million at December 31, 2003 primarily as a result of the timing of payments. Income and other taxes increased to $3.5 million from $2.6 million at December 31, 2003 as a result of the timing of tax payments and increased earnings in the current year. Common stock and capital in excess of par value have increased from December 31, 2003 due to new shares issued in connection with the exercise of stock options and purchases by the Employee Savings and Stock Ownership Plan (ESSOP). Treasury stock increased due to shares repurchased during the period. Employee benefit stock decreased $0.2 million due to shares released as a result of a payment made on the ESSOP loan during the first quarter of 2004. Badger Meter's financial condition remains strong. The Company believes that its operating cash flows, available borrowing capacity, including $27.0 million of unused credit lines, and its ability to raise additional capital provide adequate resources to fund ongoing operating requirements, future capital requirements and the development of new products. Other Matters 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 a number of multi-party asbestos lawsuits pending in various state courts. These lawsuits assert claims alleging that certain industrial products were manufactured by the defendants and were the cause of injury and harm. The Company is vigorously defending itself against these alleged claims. Although it is not possible to predict the ultimate outcome of these matters, 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. No other risks or uncertainties were identified that could have a material impact on operations and no long-lived assets have become permanently impaired in value. 12 Off-Balance Sheet Arrangements and Contractual Obligations The Company's off-balance sheet arrangements and contractual obligations are discussed in Part II Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the headings "Off-Balance Sheet Arrangements" and "Contractual Obligations" in the Company's Annual Report on Form 10-K for the year ended December 31, 2003, and have not materially changed since that report was filed. Item 3 Quantitative and Qualitative Disclosures about Market Risk The Company's quantitative and qualitative disclosures about market risk are included in Part II Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the heading "Market Risk" in the Company's Annual Report on Form 10-K for the year ended December 31, 2003, and have not materially changed since that report was filed. Item 4 Controls and Procedures In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), as of the end of the third quarter of 2004, an evaluation was carried out under the supervision and with the participation of the Company's management, including the Company's Chairman, President and Chief Executive Officer and the Company's Senior Vice President -- Finance, Chief Financial Officer and Treasurer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in the rules promulgated under the Exchange Act). Based upon their evaluation of these disclosure controls and procedures, the Company's Chairman, 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 third quarter of 2004 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 Quarterly Report on Form 10-Q was being prepared. There was no change in the Company's internal control over financial reporting that occurred during the third quarter of 2004 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. Part II - Other Information Item 2 Unregistered Sales of Equity Securities and Use of Proceeds The Company has undertaken stock repurchases from time to time to offset dilution created by shares issued for stock options and other corporate purposes, as well as to repurchase shares when market conditions are favorable. For the quarter ended September 30, 2004, the Company repurchased 5,069 shares of Common Stock for $223,000. As of the end of the third quarter of 2004, the Company has remaining availability to repurchase up to an additional 250,781 shares (which is currently valued at $11.4 million) in Common Stock pursuant to the Board of Directors' authorizations. The purchase of Common Stock is at the Company's discretion, subject to prevailing financial and market conditions. The following chart discloses information regarding the shares of the Company's Common Stock repurchased during the quarter ended September 30, 2004, all of which were purchased pursuant to the Board of Directors' authorizations:
Total number of shares Maximum number purchased as part of of shares that may yet Total number of Average price paid publicly announced be purchased under the Period shares purchased per share plans or programs plans or programs July 1 to July 31 3,088 $43.43 3,088 252,762 August 1 to August 31 1,177 $44.50 1,177 251,585 September 1 to September 30 804 $45.45 804 250,781 ------ ------- ------ -------- Total/Average 5,069 $44.00 5,069 250,781
13 On December 4, 2000, the Board of Directors authorized the repurchase of up to 600,000 shares of Badger Meter, Inc. Common Stock over a three-year period. The Company publicly announced the stock repurchase plan in a press release issued on December 4, 2000. At November 14, 2003, the Company had repurchased a total of 320,945 shares. The Board authorized a two-year extension of the repurchase plan, effective December 1, 2003, allowing the Company to repurchase up to the remaining 279,055 shares prior to December 1, 2005. The Company publicly announced the extension of the stock repurchase plan in a press release issued on November 14, 2003. Item 6 Exhibits Exhibit No. Description 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 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. 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BADGER METER, INC. Dated: October 27, 2004 By /s/ Richard A. Meeusen ----------------------- Richard A. Meeusen Chairman, 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 15 BADGER METER, INC. QUARTERLY REPORT ON FORM 10-Q FOR PERIOD ENDED SEPTEMBER 30, 2004 EXHIBIT INDEX Exhibit No. Description 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 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. 16 EX-31.1 2 c89070exv31w1.txt CERTIFICATION BY CHIEF EXECUTIVE OFFICER EXHIBIT 31.1 CERTIFICATION OF CHAIRMAN, 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 Quarterly Report on Form 10-Q 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 functions): 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: October 27, 2004 By /s/ Richard A. Meeusen ----------------------- Richard A. Meeusen Chairman, President and Chief Executive Officer 17 EX-31.2 3 c89070exv31w2.txt CERTIFICATION BY CHIEF FINANCIAL OFFICER 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 Quarterly Report on Form 10-Q 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 functions): 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: October 27, 2004 By /s/ Richard E. Johnson ----------------------- Richard E. Johnson Senior Vice President - Finance, Chief Financial Officer and Treasurer 18 EX-32 4 c89070exv32.txt CERTIFICATION OF PERIODIC FINANCIAL REPORT EXHIBIT 32 WRITTEN STATEMENT OF THE CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 Solely for the purpose of complying with 18 U.S.C. Section 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 Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2004 (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: October 27, 2004 By /s/ Richard A. Meeusen ---------------------- Richard A. Meeusen Chairman, President and Chief Executive Officer By /s/ Richard E. Johnson ---------------------- Richard E. Johnson Senior Vice President - Finance, Chief Financial Officer and Treasurer 19 -----END PRIVACY-ENHANCED MESSAGE-----