-----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, I6YK0sWNaKTR1zBPJYOdDW+gnyBRFIZYT0Cn6823+36k5Xzl/bST1+xPDtsT0P3O PSHPGsh81Ac+zF0B5FuKrQ== 0000950137-05-009771.txt : 20050808 0000950137-05-009771.hdr.sgml : 20050808 20050808130735 ACCESSION NUMBER: 0000950137-05-009771 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20050630 FILED AS OF DATE: 20050808 DATE AS OF CHANGE: 20050808 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: 051005221 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 c97483e10vq.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 JUNE 30, 2005 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 July 18, 2005, there were 6,788,905 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 JUNE 30, 2005 INDEX
Page No. -------- Part I. Financial Information: Item 1 Financial Statements: Consolidated Condensed Balance Sheets - - June 30, 2005 and December 31, 2004 4 Consolidated Condensed Statements of Operations - - Three and Six Months Ended June 30, 2005 and 2004 5 Consolidated Condensed Statements of Cash Flows - - Six Months Ended June 30, 2005 and 2004 6 Notes to Unaudited Consolidated Condensed Financial Statements 7 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3 Quantitative and Qualitative Disclosures about Market Risk 14 Item 4 Controls and Procedures 14 Part II. Other Information: Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 14 Item 4 Submission of Matters to a Vote of Security Holders 15 Item 6 Exhibits 15 Signatures 17 Exhibit Index 18
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 Badger Meter, Inc. (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 newer Company products, including the Orion(R) radio frequency mobile AMR system, the absolute digital encoder (ADE(TM)) and the 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, including housing starts in the United States and overall industrial activity; - increases in the cost and/or availability of needed raw materials and parts; - changes in foreign economic conditions, particularly currency fluctuations between the United States dollar and the euro; 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
June 30, December 31, 2005 2004 ----------- ------------ (Unaudited) (In thousands) ASSETS Current assets: Cash $ 2,143 $ 2,834 Receivables 34,579 26,879 Inventories: Finished goods 13,367 14,121 Work in process 9,678 9,054 Raw materials 11,401 12,471 ----------- --------- Total inventories 34,446 35,646 Prepaid expenses 2,755 2,016 Deferred income taxes 3,969 4,007 ----------- --------- Total current assets 77,892 71,382 Property, plant and equipment, at cost 106,241 107,295 Less accumulated depreciation (66,278) (65,279) ----------- --------- Net property, plant and equipment 39,963 42,016 Intangible assets, at cost less accumulated amortization 1,114 1,160 Prepaid pension 16,508 17,290 Other assets 4,246 4,009 Goodwill 6,667 7,104 ----------- --------- Total assets $ 146,390 $ 142,961 =========== ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term debt $ 6,985 $ 17,539 Current portion of long-term debt 7,247 5,348 Payables 14,362 11,395 Accrued compensation and employee benefits 5,302 6,166 Warranty and after-sale costs 3,678 3,817 Income and other taxes 4,429 982 ----------- --------- Total current liabilities 42,003 45,247 Deferred income taxes 7,408 7,437 Accrued non-pension postretirement benefits 4,247 4,490 Other accrued employee benefits 6,386 6,902 Long-term debt 17,855 14,819 Commitments and contingencies Shareholders' equity: Common Stock 9,973 9,872 Capital in excess of par value 20,246 18,313 Reinvested earnings 70,761 64,928 Accumulated other comprehensive income 364 2,024 Less: Employee benefit stock (1,452) (1,065) Treasury stock, at cost (31,401) (30,006) ----------- --------- Total shareholders' equity 68,491 64,066 ----------- --------- Total liabilities and shareholders' equity $ 146,390 $ 142,961 =========== =========
See accompanying notes to consolidated condensed financial statements. 4 BADGER METER, INC. CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended June 30, June 30, -------------------------- -------------------------- (Unaudited) (Unaudited) (In thousands except share and per share amounts) 2005 2004 2005 2004 ----------- ----------- ----------- ----------- Net sales $ 57,432 $ 53,550 $ 111,864 $ 103,152 Cost of sales 37,333 36,569 72,803 69,545 ----------- ----------- ----------- ----------- Gross margin 20,099 16,981 39,061 33,607 Selling, engineering and administration 12,544 11,614 25,364 23,642 ----------- ----------- ----------- ----------- Operating earnings 7,555 5,367 13,697 9,965 Interest expense 317 454 775 882 Other expense (income), net 56 73 (288) 200 ----------- ----------- ----------- ----------- Earnings before income taxes 7,182 4,840 13,210 8,883 Provision for income taxes 3,023 1,863 5,495 3,456 ----------- ----------- ----------- ----------- Net earnings $ 4,159 $ 2,977 $ 7,715 $ 5,427 =========== =========== =========== =========== Per share amounts: Earnings per share: Basic $ .62 $ .46 $ 1.15 $ .83 Diluted $ .59 $ .44 $ 1.11 $ .80 Dividends declared: $ .14 $ .14 $ .28 $ .27 Shares used in computation of earnings per share: Basic 6,724,827 6,577,154 6,713,221 6,563,270 Impact of stock-based compensation 273,505 213,176 249,958 185,673 ----------- ----------- ----------- ----------- Diluted 6,998,332 6,790,330 6,963,179 6,748,943 =========== =========== =========== ===========
See accompanying notes to consolidated condensed financial statements. 5 BADGER METER, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, ---------------- (Unaudited) (In thousands) 2005 2004 -------- -------- Operating activities: Net earnings $ 7,715 $ 5,427 Adjustments to reconcile net earnings to net cash provided by (used for) operations: Depreciation 3,449 3,564 Amortization 117 81 Tax benefit on stock options 550 163 Deferred income taxes (31) 26 Noncurrent employee benefits 1,158 1,077 Changes in: Receivables (8,412) (3,756) Inventories 349 (1,392) Prepaid expenses (786) (594) Current liabilities other than debt 4,573 (1,367) -------- -------- Total adjustments 967 (2,198) -------- -------- Net cash provided by operations 8,682 3,229 -------- -------- Investing activities: Property, plant and equipment (2,302) (2,549) Other - net (409) (263) -------- -------- Net cash used for investing activities (2,711) (2,812) -------- -------- Financing activities: Net increase (decrease) in short-term debt (10,100) 5,017 Issuance of long-term debt 10,000 - Repayments of long-term debt (5,066) (3,628) Dividends paid (1,882) (1,774) Proceeds from exercise of stock options 1,148 826 Treasury stock purchases (1,653) (694) Issuance of treasury stock 576 333 -------- -------- Net cash provided by (used for) financing activities (6,977) 80 -------- -------- Effect of exchange rate on cash 315 272 -------- -------- Increase (decrease) in cash (691) 769 Cash - beginning of period 2,834 2,089 -------- -------- Cash - end of period $ 2,143 $ 2,858 ======== ========
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 June 30, 2005, results of operations for the three- and six-month periods ended June 30, 2005 and 2004, and cash flows for the six-month periods ended June 30, 2005 and 2004. 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 U.S. generally accepted accounting principles 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. Certain reclassifications have been made to the 2004 consolidated condensed financial statements to conform to the 2005 presentation. 2. The consolidated condensed balance sheet at December 31, 2004 was derived from amounts included in the Company's Annual Report on Form 10-K for the year ended December 31, 2004. 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 $7,104,000 at December 31, 2004 to $6,667,000 at June 30, 2005 as a result of translation adjustments for goodwill denominated in foreign currencies. 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 six-month periods ended June 30, 2005 and 2004 are as follows:
Balance at Additions Balance beginning charged to Costs at (In thousands) of year earnings incurred June 30 - -------------- ---------- ---------- -------- ------- 2005 $3,817 $803 $(942) $ 3,678 2004 $3,767 $662 $(621) $ 3,808
STOCK-BASED COMPENSATION 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 400,000 shares of Common Stock, with vesting periods of up to ten years and maximum option terms of ten years. As of June 30, 2005, options to purchase 291,148 shares remain available for grant under four of these plans. On April 29, 2005, a restricted stock plan was approved which provides for the issuance of non-vested Common Stock to certain eligible employees. The plan authorizes the issuance of shares up to an aggregate of 50,000 shares of Common Stock, of which 15,500 were issued in May 2005. The May issue requires a three-year cliff vesting period contingent on employment. Compensation expense related to this issue was $32,000 for the quarter ended June 30, 2005. As allowed by Financial Accounting Standards Board (FASB) Statement No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," and Statement No. 148 (SFAS 148), "Accounting for Stock-Based Compensation - Transition and Disclosure," the Company has elected to follow Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees," 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 stock-based compensation granted since January 1, 1995. As such, the impacts are not necessarily indicative of the effects on net earnings of future years.
Three months Six months ended June 30, ended June 30, -------------- -------------- (In thousands except per share amounts) 2005 2004 2005 2004 - --------------------------------------------- --------- --------- --------- --------- Net earnings, as reported $ 4,159 $ 2,977 $ 7,715 $ 5,427 Deduct: Incremental stock-based compensation determined under fair value based method for all awards since January 1, 1995, net of related tax effects 62 91 138 194 --------- --------- --------- --------- Pro forma net earnings $ 4,097 $ 2,886 $ 7,577 $ 5,233 ========= ========= ========= ========= Earnings per share: Basic, as reported $ .62 $ .46 $ 1.15 $ .83 Basic, pro forma $ .61 $ .44 $ 1.13 $ .80 Diluted, as reported $ .59 $ .44 $ 1.11 $ .80 Diluted, pro forma $ .58 $ .43 $ 1.08 $ .78
In December 2004, the FASB issued Statement No. 123(R) (SFAS 123(R)), "Share-Based Payment," which changed the accounting rules relating to equity compensation programs. On April 15, 2005, the Security and Exchange Commission provided a phased-in implementation process for SFAS 123(R), which will now be effective for the Company on January 1, 2006. Refer to the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2004 for additional information regarding SFAS 123(R) and the anticipated impact of adoption. 3. Included in other expense (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 MecaPlus Equipements SAS (MPE)), MPE and Badger Meter Czech Republic, whose functional currency is the euro. A foreign currency gain of $354,000 and a loss of $(67,000) was reported for the six months ended June 30, 2005 and 2004, respectively, primarily related to the recent strengthening of the U.S. dollar versus the euro. 4. 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 June 30, 2005 and 2004 based on a September 30 measurement date:
Other postretirement Pension benefits benefits ---------------- -------------- (In thousands) 2005 2004 2005 2004 - -------------- ----- ----- ----- ----- Service cost $ 457 $ 406 $ 44 $ 52 Interest cost 625 628 125 117 Expected return on plan assets (910) (928) - - Amortization of prior service cost (29) (34) (45) (44) Amortization of net loss 248 164 40 38 ----- ----- ----- ----- Net periodic benefit cost $ 391 $ 236 $ 164 $ 163 ===== ===== ===== =====
8 The following table sets forth the components of net periodic pension cost for the six months ended June 30, 2005 and 2004 based on a September 30 measurement date:
Other postretirement Pension benefits benefits ------------------ ------------------ (In thousands) 2005 2004 2005 2004 - -------------- ------- ------- ------- ------- Service cost $ 914 $ 813 $ 88 $ 84 Interest cost 1,250 1,255 250 237 Expected return on plan assets (1,820) (1,855) - - Amortization of prior service cost (58) (68) (90) (87) Amortization of net loss 496 328 80 77 ------- ------- ------- ------- Net periodic benefit cost $ 782 $ 473 $ 328 $ 311 ======= ======= ======= =======
The Company previously disclosed in its financial statements for the year ended December 31, 2004 that it did not expect to contribute funds to its pension plan in 2005. While the Company believes that it will not be required to make a contribution in 2005, such belief is based upon the expected return on assets as of the annual measurement date of September 30, 2005. The Company also disclosed in its financial statements for the year ended December 31, 2004 that it estimated it would pay $688,000 in other postretirement benefits in 2005. As of June 30, 2005, $396,000 of such benefits were paid. While it is difficult to estimate future payments, the Company estimates at June 30, 2005 that payments for the full year may be closer to $800,000. Note that the amount of benefits paid in calendar year 2005 will not impact the expense for postretirement benefits for the current year. 5. The Company guarantees the debt of the Badger Meter Officers' Voting Trust (BMOVT), from which the BMOVT 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 has guaranteed debt of $1,428,000 and $1,593,000 of the BMOVT's debt at June 30, 2005 and December 31, 2004, respectively. The current loan matures in April 2006, at which time it is expected to be renewed. The fair market value of this guarantee at June 30, 2005 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 $150,000 in the first quarter of 2005 reduced the loan from $1,065,000 at December 31, 2004 to $915,000 at June 30, 2005. 6. Total comprehensive income was $3,257,000 and $2,864,000 for the three-month periods ended June 30, 2005 and 2004, respectively. Included in the three-month periods ended June 30, 2005 and 2004 was $902,000 and $113,000, respectively, of other comprehensive loss related to foreign currency translation adjustments. Total comprehensive income was $6,055,000 and $5,200,000 for the six-month periods ended June 30, 2005 and 2004, respectively. Included in the six-month periods ended June 30, 2005 and 2004 is $1,660,000 and $227,000 of other comprehensive loss, respectively, related to foreign currency translation adjustments. 7. 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 as follows. The Company is subject to contingencies relating to environmental laws and regulations. Currently, the Company is in the process of resolving issues relating to two landfill sites and other matters. 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 9 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 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. 10 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BUSINESS DESCRIPTION AND OVERVIEW Badger Meter, Inc. (the "Company") 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 and constitute a majority of the Company's sales. 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 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 for these products driven by replacement units and, to a lesser extent, housing starts. Sales above the base level depend on conversions to AMR. The Company believes that conversion from local read meters to AMR products can accelerate replacements of meters and result in growth, because it is estimated that only 15% of the water meter market has been converted to AMR. 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 JUNE 30 Net sales for the three-month period ended June 30, 2005 increased $3.9 million, or 7.2%, over the same period in 2004. Residential and commercial water meter sales represented 75.0% of total sales in the second quarter of 2005 compared to 74.1% in the second quarter of 2004. These sales increased $3.4 million to nearly $43.1 million compared to $39.7 million in the same period in 2004. These increases were driven by higher sales of AMR products offset somewhat by slightly lower sales of local (or manual) read water meter units. Units utilizing AMR technologies carry higher prices. Most notable in the increased sales of AMR products was the increase in sales of the Company's proprietary AMR product, Orion(R), which increased more than two-fold over the amount sold in the second quarter of 2004, while other AMR products had low or declining sales growth. 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 25.0% of total sales for the three months ended June 30, 2005 compared to 25.9% for the same period in 2004. 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 $14.3 million in the second quarter of 2005 compared to $13.9 million in the second quarter of 2004. This was the net effect of increases in sales of small precision valves and electromagnetic meters offset somewhat by declines in automotive fluid meters and systems. Gross margins for the first quarter of 2005 were 35.0% compared to 31.7% in the second quarter of 2004. The increase was due to the higher mix of AMR products, particularly the Orion(R) product that carries higher margins, price increases instituted on select products, and the effects of a slightly weaker euro on foreign sourced parts. These factors were offset somewhat by continuing price pressures due to competition. Selling, engineering and administration costs in the second quarter of 2005 were $0.9 million, or 8.0%, higher than the same period in 2004 due to higher research and development costs, increased costs associated with increased sales, expenses associated with the Company's 100th anniversary celebration and normal inflationary pressures, offset somewhat by continuing cost control efforts. 11 Interest expense for the second quarter of 2005 was $137,000 lower than the same period in the prior year primarily due to lower debt balances offset somewhat by higher interest rates. The effective tax rate for the second quarter of 2005 was 42.1% compared to 38.5% due principally to higher Federal and state tax rates and increased net earnings, offset somewhat by a decreased impact of the valuation reserve for the operating loss of the Company's French subsidiary. As a result of the above-mentioned items, net earnings for the second quarter of 2005 were nearly $4.2 million compared to net earnings in the second quarter of 2004 of $3.0 million. On a diluted earnings per share basis, this equated to $0.59 per share for the second quarter of 2005 compared to $0.44 for the same period in 2004. RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30 Net sales for the six-month period ended June 30, 2005 increased $8.7 million, or 8.4%, over the same period in 2004. Residential and commercial water meter sales represented 74.1% of total sales in the first half of 2005 compared to 72.7% for the same period in 2004. These sales increased $7.9 million to nearly $82.9 million compared to $75.0 million in the same period in 2004. These increases were driven by higher sales of AMR products and slightly higher sales of local (or manual) read water meter units. Units utilizing AMR technologies carry higher prices. Most notable in the increased sales of AMR products was the increase in sales of the Company's proprietary AMR product, Orion(R), which increased more than 250% over the amount sold in the first half of 2004. This was mitigated somewhat by sales decreases in other AMR products. 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 25.9% of total sales for the six months ended June 30, 2005 compared to 27.3% for the same period in 2004. The change was due to a higher percentage increase in water meter sales compared to industrial product sales. Industrial sales increased $0.8 million to $29.0 million in the first half of 2005 compared to $28.2 million for the same period in 2004. This was the net effect of increases in sales of small precision valves, electromagnetic meters, and concrete and impeller meters offset somewhat by declines in automotive fluid meters and systems. Gross margins for the six months ended June 30, 2005 were 34.9% compared to 32.6% for the same period in 2004. The increase was due to the higher mix of AMR products, particularly the Orion(R) product that carries higher margins, price increases instituted on select products, and the effects of a slightly weaker euro on foreign sourced parts. These factors were offset somewhat by continuing price pressures due to competition. Selling, engineering and administration costs for the six months ended June 30, 2005 were $1.7 million, or 7.3%, higher than the same period in 2004 due to higher research and development costs, increased costs associated with increased sales, expenses associated with the Company's 100th anniversary celebration and normal inflationary pressures, offset somewhat by continuing cost control efforts. Interest expense for the six months ended June 30, 2005 was $107,000 lower than the same period in the prior year primarily due to lower debt balances offset somewhat by higher interest rates. The effective tax rate for the second half of 2005 was 41.6% compared to 38.9% due principally to higher Federal and state tax rates and increased net earnings, offset somewhat by a decreased impact of the valuation reserve for the operating loss of the Company's French subsidiary. Other expense (income), net changed nearly $0.5 million between periods primarily due to the favorable effects of foreign currency translations. As a result of the above-mentioned items, net earnings for the six months ended June 30, 2005 were $7.7 million compared to net earnings in the same period of 2004 of $5.4 million. On a diluted earnings per share basis, this equated to $1.11 per share for the first six months of 2005 compared to $0.80 for the same period in 2004. LIQUIDITY AND CAPITAL RESOURCES The main sources of liquidity for the Company typically are cash from operations and borrowing capacity. For the first six months of 2005, $8.7 million of cash was provided by operations, primarily as the net result of increased earnings adjusted for depreciation and amortization and decreased inventory levels offset by increases in receivables due to increased sales. 12 The change in the receivables balance from $26.9 million at December 31, 2004 to $34.6 million at June 30, 2005 was primarily due to increased sales, the timing of certain customer payments and the strengthening of the U.S. dollar against the euro. Inventories at June 30, 2005 have declined $1.2 million to $34.4 million from the December 31, 2004 balance of $35.6 million due primarily to the higher sales in the six months ended June 30, 2005 and the effects of a strengthening U.S. dollar. Capital expenditures of $2.3 million were less than the depreciation expense of $3.4 million for the first six months of 2005 resulting in a decrease in net property, plant and equipment balances from December 31, 2004. Short-term debt and the current portion of long-term debt at June 30, 2005 decreased nearly $8.7 million to a combined $14.2 million versus a balance at the end of 2004 of $22.9 million. This decrease was primarily due to securing a $10 million term loan in the second quarter of 2005, which was used to replace short-term borrowings. As a result, long-term debt increased net of regularly scheduled debt payments. Payables increased to $14.4 million at June 30, 2005 from $11.4 million at December 31, 2004 primarily as a result of the timing of payments. Income and other taxes increased to $4.4 million from $1.0 million at December 31, 2004 as a result of the timing of tax payments. Common stock and capital in excess of par value have increased from December 31, 2004 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 increased due to a restricted stock plan implemented in the second quarter of 2005, offset by a $150,000 reduction due to shares released as a result of a payment made on the ESSOP loan during the first quarter of 2005. Badger Meter's financial condition remains strong. The Company believes that its operating cash flows, available borrowing capacity, including $39.2 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 as follows. The Company is subject to contingencies relative to environmental laws and regulations. Currently, the Company is in the process of resolving issues relative to two landfill sites and other matters. 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. 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, 2004, and have not materially changed since that report was filed. 13 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 Risks" in the Company's Annual Report on Form 10-K for the year ended December 31, 2004, and have not materially changed since that report was filed. ITEM 4 CONTROLS AND PROCEDURES 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 Chairman, 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 quarter ended June 30, 2005. 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 quarter ended June 30, 2005 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. Changes in Internal Control over Financial Reporting There was no change in the Company's internal control over financial reporting that occurred during the quarter ended June 30, 2005 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 June 30, 2005, the Company repurchased 29,544 shares of Common Stock for $1,020,128. As of the end of the second quarter of 2005, the Company has remaining availability to repurchase up to an additional 419,836 shares of Common Stock (which were valued at $17.3 million at the June 30, 2005 closing price of $41.30 per share) 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 June 30, 2005, all of which were purchased pursuant to the Board of Directors' authorizations: 14
TOTAL NUMBER OF MAXIMUM NUMBER SHARES PURCHASED OF SHARES THAT MAY AS PART OF PUBLICLY YET BE PURCHASED TOTAL NUMBER OF AVERAGE PRICE PAID ANNOUNCED PLANS OR UNDER THE PLANS OR PERIOD SHARES PURCHASED PER SHARE PROGRAMS (1) PROGRAMS (1) - ------------------- ---------------- ------------------ ------------------- ------------------- April 1 to April 30 14,507 $ 30.67 14,507 434,873 May 1 to May 31 11,152 $ 37.81 11,152 423,721 June 1 to June 30 3,885 $ 40.05 3,885 419,836 ------ ------- ------ ------- Total/Average 29,544 $ 34.60 29,544 419,836 ====== ======= ====== =======
(1) On December 4, 2000, the Board of Directors authorized the repurchase of up to 1,200,000 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 641,890 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 558,110 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 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Company's Annual Meeting of Shareholders held on April 29, 2005, the following individuals were elected to the Board of Directors:
Votes Votes NAME FOR WITHHELD Not Voted - ---- --------- -------- --------- Directors elected to three-year terms expiring at the 2008 Annual Meeting: Ronald H. Dix 5,859,540 383,762 502,139 Thomas J. Fischer 5,856,484 386,818 502,139 Richard A. Meeusen 5,866,539 376,763 502,139
Directors continuing in office with terms expiring at the 2007 Annual Meeting: Kenneth P. Manning John J. Stollenwerk Directors continuing in office with terms expiring at the 2006 Annual Meeting: Ulice Payne, Jr. Andrew J. Policano Steven J. Smith At the Company's Annual Meeting of Shareholders held on April 29, 2005, the shareholders voted to adopt the Badger Meter, Inc. 2005 Restricted Stock Plan. There were 3,581,708 shares voted FOR this plan; 729,029 shares voted AGAINST this plan; and 140,904 shares ABSTAINED, with 1,791,659 broker non-votes. ITEM 6 EXHIBITS EXHIBIT NO. DESCRIPTION 4.1 Note Modification Agreement and Amendment to Loan Agreement dated June 20, 2003 between JPMorgan Chase Bank, N.A. and the Badger Meter Employee Savings and Stock Ownership Plan and Trust, dated April 18, 2005. 4.2 Loan Agreement dated May 20, 2005 between Badger Meter, Inc. and the M&I Marshall & Ilsley Bank relating to Badger Meter, Inc.'s business note. 10.1 Badger Meter, Inc. 2005 Restricted Stock Plan. [Incorporated by reference to Appendix A to Badger Meter, Inc.'s Proxy statement for the Annual Meeting of Shareholders on April 29, 2005]. 10.2 Form of Restricted Stock Award Agreement under Badger Meter, Inc. 2005 Restricted Stock Plan. 15 [Incorporated by reference from Badger Meter, Inc.'s Report on Form 8-K dated May 5, 2005]. 10.3 2005 Director Compensation Summary. [Incorporated by reference from Badger Meter, Inc.'s Report on Form 8-K dated May 5, 2005]. 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 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: August 5, 2005 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 17 BADGER METER, INC. QUARTERLY REPORT ON FORM 10-Q FOR PERIOD ENDED JUNE 30, 2005 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION 4.1 Note Modification Agreement and Amendment to Loan Agreement dated June 20, 2003 between JPMorgan Chase Bank, N.A. and the Badger Meter Employee Savings and Stock Ownership Plan and Trust, dated April 18, 2005. 4.2 Loan Agreement dated May 20, 2005 between Badger Meter, Inc. and the M&I Marshall & Ilsley Bank relating to Badger Meter, Inc.'s business note. 10.1 Badger Meter, Inc. 2005 Restricted Stock Plan. [Incorporated by reference to Appendix A to Badger Meter, Inc.'s Proxy statement for the Annual Meeting of Shareholders on April 29, 2005]. 10.2 Form of Restricted Stock Award Agreement under Badger Meter, Inc. 2005 Restricted Stock Plan. [Incorporated by reference from Badger Meter, Inc.'s Report on Form 8-K dated May 5, 2005]. 10.3 2005 Director Compensation Summary. [Incorporated by reference from Badger Meter, Inc.'s Report on Form 8-K dated May 5, 2005]. 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. 18 EX-4.1 2 c97483exv4w1.txt NOTE MODIFICATION AGREEMENT AND AMENDMENT TO LOAN AGREEMENT Exhibit 4.1 NOTE MODIFICATION AGREEMENT AND AMENDMENT TO LOAN AGREEMENT DATED JUNE 20, 2003 BETWEEN JPMORGAN CHASE BANK, N.A. AND THE BADGER METER EMPLOYEE SAVINGS AND STOCK OWNERSHIP PLAN AND TRUST, DATED APRIL 18, 2005. AMENDMENT TO LOAN AGREEMENT DATED JUNE 20, 2003 This agreement is dated as of April 18, 2005, by and between Badger Meter Employee Savings and Stock Ownership Plan and Trust (the "Borrower") and JPMorgan Chase Bank, N.A., successor by merger to Bank One, NA with its main office in Chicago, IL (the "Bank"), and its successors and assigns. WHEREAS, the Borrower and the Bank entered into a Loan Agreement dated June 20, 2003, as amended (if applicable) (the "Credit Agreement"); and WHEREAS, the Borrower has requested and the Bank has agreed to amend the Credit Agreement as set forth below; NOW, THEREFORE, in mutual consideration of the agreements contained herein and for other good and valuable consideration, the parties agree as follows; 1. DEFINED TERMS. Capitalized terms not defined herein shall have the meaning ascribed in the Credit Agreement. 2. MODIFICATION OF CREDIT AGREEMENT. The Credit Agreement is hereby amended as follows: 2.1 Section 1.13 of the Credit Agreement captioned "Termination Date" and Section 2.1 of the Credit Agreement captioned "Stock Acquisition Loan" are hereby amended by deleting the date "April 30, 2006" contained therein and replacing it with "April 30, 2008". 3. RATIFICATION. The Borrower confirms that the Credit Agreement remains in full force and effect, other than as specifically modified herein. 4. EXECUTION AND DELIVERY. This agreement shall become effective only after it is fully executed by the Borrower, Badger Meter, Inc., and the Bank, and the Bank shall have received from the Borrower the following documents: Note Modification Agreement. 5. ACKNOWLEDGEMENT OF BORROWER. The Borrower, the Bank and Badger Meter, Inc. acknowledge and agree that this agreement is limited to the terms outlined above, and shall not be construed as an agreement to change any other terms or provisions of the Credit Agreement. This agreement shall not establish a course of dealing or be construed as evidence of any willingness on the Bank's part to grant other or future agreements, should any be requested. 6. NOT A NOVATION. This agreement is a modification only and not a novation. Except for the above-quoted modification(s), the Credit Agreement, any loan agreements, credit agreements, reimbursement agreements, security agreements, mortgages, deeds of trust, pledge agreements, assignments, guaranties, instruments or documents executed in connection with the Credit Agreement, and all the terms and conditions thereof, shall be and remain in full force and effect with the changes herein deemed to be incorporated therein. This agreement is to be considered attached to the Credit Agreement and made a part thereof. This agreement shall not release or affect the liability of any guarantor of any promissory note or credit facility executed in reference to the Credit Agreement or release any owner of collateral granted as security for the Credit Agreement. The validity, priority and enforceability of the Credit Agreement shall not be impaired hereby. To the extent that any provision of this agreement conflicts with any term or condition set forth in the Credit Agreement, or any document executed in conjunction therewith, the provisions of this agreement shall supersede and control. The Borrower and the Bank, respectfully, each expressly reserves all rights against all parties to the Credit Agreement. 19 BANK: JPMORGAN CHASE BANK, N.A. By: /s/ Gregory S. Dorf, Senior Vice President ------------------------------------------- Date Signed: 5/16/05 BORROWER: BADGER METER EMPLOYEE SAVINGS AND STOCK OWNERSHIP PLAN AND TRUST By: /s/ Michael C. Wieber, ------------------------------------ Vice President, Marshall & Ilsley Trust Company N.A., Trustee Date Signed: 5/12/05 By: /s/ Lora C. Sykora, ------------------------------------ Vice President, Marshall & Ilsley Trust Company N.A., Trustee Date Signed: 5/12/05 The undersigned, Badger Meter, Inc., is signing below to acknowledge, ratify, and reaffirm the representation, warranties and convenants set forth in Sections 3, 5, and 7 of the Loan Agreement dated June 20, 2003. BADGER METER, INC. BY: /s/ Richard Johnson, CFO & Treasurer ----------------------------------------- Date Signed: 4/18/05 NOTE MODIFICATION AGREEMENT This agreement is dated as of April 19, 2005 (the "Agreement Date"), to be effective as of April 19, 2005 (the "Effective Date"), by and between Badger Meter Employee Savings and Stock Ownership Plan and Trust (the "Borrower") and JP Morgan Chase Bank, NA, successor by merger to Bank One, NA with its main office in Chicago, IL (the "Bank"). WHEREAS, the Borrower executed a Promissory Note as evidence of indebtedness in the original face amount of One Million Two Hundred Eight-Five Thousand and 00/100 Dollars ($1,285,000.00), dated June 20, 2003 owing by the Borrower to the Bank, as same may have been amended or modified from time to time (the "Note"), which Note has at all times been, an is now, continuously and without interruption outstanding in favor of the Bank; and, WHEREAS, the Borrower has requested and the Bank has agreed that the Note be modified to the limited extent as hereinafter set forth; NOW THEREFORE, in mutual consideration of the agreements contained herein and for other good and valuable consideration, the parties agree as follows: 1. ACCURARY OF RECITALS. The Borrower acknowledges the accuracy of the Recitals stated above. 2. MODIFICATION OF NOTE. 2.1 From and after the Effective Date, the date in which the entire unpaid principal balance plus all accrued interest shall be due and payable is hereby changed from April 30, 2006 to April 30, 2008. 3. RATIFICATION OF RELATED DOCUMENTS AND COLLAERAL. The Note shall remain in full force and effect as IT may be modified herein. 20 4. EXECUTION AND DELIVERY OF AGREEMENT BY THE BANK. Neither the Borrower nor the Bank shall be bound by this agreement until both the Borrower and the Bank have executed this Agreement. 5. INTEGRATION, ENTIRE AGREEMENT, CHANGE, DISCHARGE, TERMINATION, OR WAIVER. The Note as modified herein (along with the related Loan Agreement dated June 20, 2003, as amended, between JPMorgan Chase Bank, N.A., successor by merger to Bank One, NA and Badger Meter Employee Savings and Stock Ownership Plan and Trust) contain the complete understanding and agreement of the Borrower and the Bank in respect of the loan and supersede all prior representations, warranties, agreements, arrangements, understandings, and negotiations. No provision of the Note as modified herein may be changed, discharged, supplemented, terminated, or waived except in a writing signed by the party against whom it is being enforced. 6. COUNTERPART EXECUTION. This agreement may be executed in multiple counterparts, each of which, when so executed, shall be deemed an original, but all such counterparts, taken together, shall constitute one and the same agreement. 7. NOT A NOVATION. This agreement is a modification only and not a novation. In addition to all amounts hereafter due under the Note as modified herein, all accrued interest evidenced by the Note being modified by this agreement shall continue to be due and payable until paid. Except for the above-quoted modification(s), the Note, and all the terms and conditions thereof, shall be and remain in full force and effect with the changes herein deemed to be incorporated therein. This agreement is to be considered attached to the Note and made a part thereof. This agreement shall not release or affect the liability of any guarantor, surety or endorser of the Note or release any owner of collateral securing the Note. The validity, priority and enforceability of the Note shall not be impaired hereby. BANK: JPMORGAN CHASE BANK, N.A. By: /s/ Gregory S. Dorf, Senior Vice President --------------------------------------------- Date Signed: 5/16/05 BORROWER: BADGER METER EMPLOYEE SAVINGS AND STOCK OWNERSHIP PLAN AND TRUST By: /s/ Michael C. Wieber, -------------------------------------------- Vice President, Marshall & Ilsley Trust Company N.A., Trustee Date Signed: 5/12/05 By: /s/ Lora C. Sykora, ------------------------------------------ Vice President, Marshall & Ilsley Trust Company N.A., Trustee Date Signed: 5/12/05 21 EX-4.2 3 c97483exv4w2.txt LOAN AGREEMENT Exhibit 4.2 LOAN AGREEMENT DATED MAY 20, 2005 BETWEEN BADGER METER, INC. AND THE M&I MARSHALL & ILSLEY BANK RELATING TO BADGER METER, INC.'S BUSINESS NOTE. M&I MARSHALL & ILSLEY BANK PROMISSORY NOTE
PRINCIPAL LOAN DATE MATURITY LOAN NO. CALL / COLL ACCOUNT OFFICER INITIALS - -------------- ---------- ---------- -------------- ----------- ----------- ------- -------- $10,000,000.00 05-20-2005 05-20-2010 M100 / A4 12191 - -------------- ---------- ---------- -------------- ----------- ----------- ------- --------
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. Any item above containing "***" has been omitted due to text length limitations. BORROWER: Badger Meter, Inc. LENDER: M&I Marshall & Ilsley Bank 4545 W. Brown Deer Rd. SE Wisconsin Region Commercial Lending Milwaukee, WI 53223-2413 770 North Water Street Milwaukee, WI 53202
Principal Amount: $10,000,000.00 Initial Rate: 5.590% Date of Note: May 20, 2005
PROMISE TO PAY. Badger Meter, Inc. ("Borrower") promises to pay to M&I Marshall & Ilsley Bank ("Lender"), or order, in lawful money of the United States of America, the principal amount of Ten Million & 00/100 Dollars ($10,000,000.00) together with interest at the rate of 5.590% per annum on the unpaid principal balance from May 20, 2005, until paid in full. PAYMENT. Borrower will pay this loan in 59 regular payments of $191,500.00 each and one irregular last payment estimated at $213,952.49. Borrower's first payment is due June 20, 2005, and all subsequent payments are due on the same day of each month after that. Borrower's final payment will be due on May 20, 2010, and will be for all principal and all accrued interest not yet paid. Payments include principal and interest. Unless otherwise agreed or required by applicable law, payments will be applied to Accrued Interest, Credit Life Premiums, Principal, Late Charges, and Escrow. The annual interest rate for this Note is computed on a 365/360 basis; that is, by applying the ratio of the annual interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding. Borrower will pay Lender at Lender's address shown above or at such other place as Lender may designate in writing. PREPAYMENT PENALTY. Upon prepayment of this Note, Lender is entitled to the following prepayment penalty: 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 scheduled 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 1.35%, 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 linear interpolation between the two rates (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 a www.federalreserve.gov/releases/h15/update) Prepayment calculation notice to Borrower: Following the notice of prepayment from the Maker described above, Lender shall promptly notify Borrower 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. Except for the foregoing, Borrower may pay all or a portion of the amount owed 22 earlier than it is due. Early payments will not, unless agreed to by Lender in writing, relieve Borrower of Borrower's obligation to continue to make payments under the payment schedule. Rater, early payments will reduce the principal balance due and may result in Borrower's making fewer payments. Borrower agrees not to send Lender payments marked "paid in full", "without recourse", or similar language. If Borrower sends such a payment, Lender may accept it without losing any of Lender's rights under this Note, and Borrower will remain obligated to pay any further amount owed to Lender. All written communications concerning disputed amounts, including any check or other payment instrument that indicates that the payment constitutes "payment in full" of the amount owed or that is tendered with other conditions or limitations or as full satisfaction of a disputed amount must be mailed or delivered to: M&I Marshall & Ilsley Bank, P.O. 3114 Milwaukee, WI 53201-3114. PROMISSORY NOTE (CONTINUED) LOAN NO: PAGE 2 LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged 5.000% of the unpaid portion of the regularly scheduled payment. INTEREST AFTER DEFAULT. Upon default, including failure to pay upon final maturity, Lender, at its option, may, if permitted under applicable law, increase the interest rate on this Note 3.000 percentage points. The interest rate will not exceed the maximum rate permitted by applicable law. DEFAULT. Each of the following shall constitute an event of default ("Event of Default") under this Note: PAYMENT DEFAULT. Borrower fails to make any payment when due under this Note. OTHER DEFAULTS. Borrower fails to comply with or to perform any other term, obligation, covenant or condition contained in this Note or in any of the related documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Lender and Borrower. DEFAULT IN FAVOR OF THIRD PARTIES. Borrower or any Grantor defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's ability to repay this Note or perform Borrower's obligations under this Note or any of the related documents. FALSE STATEMENTS. Any warranty, representation or statement made or furnished to Lender by Borrower or on Borrower's behalf under this Note or the related documents is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter. INSOLVENCY. The dissolution or termination of Borrower's existence as a going business, the insolvency of Borrower, the appointment of a receiver for any part of Borrower's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower. CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower or by any government agency against any collateral securing the loan. This includes a garnishment of any of Borrower's accounts, including deposit accounts, with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Borrower as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Borrower gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute. EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with respect to any guarantor, endorser, surety, or accommodation party of any of the indebtedness or any guarantor, endorser, surety, or accommodation party dies or becomes incompetent, or revokes or disputes the validity of, or liability under, any guaranty of the indebtedness evidenced by this Note. In the event of a death, Lender, at its option, may, but shall not be required to, permit the guarantor's estate to assume unconditionally the obligations arising under the guaranty in a manner satisfactory to Lender, and, in doing so, cure any Event of Default. CHANGE IN OWNERSHIP. A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of this Note is impaired. INSECURITY. Lender in good faith believes itself insecure. LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal balance on this Note and all accrued unpaid interest immediately due, and then Borrower will pay that amount. ATTORNEY'S FEES; EXPENSES. Lender may hire or pay someone else to help collect this Note if Borrower does not pay. Borrower will pay Lender that amount. This includes, subject to any limits under applicable law, Lender's attorney's fees and Lender's legal expenses, whether or not there is a lawsuit, including attorney's fees, expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), and appeals. If not prohibited by applicable law, Borrower also will pay any court costs, in addition to all other sums provided by law. JURY WAIVER. LENDER AND BORROWER HEREBY WAIVE THE RIGHT TO ANY JURY TRIAL IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY EITHER LENDER OR BORROWER AGAINST THE OTHER. GOVERNING LAW. THIS NOTE WILL BE GOVERNED BY FEDERAL LAW APPLICABLE TO LENDER AND, TO THE EXTENT NOT PREEMPTED BY FEDERAL LAW, THE LAWS OF THE STATE OF WISCONSIN WITHOUT REGARD TO ITS CONFLICTS OF LAW PROVISIONS. THIS NOTE HAS BEEN ACCEPTED BY LENDER IN THE STATE OF WISCONSIN. CHOICE OF VENUE. If there is a lawsuit, Borrower agrees upon Lender's request to submit to the jurisdiction of the courts of Milwaukee County, State of Wisconsin. 23 DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $15.00 if Borrower makes a payment on Borrower's loan and the check or preauthorized charge with which Borrower pays is later dishonored. RIGHT OF SETOFF. To the extent permitted by applicable law, Lender reserves a right of setoff in all Borrower's accounts with Lender (whether checking, savings, or some other account). This includes all accounts Borrower holds jointly with someone else and all accounts Borrower may open in the future. However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on the debt PROMISSORY NOTE (CONTINUED) LOAN NO: PAGE 3 against any and all such accounts, and, at Lender's option, to administratively freeze all such accounts to allow Lender to protect Lender's charge and setoff rights provided in this paragraph. SUCCESSOR INTERESTS. The terms of this Note shall be binding upon Borrower, and upon Borrower's heirs, personal representatives, successors and assigns, and shall inure to the benefit of Lender and its successors and assigns. GENERAL PROVISIONS. This Note benefits Lender and its successors and assigns, and binds Borrower and Borrower's heirs, successors, assigns, and representatives. Lender may delay or forgo enforcing any of its rights or remedies under this Note without losing them. Borrower and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, waive presentment, demand for payment, and notice of dishonor. Upon any change in the terms of this Note, and unless otherwise expressly stated in writing, no party who signs this Note, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this loan or release any party or guarantor or collateral; or impair, fail to realize upon or perfect Lender's security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone. All such parties also agree that Lender may modify this loan without the consent of or notice to anyone other than the party with whom the modification is made. The obligations under this Note are joint and several. PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE NOTE. BORROWER ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THIS PROMISSORY NOTE. BORROWER: BADGER METER, INC. BY: /s/ Richard A. Meeusen ------------------------------------------ Chairman, President and Chief Executive Officer BY: /s/ Richard E. Johnson ------------------------------------------------ Senior Vice President - Finance, Chief Financial Officer and Treasurer 24 EX-31.1 4 c97483exv31w1.txt CERTIFICATION BY THE 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(s) 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. 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 d. 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(s) 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. Dated: August 5, 2005 By /s/ Richard A. Meeusen ----------------------- Richard A. Meeusen Chairman, President and Chief Executive Officer 25 EX-31.2 5 c97483exv31w2.txt CERTIFICATION BY THE 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(s) 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. 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 d. 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(s) 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. Dated: August 5, 2005 By /s/ Richard E. Johnson ----------------------- Richard E. Johnson Senior Vice President - Finance, Chief Financial Officer and Treasurer 26 EX-32 6 c97483exv32.txt CERTIFICATIONS 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 June 30, 2005 (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: August 5, 2005 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 27 -----END PRIVACY-ENHANCED MESSAGE-----