1 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------------ ------------------ Commission File Number 1-6706 -------- BADGER METER, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Wisconsin 39-0143280 - ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4545 West Brown Deer Road, Milwaukee, Wisconsin 53223 - ----------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (414) 355-0400 -------------- None ---------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at July 16, 1999 - ----------------------------- ---------------------------- Common Stock, $1.00 par value 2,575,741 Class B Common Stock, $.10 par value 1,072,086
2 BADGER METER, INC. INDEX Page No. -------- Part I. Financial Information: Item 1 Financial Statements: Consolidated Condensed Balance Sheets -- June 30, 1999 and December 31, 1998 3 Consolidated Condensed Statements of Operations -- Three and Six Months Ended June 30, 1999 and 1998 4 Consolidated Condensed Statements of Cash Flows -- Six Months Ended June 30, 1999 and 1998 5 Notes to Consolidated Condensed Financial Statements 6 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Part II. Other Information: Item 4 Submission of Matters to a Vote of Security Holders 9 Item 5 Market for Registrant's Common Equity and Related Stockholder Matters 10 Item 6(a) Exhibits 10 Item 6(b) Reports on Form 8-K 10 Exhibit Index 12 -2-
3 Part I - Financial Information BADGER METER, INC. Item 1 Financial Statements CONSOLIDATED CONDENSED BALANCE SHEETS (Dollars in Thousands) <TABLE> <CAPTION> Assets June 30, December 31, 1999 1998 -------- ------------ (Unaudited) <S> <C> <C> Current assets: Cash $ 712 $ 2,371 Receivables 20,972 19,814 Inventories: Finished goods 4,585 5,270 Work in process 9,183 10,089 Raw materials and purchased parts 7,484 7,044 -------- -------- Total inventories 21,252 22,403 Prepaid expenses 1,033 1,064 -------- -------- Total current assets 43,969 45,652 Property, plant and equipment, at cost 85,599 79,934 Less accumulated depreciation (45,130) (42,523) -------- -------- 40,469 37,411 Intangible assets, at cost less accumulated amortization 1,354 1,452 Prepaid pension 6,010 6,262 Deferred income taxes 2,938 2,930 Other assets 3,619 3,238 -------- -------- Total assets $ 98,359 $ 96,945 ======== ======== Liabilities and Shareholders' Equity Current liabilities: Short-term debt $ 11,902 $ 14,315 Payables 9,653 10,174 Accrued compensation and employee benefits 5,212 5,521 Other accrued liabilities 4,703 4,386 Income and other taxes 1,450 480 -------- -------- Total current liabilities 32,920 34,876 Accrued non-pension postretirement benefits 7,173 7,459 Other accrued employee benefits 4,389 4,162 Long-term debt 2,844 2,600 Shareholders' equity: Common Stock 3,432 3,392 Class B Common Stock 107 111 Capital in excess of par value 13,301 12,732 Reinvested earnings 42,945 39,198 Less: Employee benefit stock (2,595) (2,606) Treasury stock, at cost (6,157) (4,979) -------- -------- Total shareholders' equity 51,033 47,848 -------- -------- Total liabilities and shareholders' equity $ 98,359 $ 96,945 ======== ======== </TABLE> See accompanying notes to consolidated condensed financial statements. -3-
4 BADGER METER, INC. CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Dollars in Thousands Except Share Amounts) (Unaudited) <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, June 30, ------------------ ----------------- 1999 1998 1999 1998 ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> Net sales $ 38,512 $ 36,430 $ 76,909 $ 69,929 Cost of sales 23,042 22,163 46,665 42,219 ----------- ----------- ----------- ----------- Gross margin 15,470 14,267 30,244 27,710 Selling, engineering and administration 10,635 10,530 21,651 21,236 ----------- ----------- ----------- ----------- Operating earnings 4,835 3,737 8,593 6,474 Interest expense 228 104 488 248 ----------- ----------- ----------- ----------- Earnings before income taxes 4,607 3,633 8,105 6,226 Provision for income taxes 1,773 1,338 3,120 2,334 ----------- ----------- ----------- ----------- Net earnings $ 2,834 $ 2,295 $ 4,985 $ 3,892 =========== =========== =========== =========== Per share amounts: * Earnings per share: Basic $ .77 $ .63 $ 1.35 $ 1.07 =========== =========== =========== =========== Diluted $ .73 $ .59 $ 1.27 $ 1.00 =========== =========== =========== =========== Dividends declared - Common Stock $ .18 $ .15 $ .36 $ .30 =========== =========== =========== =========== Dividends declared - Class B Common Stock $ .16 $ .14 $ .32 $ .27 =========== =========== =========== =========== Shares used in computation of: Basic 3,663,794 3,632,886 3,684,441 3,622,874 Impact of dilutive stock options 237,881 269,990 238,234 278,057 ----------- ----------- ----------- ----------- Diluted 3,901,675 3,902,876 3,922,675 3,900,931 =========== =========== =========== =========== </TABLE> * Earnings per share is computed independently for each of the quarters presented. Therefore, the sum of the quarterly earnings per share does not necessarily equal the total for the year. See accompanying notes to consolidated condensed financial statements. -4-
5 BADGER METER, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Dollars in Thousands) (Unaudited) <TABLE> <CAPTION> Six Months Ended June 30, ---------------- 1999 1998 ----------- ----------- <S> <C> <C> Operating activities: Net earnings $ 4,985 $ 3,892 Adjustments to reconcile net earnings to net cash provided by (used for) operations: Depreciation 3,044 2,609 Amortization 98 77 Noncurrent employee benefits 204 473 Changes in: Receivables (1,158) (216) Inventory 1,151 904 Current liabilities other than short-term debt 457 (534) Prepaid expenses and other 23 4 ----------- ------------ Total adjustments 3,819 3,317 ----------- ------------ Net cash provided by (used for) operations 8,804 7,209 ----------- ------------ Investing activities: Property, plant and equipment (6,102) (9,737) Other - net (381) 1,271 ----------- ------------ Net cash provided by (used for) investing activities (6,483) (8,466) ----------- ------------ Financing activities: Bank borrowings (repayments) (2,169) 181 Dividends (1,238) (1,056) Stock options and ESSOP 642 2,015 Treasury stock transactions (1,215) (678) ----------- ------------ Net cash provided by (used for) financing activities (3,980) 462 ----------- ------------ Increase (decrease) in cash (1,659) (795) Beginning of year 2,371 1,055 ----------- ------------ End of period $ 712 $ 260 =========== ============ Supplemental disclosures of cash flow information: Cash paid (refunded) during the period for: Income taxes $ 1,974 $ 2,178 =========== ============ Interest $ 517 $ 335 =========== ============ </TABLE> See accompanying notes to consolidated condensed financial statements. -5-
6 BADGER METER, INC. NOTES TO 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 consolidated condensed financial position at June 30, 1999 and the results of operations for the three and six-month periods ended June 30, 1999 and 1998 and the cash flows for the six-month periods ended June 30, 1999 and 1998. The results of operations for any interim period are not necessarily indicative of the results to be expected for the full year. Certain reclassifications have been made to the 1998 data to conform to the 1999 presentation. 2. The consolidated condensed balance sheet at December 31, 1998, was derived from amounts included in the Annual Report to Shareholders which was incorporated by reference in the Company's annual report on Form 10-K for the year ended December 31, 1998. Refer to the footnotes in those reports for a description of the 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 a result of normal transactions in the interim. 3. During the six months ended June 30, 1999, the Company repurchased 35,436 shares of common stock for an aggregate purchase price of $1,215,000. 4. The Company continues to address the year 2000 software issues as discussed in the Company's Annual Report to Shareholders for the year ended December 31, 1998. Many systems have already been updated while other systems are in process. All remaining upgrades are expected to be completed during the third quarter of 1999 and management does not expect to incur any significant costs in excess of normal software upgrade costs. Testing has begun and will continue until the implementation is complete. If the Company and its vendors do not properly address this issue, the Company could incur additional transaction processing costs and there could be interruptions in the Company's supply chain, resulting in increased costs as the Company obtains alternate vendors. However, the Company does not expect to have any significant problems with its products, systems or vendors as a result of this issue. 5. The various trusts of the Wright Family Voting Trust ("WFVT") continue to sell Company common stock for diversification purposes. The WFVT released for sale 34,984 shares in 1995, 38,850 shares in 1996, 21,400 shares in 1997, 49,450 shares in 1998 and 30,494 shares through the period ended June 30, 1999. The WFVT has indicated that these trusts presently intend to continue diversifying in the future. The Company does not have a commitment to purchase any of these shares. 6. In the ordinary course of business, the Company enters into various material purchase agreements with its vendors, some of which contain minimum purchase quantity commitments extending beyond one year. Future purchase commitments are not expected to exceed normal usage requirements. -6-
7 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Financial Condition Receivables as of June 30, 1999 increased 5.8%, or $1,158,000, from the December 31, 1998 balance primarily due to the increased sales. Inventories decreased 5.1% as efficient inventory management offset increased production requirements. Property, plant and equipment (at cost) increased $5,665,000 in connection with completion of the Milwaukee facility expansion and remodeling plus other equipment purchases. Prepaid pension decreased $252,000 since December 31, 1998, due to the recording of normal pension expense with no funding payments required due to the overfunded status of the plan. Payables decreased $521,000 since December 31, 1998 due to timing of payments. Income and other taxes payable increased $970,000 due to the timing of estimated tax payments and a higher tax rate for 1999 compared to 1998. Changes in accrued non-pension postretirement benefits and other accrued employee benefits since December 31, 1998, were primarily due to the timing of benefit payments. Long-term debt increased $244,000 due to the addition of a capital lease during the second quarter of 1999. Since December 31, 1998, common stock and capital in excess of par value both increased due to new shares issued in connection with stock options exercised and ESSOP purchases. Treasury stock increased due to shares repurchased by the Company. The Company paid down short-term debt by $2,413,000 since December 31, 1998 as cash generated by operations exceeded cash requirements for fixed asset additions, dividends and stock repurchases. As of June 30, 1999, the Company had approximately $39,300,000 of credit lines with domestic and foreign banks of which $11,902,000 was in use. This compares to $11,557,000 in use at June 30, 1998 and $14,315,000 at December 31, 1998. The Company believes that the present lines of credit are adequate to meet operating requirements. Results of Operations Net sales for the second quarter of 1999 of $38,512,000 reflect a 5.7% increase over the second quarter of 1998. For the six-month period ended June 30, 1999, sales of $76,909,000 represented a 10% increase over the first six months of 1998. These increases were primarily due to higher unit sales of both residential and commercial/industrial water meters, which offset lower sales of valves and automotive fluid meters. The increases also represent higher international sales of water meters, primarily into Mexico. Gross margins increased from 39.2% in the second quarter of 1998 to 40.2% in the second quarter of 1999 due to favorable pricing and product mix offsetting higher manufacturing capacity costs. The six-month margins for 1999 were 39.3%, down from 39.6% for the first six months of 1998 due to the higher manufacturing capacity costs in the first quarter of 1999. Selling, engineering and administrative costs increased only 1.0% for the second quarter of 1999 compared to the same quarter in 1998, and 2.0% for the six-month period, due to cost controls offsetting normal personnel and expense increases. Interest expense increased between the periods due to higher debt balances, including debt associated with the increased ESSOP loan. Also, interest related to the Milwaukee facility expansion was capitalized during 1998, but no such offset was made in 1999 due to completion of the expansion. The effective tax rates for both the quarter and six-month periods of 1999 were estimated to be 38.5%, which is higher than the 1998 rates due to favorable tax credits in 1998 and impacts of foreign tax rates. -7-
8 Earnings for the second quarter of 1999 were $2,834,000, an increase of 23.5% over second quarter 1998 earnings of $2,295,000. This increase was primarily due to the increases in sales and improved margins, while the Company's selling, engineering and administration expenses increased only 1%. For the six-month periods, the 28.1% increase in net earnings was primarily due to the 10% increase in sales, while selling, engineering and administration expenses only increased 2%. Other Matters 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 litigation filed by the owner of property near one of the Company's plants, which alleges damage to property value by virtue of alleged spillage from past Company operations. Also, the Company is in the process of settling a suit alleging violation of Proposition 65, California's environmental regulation. The Company does not believe the ultimate resolution of these claims will have a material adverse effect on the Company's financial position or results of operations. Provision has been made for all known settlement costs. 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. -8-
9 Part II - Other Information Item 4 Submission of Matters to a Vote of Security Holders (a) The Annual Meeting of Shareholders was held April 23, 1999. (b) 1. The following table represents the aggregate votes related to the election of directors: <TABLE> <CAPTION> Votes Votes NAME FOR WITHHELD Not Voted ---- ----- -------- --------- <S> <C> <C> <C> DIRECTORS ELECTED TO THREE-YEAR TERMS EXPIRING AT 2002 ANNUAL MEETING James L. Forbes 12,628,832 11,834 766,518 Charles F. James, Jr. 12,628,950 11,716 766,518 John J. Stollenwerk 12,629,240 11,426 766,518 James O. Wright, Jr. 12,629,351 11,315 766,518 DIRECTOR ELECTED TO A TWO-YEAR TERM EXPRING AT THE 2001 ANNUAL MEETING Robert D. Belan 12,627,998 12,668 766,518 </TABLE> 2. DIRECTORS CONTINUING IN OFFICE WITH TERMS EXPIRING AT THE 2000 ANNUAL MEETING James O. Wright Robert M. Hoffer Andrew J. Policano 3. DIRECTORS CONTINUING IN OFFICE WITH TERMS EXPIRING AT THE 2001 ANNUAL MEETING Kenneth P. Manning Donald J. Schuenke Pamela B. Strobel (c) 1. Proxies were solicited to restate the Restated Articles of Incorporation to (i) provide that all outstanding shares of Class B Common Stock will automatically be converted into shares of Common Stock on a share-for-share basis upon the closing of a public offering of Common Stock with gross proceeds to the Company of not less than $20,000,000 (a "Qualified Public Offering"); (ii) provide that Section 180.1150 of the Wisconsin Business Corporation Law will become applicable to the Company upon the closing of a Qualified Public Offering; and (iii) eliminate certain provisions of the Restated Articles relating to the initial issuance of the Class B Common Stock in 1986 that are no longer relevant. There was no solicitation in opposition to these amendments. The restating of the Restated Articles required the affirmative vote of a majority of the votes entitled to be cast at the meeting by the holders of Common Stock and holders of Class B Common Stock, each voting separately as a class, as well as the affirmative vote of a majority of the votes entitled to be cast at the meeting by all shareholders voting together as a single class. The proposal passed with 75% of the votes of holders of Common Stock, 95.4% of the votes of holders of Class B shares, and a combined vote of 91.4% of the total votes entitled to be cast at the meeting. As of the record date, February 26, 1999, the total number of votes represented by shares of Common Stock and Class B Common Stock was 13,405,624. The following table represents the aggregate votes cast on the restatement proposal: -9-
10 <TABLE> <CAPTION> Votes Votes Votes Broker FOR AGAINST ABSTAIN NON-VOTES ----- ------- ------- --------- <S> <C> <C> <C> <C> Common Stock 1,941,173 18,643 27,617 335,273 Class B Common Stock 10,317,960 0 0 0 Common and Class B Voting as a Single Class 12,259,133 18,643 27,617 335,273 </TABLE> 2. Proxies were solicited for the adoption of the Badger Meter, Inc. 1999 Stock Option Plan. There were no solicitations in opposition to the proposed adoption of the plan, and the plan was adopted with 98.8% votes in favor of its adoption. The following table represents the aggregate votes related to the adoption of the stock option plan: <TABLE> <CAPTION> Votes Votes Votes FOR AGAINST ABSTAIN ----- ------- ------- <S> <C> <C> 12,468,263 112,953 31,618 </TABLE> (d) Not applicable. Item 5 Market for Registrant's Common Equity and Related Stockholder Matters A shareholder wishing to include a proposal pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as amended ("Rule 14a-8"), in the proxy statement for the 2000 Annual Meeting of Shareholders must forward the proposal to the company by November 23,1999. In addition, a shareholder who otherwise intends to present business at the 2000 Annual Meeting (including nominating persons for election as directors) must comply with the requirements set forth in the Company's Restated By-laws. Among other things, to bring business before an annual meeting, a shareholder must give written notice thereof, complying with the Restated By-laws, to the Secretary of the Company not less than 60 days and not more than 90 days prior to the second Saturday in the month of April (subject to certain exceptions if the annual meeting is advanced or delayed a certain number of days). Accordingly, if the Company does not receive notice of a shareholder proposal submitted otherwise than pursuant to Rule 14a-8 prior to February 8, 2000, then the notice will be considered untimely and the Company will not be required to present such proposal at the 2000 Annual Meeting. If the Board of Directors chooses to present such proposal at the 2000 Annual Meeting, then the persons named in the proxy solicited by the Board of Directors for the 2000 Annual Meeting may exercise discretionary voting power with respect to such proposal. Item 6 Exhibits and Reports on Form 8-K (a) Exhibits: (3.0) (i) Articles of Incorporation (3.0) (ii) By-laws (27.0) Financial Data Schedule (b) Reports on Form 8-K: There were no reports on Form 8-K filed for the three months ended June 30, 1999. -10-
11 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BADGER METER, INC. Dated: July 27, 1999 By /S/ Richard A. Meeusen ----------------------- Richard A. Meeusen Vice President - Finance and Treasurer Chief Financial Officer By /S/ Beverly L.P. Smiley ------------------------- Beverly L.P. Smiley Corporate Controller -11-
12 EXHIBIT INDEX Page Number (3.0) (i) Articles of Incorporation 13 (3.0) (ii) By-laws 20 (27.0) Financial Data Schedule -12-