Badger Meter - 10-Q quarterly report FY

 

     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.

      Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

     As of July 15, 2008, there were 14,655,385 shares of Common Stock outstanding with a par value of $1 per share.

          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:

          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.

          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 except as otherwise discussed) necessary to present fairly the Company’s consolidated condensed financial position at June 30, 2008, results of operations for the three- and six-month periods ended June 30, 2008 and 2007, and cash flows for the six-month periods ended June 30, 2008 and 2007. 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.

          The consolidated condensed balance sheet at December 31, 2007 was derived from amounts included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007. Refer to the footnotes to the financial statements included in that report for a description of the Company’s accounting policies and for 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.

          Warranty and After-Sale Costs

          The Company estimates and records provisions for warranties and other after-sale costs in the period in which the sale is recorded, based on a lag factor and historical warranty claim experience. 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, 2008 and 2007 are as follows:

          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, 2008 and 2007 based on a September 30 measurement date:

          The following table sets forth the components of net periodic benefit cost for the six months ended June 30, 2008 and 2007 based on a September 30 measurement date:

          The Company previously disclosed in its financial statements for the year ended December 31, 2007 that it did not expect to contribute funds to its pension plan in 2008. While the Company believes that it will not be required to make any such contributions in 2008, such belief is based upon the estimated return on plan assets as of the annual measurement date.

          The Company disclosed in its financial statements for the year ended December 31, 2007 that it estimated it would pay $0.6 million in other postretirement benefits in 2008 based on actuarial estimates. As of June 30, 2008, $106,000 of such benefits were paid. The Company now believes that its estimated payments for the full year may be somewhat less than the full-year estimate. However, such estimates contain inherent uncertainties because cash payments can vary significantly depending on the timing of postretirement medical claims and the collection of the retiree’s portion of certain costs. Note that the amount of benefits paid in calendar year 2008 will not impact the expense for postretirement benefits for the current year.

          In September 2006, the Financial Accounting Standards Board (FASB) issued Statement No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R)” (SFAS 158). On December 31, 2006, the Company adopted the required provisions of SFAS 158 by recognizing the funded status of its defined benefit pension and postretirement benefit plans in the statement of financial position. Additionally, employers are required to measure the funded status of a plan as of the date of its year-end statement of financial position and provide additional disclosures. Prior to the adoption of the measurement date provisions of SFAS 158, the Company’s pension plans previously used a September 30 measurement date. As permitted by the statement, the Company will adopt the measurement provisions of SFAS 158 during the fourth quarter for the 2008 full-year statements, at which time the Company expects to recognize a reduction of $0.4 million, net of tax, to the 2008 beginning of the year reinvested earnings. There will be no effect on the Company’s results of operations or cash flows.

          The Company guarantees the outstanding debt of the Badger Meter Employee Savings and Stock Ownership Plan (“ESSOP”) that is recorded in long-term debt, offset by a similar amount of unearned compensation that has been recorded as a reduction of shareholders’ equity. The loan amount is collateralized by shares of the Company’s Common Stock. A payment of $23,000 was made in the first quarter of 2008 that reduced the debt and the corresponding employee benefit stock balance included in shareholders’ equity.

          Comprehensive income for the three-month periods ended June 30, 2008 and 2007 was $7.2 million and $5.7 million, respectively. Comprehensive income for the six-month periods ended June 30, 2008 and 2007 was $13.8 million and $8.4 million, respectively.

          Components of accumulated other comprehensive loss are as follows:

          During 2006, the Company carefully evaluated strategic alternatives for its subsidiaries in Nancy, France, including restructuring, sale or shutdown. In the third quarter of 2006, the Company began the process under French law to obtain the approvals to close the operations. On October 16, 2006, the decision to discontinue the Company’s French operations was finalized, and all disposal transactions were completed by December 31, 2007. Information about the Company’s discontinued French operations is included in the Notes to Consolidated Financial Statements in the Company’s 2007 Annual Report on Form 10-K under the heading “Note 3 Discontinued Operations.”

          For the three-month period ended June 30, 2007, net sales from the French operations were $58,000 and net losses were $0.3 million. For the six-month period ended June 30, 2007, net sales from the French operations were $1.9 million and net losses were $0.1 million.

          In April 2008, the Company acquired the advanced metering infrastructure (AMI) technology used in its Galaxy® fixed network system from Miltel Communications Ltd. for a purchase price of approximately $25.7 million. The technology agreement included the acquisition of the core technology, the exclusive right to manufacture the Galaxy® system and distribute it in certain water and gas utility markets, and a non-compete clause. The purchase price was recorded in the second quarter of 2008 as intangible assets that will be amortized over estimated lives of 20 and 10 years for the core technology and non-compete arrangement, respectively. This acquisition was initially funded from commercial paper drawn on the Company’s short-term line of credit, which was amended in April 2008 to increase availability to accommodate this purchase.

          In July 2008, the Company obtained a $15.0 million unsecured two-year loan that bears interest at 5.04% annually to refinance a portion of the existing short-term debt that funded this acquisition.

          On April 25, 2008, 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 100,000 shares of Common Stock (no individual participant may be granted more than 20,000 shares in the aggregate), of which 5,100 were issued in May 2008. The restricted stock issued in May is generally subject to a three-year cliff vesting period contingent on employment. Compensation expense related to the issuance of restricted stock was $37,881 for the quarter ended June 30, 2008.

          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 discussed below.

          The Company is subject to contingencies related to environmental laws and regulations. Currently, the Company is in the process of resolving matters relating to two landfill sites where it has been named as one of many potentially responsible parties. These sites are impacted by the Federal Comprehensive Environmental Response, Compensation and Liability Act and other environmental laws and regulations. At this time, 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. This belief is based on the Company’s assessment of its limited past involvement with these sites as well as the substantial involvement of other named third parties in these matters. However, due to the inherent uncertainties of such proceedings, the Company cannot predict the ultimate outcome of these matters. A future change in circumstances with respect to these specific matters or with respect to sites formerly or currently owned or operated by the Company, or with respect to off-site disposal locations used by the Company, could result in future costs to the Company and such amounts could be material.

          Like other companies in recent years, the Company has been named as a defendant in numerous multi-claimant/multi-defendant lawsuits alleging personal injury as a result of exposure to asbestos, manufactured by third parties, and integrated into or sold with a very limited number of the Company’s products. The Company is

vigorously defending itself against these 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. This belief is based in part on the fact that no claimant has demonstrated exposure to products manufactured or sold by the Company and that a number of cases have been voluntarily dismissed.

          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. Although the Company relies on single suppliers for certain castings and components in several of its product lines, 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 risks on a periodic basis and makes adjustments to reserves as appropriate.

          The Company is a leading manufacturer and marketer of products incorporating liquid flow measurement and control technologies, which are developed both internally and in conjunction with other technology companies. Its products are used to measure and control the flow of liquids in a wide variety of applications. The Company’s product lines fall into two general categories, utility and industrial flow measurement. The utility category is comprised of two primary product lines — residential and commercial water meters that are used by water utilities as the basis for generating water and wastewater revenues. The market for these product lines is North America, primarily the United States, because these meters are designed and manufactured to conform to standards promulgated by the American Water Works Association. The utility flow measurement products constitute a majority of the Company’s sales.

          Industrial product line sales comprise the remainder of the Company’s sales and include precision valves, electromagnetic inductive flow meters, impeller flow meters, and turbine and positive displacement industrial flow meters. Rounding out the industrial product line are automotive fluid meters for the measurement of various types of automotive fluids.

          Residential and commercial water meters generally have been classified as either manual read meters or remote read meters via radio technology. A meter that is manually read consists of the water meter and a register displaying the meter reading. Remotely read meters are equipped with radio technology and convert the mechanical measurement to a digital format which is then transmitted via radio frequency to a receiver that collects and formats the data appropriately for the utility’s billing computer. Drive-by systems are referred to as automatic meter reading (AMR) systems and have been the primary technology deployed by water utilities over the past decade, providing cost effective and accurate billing data. In a drive-by AMR system, a vehicle equipped for meter reading purposes collects meter reading data.

          Fixed network advanced metering infrastructure (AMI) systems are of growing interest to water utilities. These systems do not rely on a drive-by data collector, but rather incorporate a network of data collectors that are always active or listening to the radio transmission from the utility’s meters. Not only do fixed network systems eliminate the need for meter readers, but they have the ability to provide the utility with more frequent and diverse data at specified intervals. The Company’s response to the increased interest in AMI systems is further detailed in the Business Trends section below.

          The Company’s net sales and corresponding net earnings depend on unit volume and mix of products, with the Company generally earning higher margins on meters equipped with AMR or AMI technology. In addition to selling its proprietary AMR/AMI products including the Orion® drive-by AMR technology and the Galaxy® fixed network AMI system, the Company also remarkets the Itron® drive-by AMR product under a license and distribution agreement. The Company’s proprietary AMR/AMI products generally result in higher margins than the non-proprietary AMR/AMI products that the Company remarkets.

          One distinctive advantage of the Orion® AMR technology over other AMR products is that while it is fundamentally a drive-by AMR system, the proprietary receiver technology of Orion® has been licensed to other

technology providers, including those providing AMR/AMI products that communicate over power lines, broadband networks, municipal WiFi and proprietary radio frequency networks.

          Utility meter sales, including sales of AMR and AMI products within this category, are generally derived from the water meter replacement requirements of customers, along with their plans for adoption and deployment of new technology. To a much lesser extent, housing starts also contribute to the base of new product sales. Over the last decade there has been a growing trend in the conversion to AMR/AMI from manually read water meters. This conversion rate is accelerating and contributing to an increased base of business available to meter and AMR/AMI producers. It is currently estimated that approximately 25-30% of water meters installed in the United States have been converted to AMR/AMI systems. Badger Meter’s strategy is to solve customers’ metering needs with its proprietary meter reading systems or other systems available through its alliance partners in the marketplace.

          The industrial products generally serve a variety of niche flow measurement applications across a broad range of industries. Some of the flow measurement technologies now used industrially, such as positive displacement and turbine flow measurement, were derived from utility meter technologies. Other technologies are very specific to industrial applications. In addition, a growing requirement is for industrial meters to be equipped with specialized communication protocols that control the entire flow measurement process. Serving both the utility and industrial flow measurement market enables the Company to use its wide variety of technology for specific flow measurement and control applications, as well as to utilize existing capacity and spread fixed costs over a larger sales base.

          AMI is the growing standard of technology deployment in the electric utility industry. AMI provides an electric utility with two-way communication to monitor and control electrical devices at the customer’s site. AMI deployments are always fixed network technologies. Although the Company does not participate in the electric utility market, the trend toward AMI is now affecting the water and gas utility AMR market as well. Specifically, in the water industry, fixed network AMI enables the water utility to capture interval readings from each meter on a daily basis. While two-way communication is extremely limited in water fixed network AMI, utilities are contemplating how two-way networks could benefit them. As noted above, the Company markets the Orion® drive-by AMR product line as well as the Galaxy® fixed network AMI product line. The Company is positioned to sell either product as this trend continues. Since both products have comparable margins, any acceleration or slowdown in this trend is not expected to have a significant impact on the Company.

          Although there is growing interest in fixed network communication by water utilities, the vast majority of utilities currently installing AMR/AMI are selecting drive-by AMR technologies for their applications. The Company’s Orion® technology has experienced rapid acceptance in the United States. By the end of 2007, more than 1,000 water utilities had selected Orion® as their AMR solution of choice. There are approximately 53,000 water utilities in the United States and the Company estimates that less than 30% of their services have been converted to an AMR technology. It is anticipated that even with growing interest in fixed network AMI, drive-by AMR will continue to be the primary product of choice by water utilities for a number of years. Drive-by AMR technology is simply the lowest cost form of AMR currently available to water utilities.

          Prior to the Company’s introduction of its own proprietary Orion® products, Itron® water utility-related products were a significant contributor to the Company’s results. Itron® products are sold under an agreement between the Company and Itron, Inc. that expires in early 2009 and the Company is currently discussing with Itron an extension of the agreement. The Company’s Orion® products directly compete with Itron® water AMR products and, in recent years, many of the Company’s customers have selected Orion® products. In 2007, Orion® sales increased 24.8% compared to 2006 while Itron® licensed product sales decreased 21.7% compared to 2006. For the first six months of 2008, Orion® sales were 2.5 times greater than those of the remarketed Itron® sales. The Company expects this trend to continue, although the Company also believes that Itron® licensed products will remain a significant component of utility sales. To date, decreases in sales of the remarketed Itron® licensed products have been offset by increases in sales of Orion® products, which produce a higher gross margin than the remarketed Itron® licensed products. As a result, the Company does not expect this trend to have a material negative impact on the Company’s financial position or results of operations.

          Net sales for the three months ended June 30, 2008 increased $12.5 million, or 20.1%, to $74.7 million from $62.2 million in the same period in 2007. The increase was driven by higher sales of the Company’s products, especially AMR products, due to higher volumes and increased prices.

          Residential and commercial water meter and related automation sales represented 83.3% of total net sales for the quarter compared with 80.6% in the second quarter of 2007. These sales were $62.2 million, an increase of $12.1 million, or 24.2%, from $50.1 million in the same period in 2007. This increase was due to increased volumes in units utilizing AMR/AMI technology as well as increased sales of commercial meters. Price increases also contributed to the higher sales amount. Sales of the Company’s proprietary AMR product, Orion®, and the remarketed Itron® product increased 9.1% and 39.0%, respectively, over the sales amounts for the second quarter of 2007. While the Itron® related sales show a larger percentage increase than Orion®, the Orion® products outsold the Itron® by a ratio of more than 2.2 to 1 in the three-month period ended June 30, 2008. Commercial meter revenues increased by more than 35% due to both volume and price increases.

          Industrial sales represented 16.7% of the total net sales for the quarter ended June 30, 2008 compared with 19.4% for the same period in 2007. The decline in the percentage occurred despite a modest increase in industrial sales revenues. Industrial sales were $12.5 million in the second quarter of 2008, an increase of 3.3% over sales of $12.1 million in the same period in 2007. This increase was the net effect of substantially higher sales of valves, a modest increase in impeller sales, and decreases in the other industrial product lines caused primarily by volume declines related to the weaker economy.

          The total gross margin percentage declined in the second quarter of 2008 to 35.3% from 36.2% for the same period in 2007. The decline was primarily due to product mix in the quarter, offset in part by price increases. The Company generally makes a higher margin on its proprietary products than on remarketed products. The second quarter of 2008 had a higher proportion of remarketed products than the same period in 2007. In addition, the Company experienced increased costs of materials and freight-related charges that were largely offset by price increases.

          Selling, engineering and administration costs increased $1.5 million, or 11.5%, for the three months ended June 30, 2008 compared to the same period in 2007. This was primarily the result of increased costs associated with higher sales volumes, consulting costs associated with sales process enhancements, increased research and development costs, the effects of foreign exchange and increased intangible amortization due to the acquisition of the Galaxy® technology early in the second quarter of 2008. In addition, the Company experienced normal inflationary increases, which were somewhat offset by continuing cost containment efforts.

          The provision for income taxes as a percentage of earnings from continuing operations for the second quarter of 2008 was 38.3% compared to 37.1% for the same period in 2007 and was slightly higher mainly due to certain foreign exchanges tax effects.

          As a result of the above mentioned items, earnings from continuing operations were $7.0 million for the three months ended June 30, 2008 compared to $5.7 million for the three months ended June 30, 2007. On a diluted basis, earnings per share from continuing operations were $0.48 and $0.39 for the same periods, respectively.

          Net sales for the six months ended June 30, 2008 increased nearly $28.2 million, or 24.6%, to $143.1 million from $114.8 million in the same period in 2007. The increase was driven by higher sales of the Company’s products, especially AMR products, due to higher volumes and increased prices.

          Residential and commercial water meter and related automation net sales represented 82.3% of total sales for the first six months of 2008 compared with 78.8% in the same period in 2007. These sales were $117.7 million, an increase of $27.3 million, or 30.2%, from $90.4 million in the same period in 2007. This increase was due to increased volumes in units utilizing AMR/AMI technology as well as increased sales of commercial meters. Price increases also contributed to the higher sales amount. Sales of the Company’s proprietary AMR product, Orion®, and the remarketed Itron® product increased 25.8% and 24.5%, respectively, over the sales amounts for the first six months of 2007. The ratio of Orion® to Itron® sales was 2.5 to 1 for the six months ended June 30, 2008. Commercial meter revenues increased 40% due to both volume and price increases. The increases were also due in part to the fact that sales in the first quarter of 2007 were negatively impacted by the timing of orders.

          Industrial sales represented 17.7% of the total net sales for the six months ended June 30, 2008 compared with 21.2% for the same period in 2007. The decline in percentage occurred despite a modest increase in industrial sales revenues. Industrial sales were $25.4 million for the first six months of 2008, an increase of 4.1% over sales of $24.4 million in the same period in 2007. This increase was the net effect of

substantially higher sales of valves, flat to modest increases in automotive and electromagnetic meter sales, and decreases in the other industrial product lines caused primarily by volume declines related to the weaker economy.

          The total gross margin percentage for the first six months of 2008 was 35.6% compared to 33.8% for the same period in 2007. The increase was the net effect of higher sales volumes that absorbed fixed manufacturing costs and increased prices, offset by higher costs of raw materials.

          Selling, engineering and administration costs increased $4.2 million or 16.6% for the six months ended June 30, 2008 compared to the same period in 2007. This was primarily the result of increased sales costs related to efforts to establish a presence for Orion® in the natural gas industry, increased costs associated with higher sales volumes, consulting costs associated with sales process enhancements, increased research and development costs, the effects of foreign exchange, and increased intangible amortization related to the acquisition of the Galaxy® technology early in the second quarter of 2008. In addition, the Company experienced normal inflationary increases, which were somewhat offset by continuing cost containment efforts.

          The provision for income taxes as a percentage of earnings from continuing operations for the second quarter of 2008 was 37.9% compared to 37.1% for the same period in 2007 and was slightly higher mainly due to certain foreign exchanges tax effects.

          As a result of the above mentioned items, earnings from continuing operations were $13.1 million for the six months ended June 30, 2008 compared to $8.2 million for the six months ended June 30, 2007. On a diluted basis, earnings per share from continuing operations were $0.88 and $0.56 for the same periods, respectively.

          The main sources of liquidity for the Company are cash from operations and borrowing capacity. Cash provided by operations for the first six months of 2008 was $10.3 million versus $10.6 million for the same period in 2007. The slight decrease was primarily the net effect of the increase in inventories in 2008, offset somewhat by increased net earnings to date in 2008.

          The increase in the receivables balance from $30.6 million at December 31, 2007 to $38.0 million at June 30, 2008 was due primarily to the timing of sales and certain cash collections.

          Inventories at June 30, 2008 increased to $39.5 million from $34.1 million at December 31, 2007 due primarily to longer lead times on certain electrical components and higher overall costs of material components to support increased sales levels.

          Prepaid expenses and other current assets increased between December 31, 2007 and June 30, 2008 primarily because of the payment of certain calendar year insurance premiums that are expensed ratably over the policy period.

          Net property, plant and equipment at June 30, 2008 increased $4.6 million since December 31, 2007. This is the result of $7.5 million of capital expenditures, which included $5.6 million associated with the construction of the Company’s new plant in Nogales, Mexico, which is expected to be operational in the fourth quarter of 2008, offset by depreciation expense and disposals.

          Intangible assets increased due to the purchase of the Galaxy® proprietary fixed network AMI technology for $25.7 million early in the second quarter of 2008, offset by amortization expense.

          Short-term debt increased $21.8 million at June 30, 2008 compared to the balance at December 31, 2007, primarily as a result of the purchase of the Galaxy® technology discussed above. Long-term debt decreased as a result of regularly scheduled payments. All of the Company’s debt is unsecured and does not carry any financial covenants. In July 2008, the Company obtained a $15.0 million unsecured two-year loan that bears interest at 5.04% annually to refinance a portion of the existing short-term debt that funded this acquisition.

          Payables increased to $14.8 million at June 30, 2008 from $11.4 million at December 31, 2007 primarily as a result of the increase in inventory and the timing of payments. Accrued compensation and employee benefits increased since December 31, 2007 from $6.0 million to $7.0 million due to costs accrued for 2008 expenses to date, offset somewhat by the first quarter 2008 payment of amounts accrued at December 31, 2007.

          Income and other taxes increased to $10.9 million at June 30, 2008 from $8.4 million at December 31, 2007 due to increased earnings and the timing of income tax payments.

          Common stock and capital in excess of par value both increased since December 31, 2007 due to new stock issued in connection with the exercise of stock options. Employee benefit stock decreased as a result of a payment made on the Employee Savings and Stock Ownership Plan loan during the first quarter of 2008.

          Accumulated other comprehensive loss was $8.4 million at June 30, 2008 compared to a $9.2 million loss at December 31, 2007 due primarily to the amortization in the Statement of Operations of certain pension and postretirement amounts included in accumulated other comprehensive loss as required under SFAS 158 as well as the effects of foreign exchange translations.

          Badger Meter’s financial condition remains strong. The Company believes that its operating cash flows, available borrowing capacity, and its ability to raise capital provide adequate resources to fund ongoing operating requirements, future capital expenditures and development of new products. There was $22.7 million of unused credit lines at June 30, 2008.

          There are currently no material legal proceedings pending with respect to the Company. The more significant legal proceedings are discussed below.

          The Company is subject to contingencies related to environmental laws and regulations. Currently, the Company is in the process of resolving matters relating to two landfill sites where it has been named as one of many potentially responsible parties. These sites are impacted by the Federal Comprehensive Environmental Response, Compensation and Liability Act and other environmental laws and regulations. At this time, 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. This belief is based on the Company’s assessment of its limited past involvement with these sites as well as the substantial involvement of other named third parties in these matters. However, due to the inherent uncertainties of such proceedings, the Company cannot predict the ultimate outcome of these matters. A future change in circumstances with respect to these specific matters or with respect to sites formerly or currently owned or operated by the Company, or with respect to off-site disposal locations used by the Company, could result in future costs to the Company and such amounts could be material.

          Like other companies in recent years, the Company has been named as a defendant in numerous multi-claimant/multi-defendant lawsuits alleging personal injury as a result of exposure to asbestos, manufactured by third parties, and integrated into or sold with a very limited number of the Company’s products. The Company is vigorously defending itself against these 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. This belief is based in part on the fact that no claimant has demonstrated exposure to products manufactured or sold by the Company and that a number of cases have been voluntarily dismissed.

          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.

          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, 2007, and have not materially changed since that report was filed.

          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, 2007, and have not materially changed since that report was filed.

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, 2008. 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, 2008 to ensure that information relating to the Company, including its consolidated subsidiaries, was made known to management by others within those entities as appropriate to allow timely decisions regarding required disclosure of the information, 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, 2008 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

          At the Company’s Annual Meeting of Shareholders held on April 25, 2008, the following individuals were elected to the Board of Directors. Beginning at the 2009 Annual Meeting of Shareholders, all directors will be elected annually to one-year terms because shareholders approved the amendment to the Company’s Restated Articles of Incorporation to declassify the board.

          

          At the Company’s Annual Meeting of Shareholders held on April 25, 2008, shareholders approved the Badger Meter, Inc. 2008 Restricted Stock Plan by the vote set forth below:

          At the Company’s Annual Meeting of Shareholders held on April 25, 2008, shareholders approved the amendment to the Restated Articles of Incorporation to declassify the Board of Directors by the vote set forth below:

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.