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, 2000 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 14, 2000 - ----------------------------- ---------------------------- Common Stock, $1.00 par value 3,369,716 -1-
2 BADGER METER, INC. INDEX <TABLE> <CAPTION> Page No. -------- <S> <C> Part I. Financial Information: Item 1 Financial Statements: Consolidated Condensed Balance Sheets - - June 30, 2000 and December 31, 1999 3 Consolidated Condensed Statements of Operations - - Three and Six Months Ended June 30, 2000 and 1999 4 Consolidated Condensed Statements of Cash Flows - - Six Months Ended June 30, 2000 and 1999 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 9 Item 6(a) Exhibits 10 Item 6(b) Reports on Form 8-K 10 Exhibit Index 12 </TABLE> -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, ------ 2000 1999 ---- ---- (Unaudited) <S> <C> <C> Current assets: Cash $ 1,286 $ 3,752 Receivables 25,912 24,278 Inventories: Finished goods 5,055 4,077 Work in process 9,495 8,347 Raw materials and purchased parts 10,256 6,582 ----------- ----------- Total inventories 24,806 19,006 Prepaid expenses 1,129 943 ----------- ----------- Total current assets 53,133 47,979 Property, plant and equipment, at cost 90,286 87,733 Less accumulated depreciation (47,770) (45,617) ------------ ----------- 42,516 42,116 Intangible assets, at cost less accumulated amortization 1,028 1,095 Prepaid pension 5,505 5,791 Deferred income taxes 2,241 2,213 Other assets 4,064 3,892 ----------- ----------- Total assets $ 108,487 $ 103,086 =========== =========== </TABLE> <TABLE> <CAPTION> Liabilities and Shareholders' Equity ------------------------------------ <S> <C> <C> Current liabilities: Short-term debt $ 18,381 $ 11,702 Current portion of long-term debt 5,065 4,887 Payables 10,056 10,499 Accrued compensation and employee benefits 3,721 5,914 Other accrued liabilities 3,783 3,716 Income and other taxes 1,629 111 ----------- ----------- Total current liabilities 42,635 36,829 Accrued non-pension postretirement benefits 6,712 7,014 Other accrued employee benefits 4,885 4,741 Long-term debt 8,624 11,493 Shareholders' equity: Common Stock 4,591 4,531 Capital in excess of par value 14,139 13,382 Reinvested earnings 48,909 46,445 Less: Employee benefit stock (2,300) (2,600) Treasury stock, at cost (19,708) (18,749) ------------ ----------- Total shareholders' equity 45,631 43,009 ----------- ----------- Total liabilities and shareholders' equity $ 108,487 $ 103,086 =========== =========== </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, ------- ------- <S> <C> <C> <C> <C> 2000 1999 2000 1999 ---- ---- ---- ---- Net sales $ 35,845 $ 38,512 $ 72,752 $ 76,909 Cost of sales 23,851 23,042 46,469 46,665 ----------- ----------- ----------- ----------- Gross margin 11,994 15,470 26,283 30,244 Selling, engineering and administration 10,523 10,530 21,224 21,407 ----------- ----------- ----------- ----------- Operating earnings 1,471 4,940 5,059 8,837 Interest expense 565 228 1,080 488 Other expense (income), net (1,530) 105 (2,246) 244 ------------ ----------- ----------- ----------- Earnings before income taxes 2,436 4,607 6,225 8,105 Provision for income taxes 902 1,773 2,334 3,120 ----------- ----------- ----------- ----------- Net earnings $ 1,534 $ 2,834 $ 3,891 $ 4,985 =========== =========== =========== =========== Per share amounts: * Earnings per share: Basic $ .46 $ .77 $ 1.17 $ 1.35 =========== =========== =========== =========== Diluted $ .44 $ .73 $ 1.11 $ 1.27 =========== =========== =========== =========== Dividends declared - Common Stock $ .22 $ .18 $ .43 $ .36 =========== =========== =========== =========== Dividends declared - Class B Common Stock $ .00 $ .16 $ .00 $ .32 =========== =========== =========== =========== Shares used in computation of: Basic 3,323,458 3,663,794 3,316,988 3,684,441 Impact of dilutive stock options 179,942 237,881 186,472 238,234 ----------- ----------- ----------- ----------- Diluted 3,503,400 3,901,675 3,503,460 3,922,675 =========== =========== =========== =========== </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. All of the outstanding Class B Common Stock was converted to Common Stock on August 17, 1999. 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, -------- 2000 1999 ---- ---- <S> <C> <C> Operating activities: Net earnings $ 3,891 $ 4,985 Adjustments to reconcile net earnings to net cash provided by (used for) operations: Depreciation 3,008 3,044 Amortization 67 98 Noncurrent employee benefits 428 204 Changes in: Receivables (1,634) (1,158) Inventory (5,800) 1,151 Current liabilities other than debt (1,051) 457 Prepaid expenses and other (214) 23 ------------ ------------ Total adjustments (5,196) 3,819 ------------ ------------ Net cash provided by (used for) operations (1,305) 8,804 ------------ ------------ Investing activities: Property, plant and equipment (3,408) (6,102) Other - net (172) (381) ------------ ------------- Net cash provided by (used for) investing activities (3,580) (6,483) ------------ ------------- Financing activities: Net increase (decrease) in short-term debt 6,679 (2,413) Issuance of long-term debt 0 244 Repayments of long-term debt (2,691) 0 Dividends (1,427) (1,238) Stock options and ESSOP 817 642 Treasury stock transactions (959) (1,215) ------------ ------------- Net cash provided by (used for) financing activities 2,419 (3,980) ----------- ------------- Increase (decrease) in cash (2,466) (1,659) Beginning of year 3,752 2,371 ------------ ------------ End of period $ 1,286 $ 712 ============ ============ Supplemental disclosures of cash flow information: Cash paid (refunded) during the period for: Income taxes $ 697 $ 1,974 =========== ============ Interest $ 1,144 $ 517 =========== ============ </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, 2000 and the results of operations for the three and six-month periods ended June 30, 2000 and 1999 and the cash flows for the six-month periods ended June 30, 2000 and 1999. 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 1999 data to conform to the 2000 presentation. 2. The consolidated condensed balance sheet at December 31, 1999, 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, 1999. 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 discussed below and as a result of normal transactions in the interim. 3. Other expense (income), net includes 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. Other income for the second quarter of 2000 also includes $1,480,000 of business interruption insurance proceeds related to lost sales and margins as a result of a fire at a vendor's facility during 1999. When combined with the $750,000 of insurance proceeds recorded in the fourth quarter of 1999 and the $750,000 recorded in the first quarter of 2000, the total insurance proceeds related to the fire were $2,980,000. 4. 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, 2000 increased 6.7%, or $1,634,000, from the December 31, 1999 balance primarily due to extended terms offered to certain customers in Mexico and high sales in the last month of the quarter. Inventories increased 30.5% as the company increased stocking levels of certain long-lead electronic items. Property, plant and equipment (at cost) increased $2,553,000 due to normal equipment purchases of $3,408,000 during the quarter, offset by retirements. Prepaid expenses increased $186,000 due to timing of annual payments such as insurance premiums. Prepaid pension decreased $286,000 since December 31, 1999, due to the recording of normal pension expense with no funding payments required due to the overfunded status of the plan. Since December 31, 1999, short-term debt increased $6,679,000 to fund increased working capital, fixed asset additions and repayment of long-term debt. Accrued compensation and employee benefits decreased $2,193,000 due primarily to payment of 1999 incentives during the first quarter of 2000. Income and other taxes payable increased $1,518,000 due to the timing of estimated tax payments. Changes in accrued non-pension postretirement benefits and other accrued employee benefits since December 31, 1999, were primarily due to the timing of benefit payments. Long-term debt and the current maturities of long-term debt decreased $2,691,000 due to regular monthly debt repayments. Since December 31, 1999, 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 during the period. As of June 30, 2000, the Company had approximately $52,389,000 of credit facilities with domestic and foreign banks of which $31,772,000 was in use. This compares to $11,902,000 in use at June 30, 1999 and $28,082,000 at December 31, 1999. The Company believes that the present lines of credit are adequate to meet operating requirements and future capital needs. Results of Operations Net sales for the second quarter of 2000 of $35,845,000 reflect a 6.9% decrease from the second quarter of 1999. For the six-month period ended June 30, 2000, sales of $72,752,000 represented a 5.4% decrease from the first six months of 1999. These decreases were primarily due to lower sales of certain utility products due to several factors. A September 1999 fire at the facility of one of the company's principal vendors continued to negatively impact sales in the first half of 2000, although the impact of those lost sales on net income was offset by business interruption insurance proceeds. The six-month Federal Communications Commission freeze, which ended in December 1999, continued to have an impact on sales of certain automatic meter reading products due to the disruption of the sales cycle. In addition, a major automated meter reading systems alliance partner filed bankruptcy during the first quarter of 2000, which continues to create confusion in the market place and impact sales opportunities for products that were under development with that partner. Competitive market pressures and the stronger dollar had a negative impact on sales of certain industrial products, particularly in Europe. Increased sales of water meters to commercial/industrial and submetering customers only partially offset these negative factors. Also, a one-time manufacturing problem resulted in increased scrap levels and reduced margins during the second quarter of 2000. This problem was identified by the company and corrected during the quarter, but certain deliveries of product were delayed while the problem was being addressed. Gross margins decreased from 40.2% in the second quarter of 1999 to 33.5% in the second quarter of 2000 due to the previously mentioned manufacturing problem and due to a higher mix of international sales of water meters with lower margins than domestic meters. The six-month margins for 2000 were 36.1%, down from 39.3% for the first six months of 1999 due to these same factors. -7-
8 Selling, engineering and administrative costs were relatively flat for the second quarter of 2000 compared to the same quarter in 1999, and decreased 0.9% for the six-month period, due to lower incentive accruals and cost controls offsetting personnel and expense increases. Interest expense increased between the periods due to higher interest rates and higher debt balances, including new long-term debt associated with an August 1999 stock repurchase. Other expense (income), net, for the second quarter of 2000 included $1,480,000 of business interruption insurance proceeds related to lost sales and margins as a result of a fire at a vendor's facility in 1999. When combined with the $750,000 of insurance proceeds recorded in the fourth quarter of 1999 and the $750,000 recorded in the first quarter of 2000, the total insurance proceeds related to the fire were $2,980,000. The effective tax rate for the first quarter of 2000 was 37.0%, down from 38.5% in 1999 due primarily to the favorable settlement of a tax audit in late 1999 and certain foreign tax credits. Earnings for the second quarter of 2000 were $1,534,000, a decrease of 45.9% over second quarter 1999 earnings of $2,834,000. Earnings for the six-month periods decrease 21.9%. These decreases were primarily due to the decreases in sales and margins. Other Matters During the quarter, the Company settled a suit alleging violation of Proposition 65, California's environmental regulation. All settlement costs had been previously accrued and the settlement did not have a material impact on the Company's financial position or results of operations. 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. 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. Forward Looking Statements Certain statements in this report, as well as other information provided from time to time by the Company or its employees, may contain forward looking statements that involve risks and uncertainties that could cause actual results to differ materially from those in the forward looking statements. The words "anticipate," "believe," "estimate," "expect," "think," "should" and "objective" or similar expressions are intended to identify forward looking statements. The forward looking statements are based on the Company's current views and assumptions and involve risks and uncertainties that include, among other things: the success or failure of new product offerings; the actions and financial condition of competitors and alliance partners; changes in domestic conditions, including housing starts; changes in foreign economic conditions, including currency fluctuations; changes in laws and regulations; changes in customer demand and fluctuations in the prices of and availability of purchased raw materials and parts. Some or all of these factors are beyond the Company's control. Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward looking statements and are cautioned not to place undue reliance on such forward looking statements. The forward looking statements made herein are made only as of the date of this document and the Company undertakes no obligation to publicly update such forward looking statements to reflect subsequent events or circumstances. -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 14, 2000. (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 2003 ANNUAL MEETING Ulice Payne, Jr. 2,684,241 6,752 664,883 Andrew J. Policano 2,688,426 2,567 664,883 Steven J. Smith 2,686,051 4,942 664,883 </TABLE> 2. DIRECTORS CONTINUING IN OFFICE WITH TERMS EXPIRING AT THE 2001 ANNUAL MEETING Robert D. Belan Kenneth P. Manning Donald J. Schuenke Pamela B. Strobel 3. DIRECTORS CONTINUING IN OFFICE WITH TERMS EXPIRING AT THE 2002 ANNUAL MEETING James L. Forbes Charles F. James, Jr. John J. Stollenwerk James O. Wright, Jr. (c) 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 2001 Annual Meeting of Shareholders must forward the proposal to the company by November 16, 2000. In addition, a shareholder who otherwise intends to present business at the 2001 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 12, 2001, then the notice will be considered untimely and the Company will not be required to present such proposal at the 2001 Annual Meeting. If the Board of Directors chooses to present such proposal at the 2001 Annual Meeting, then the persons named in the proxy solicited by the Board of Directors for the 2001 Annual Meeting may exercise discretionary voting power with respect to such proposal. -9-
10 Item 6 Exhibits and Reports on Form 8-K (a) Exhibits: (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, 2000. -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 20, 2000 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 Vice President - Controller -11-
12 EXHIBIT INDEX Page Number (27.0) Financial Data Schedule -12-