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, 1997 ------------- 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 18, 1997 - --------------------------- ---------------------------- Common Stock, $1.00 par value 2,426,904 Class B Common Stock, $.10 par value 1,125,570
2 BADGER METER, INC. INDEX Page No. -------- Part I. Financial Information: Item 1 Financial Statements: Consolidated Condensed Balance Sheets - - June 30, 1997 and December 31, 1996 3 Consolidated Condensed Statements of Operations - - Three and Six Months Ended June 30, 1997 and 1996 4 Consolidated Condensed Statements of Cash Flows - - Six Months Ended June 30, 1997 and 1996 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 6(a) Exhibits 9 Item 6(b) Reports on Form 8-K 9 Exhibit Index 11 -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, ------ 1997 1996 ---- ---- (Unaudited) <S> <C> <C> Current assets: Cash $ 469 $ 1,123 Receivables 17,236 15,498 Inventories: Finished goods 3,507 3,577 Work in process 9,295 8,466 Raw materials and purchased parts 6,347 5,463 ---------- ----------- Total inventories 19,149 17,506 Prepaid expenses 855 918 ---------- ----------- Total current assets 37,709 35,045 Property, plant and equipment, at cost 59,373 57,111 Less accumulated depreciation (39,313) (37,751) ---------- ----------- 20,060 19,360 Intangible assets, at cost less accumulated amortization 764 878 Prepaid pension 6,930 7,102 Deferred income taxes 1,250 1,257 Deferred charges and other assets 3,252 2,491 ---------- ----------- Total assets $ 69,965 $ 66,133 ========== =========== Liabilities and Shareholders' Equity ------------------------------------ Current liabilities: Short-term debt $ 3,027 $ 2,634 Payables 8,048 7,102 Accrued compensation and employee benefits 4,242 4,763 Other accrued liabilities 2,711 1,929 Income and other taxes 1,067 972 ---------- ----------- Total current liabilities 19,095 17,400 Accrued non-pension postretirement benefits 8,042 8,106 Other accrued employee benefits 3,367 2,899 Long-term debt 961 1,091 Shareholders' equity: Common Stock 3,213 3,154 Class B Common Stock 112 112 Capital in excess of par value 7,370 6,803 Reinvested earnings 30,604 28,200 Less: Employee benefit stock (935) (1,053) Treasury stock, at cost (1,864) (579) ---------- ----------- Total shareholders' equity 38,500 36,637 ---------- ----------- Total liabilities and shareholders' equity $ 69,965 $ 66,133 ========== =========== </TABLE> See accompanying notes to consolidated condensed financial statements. -3-
4 BADGER METER, INC. CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Dollars in Thousands Except Per Share Amounts) (Unaudited) <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, June 30, -------- -------- 1997 1996 1997 1996 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net sales $ 34,104 $ 30,542 $ 65,806 $ 57,177 Operating costs and expenses: Cost of sales 21,480 19,739 41,704 36,453 Marketing and administrative 7,497 6,841 14,931 13,640 Research and engineering 1,949 1,568 3,800 3,127 ----------- ----------- ---------- ---------- 30,926 28,148 60,435 53,220 ----------- ----------- ---------- ---------- Operating earnings 3,178 2,394 5,371 3,957 Interest expense 97 103 198 221 Other deductions 65 62 78 116 ----------- ----------- ---------- ---------- Earnings before income taxes 3,016 2,229 5,095 3,620 Provision for income taxes 1,116 840 1,885 1,343 ----------- ----------- ---------- ---------- Net earnings $ 1,900 $ 1,389 $ 3,210 $ 2,277 =========== =========== ========== ========== Per share amounts: * Net earnings: Primary $ .50 $ .38 $ .85 $ .63 =========== =========== ========== ========== Fully Diluted $ .49 $ .38 $ .83 $ .63 =========== =========== ========== ========== Dividends declared - Common Stock $ .12 $ .11 $ .23 $ .21 =========== =========== ========== ========== Dividends declared - Class B Common Stock $ .11 $ .10 $ .21 $ .19 =========== =========== ========== ========== Shares used in computation: Primary 3,794,858 3,649,442 3,798,949 3,647,720 =========== =========== ========== ========== Fully Diluted 3,839,051 3,649,966 3,852,595 3,656,140 =========== =========== ========== ========== </TABLE> * All per share amounts and number of shares data have been restated to reflect the 2-for-1 stock split paid April 18, 1997. 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, -------- 1997 1996 ---- ---- <S> <C> <C> Operating activities: Net earnings $ 3,210 $ 2,277 Adjustments to reconcile net earnings to net cash provided by (used for) operations: Depreciation 1,993 1,927 Amortization 330 425 Noncurrent employee benefits 594 31 Deferred income taxes 7 9 Other 48 14 Changes in: Receivables (1,738) (2,754) Inventory (1,643) (1,259) Current liabilities other than short-term debt 1,588 2,439 Prepaid expenses 63 (11) ---------- ----------- Total adjustments 1,242 821 ---------- ----------- Net cash provided by (used for) operations 4,452 3,098 ---------- ----------- Investing activities: Property, plant and equipment (2,771) (2,013) Other - net (1,031) (388) ---------- ----------- Net cash provided by (used for) investing activities (3,802) (2,401) ---------- ----------- Financing activities: Bank borrowings (repayments) 393 (1,304) Dividends (806) (718) Stock options and ESSOP 394 302 Purchase of treasury stock (1,285) 5 ---------- ----------- Net cash provided by (used for) financing activities (1,304) (1,715) ---------- ----------- Increase (decrease) in cash (654) (1,018) Beginning of year 1,123 1,177 ---------- ----------- End of period $ 469 $ 159 ========== =========== Supplemental disclosures of cash flow information: Cash paid (refunded) during the period for: Income taxes $ 1,576 $ 1,174 ========== ============ Interest $ 192 $ 177 ========== ============ </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 contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the consolidated condensed financial position at June 30, 1997 and the results of operations for the three and six-month periods ended June 30, 1997 and 1996 and the cash flows for the six-month periods ended June 30, 1997 and 1996. The results of operations for the six-month period ended June 30, 1997, are not necessarily indicative of the results to be expected for the full year. The consolidated condensed balance sheet at December 31, 1996, 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, 1996. 2. In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share", which is required to be adopted on December 31, 1997. At that time, the company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Among other provisions, the dilutive effect of stock options must be excluded under the new requirements for calculating basic earnings per share, which will replace primary earnings per share. The impact is expected to result in an increase in basic earnings per share from primary earnings per share for the quarter ended June 30, 1997 from $.50 to $.53 per share and an increase for the six months ended June 30, 1997 from $.85 to $.90 per share. The impact of Statement No. 128 on the calculation of diluted earnings per share is not expected to be material. -6-
7 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations Financial Condition Record sales caused receivables to increase 11%, or $1,738,000, from the seasonally low December 31, 1996 balance. Inventories increased 9%, or $1,643,000, primarily to support future sales needs. Deferred charges and other assets increased 31%, or $761,000, due to payments made to fund employee benefits plans and deposits made in connection with alliance programs. Payables increased 13%, or $946,000, due to increased inventory purchases and other trade payables since December 31, 1996. Accrued compensation decreased 11%, or $521,000, due primarily to payment of 1996 incentives during the first quarter of 1997, partially offset by additional accruals for 1997 incentives. Other accrued liabilities increased 41%, or $782,000, due to additional reserves for after-sale costs. Income and other taxes payable increased $95,000 due to accruals related to increased profits, partially offset by increased estimated tax payments. Short-term debt increased $393,000 since December 31, 1996. These borrowings, along with funds generated by net earnings, were used to fund the net working capital requirements, capital additions of $2,771,000, and treasury stock repurchases of $1,285,000. These cash requirements also resulted in a net reduction in cash of $654,000 during the first six months of 1997. As of June 30, 1997, the company had approximately $27,000,000 of credit lines with domestic and foreign banks of which $2,967,000 was in use. This compares to $4,211,000 in use at June 30, 1996 and $2,574,000 at December 31, 1996. 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 1997 of $34,104,000 reflect a 12% increase over sales of $30,542,000 for the same period in 1996. The increase was primarily related to higher unit sales of residential, commercial and industrial water meters and control valves. Gross profit margins increased due to improved manufacturing efficiencies. For the first six months of 1997, sales increased 15%, or $8,629,000, over the same period in 1996. This increase was primarily related to higher unit sales of residential, commercial and industrial water meters, as well as increased sales of lubrication meters. Gross profit margins remained relatively stable between the periods as improved manufacturing efficiencies were offset by changes in product mix. In addition to the above factors, strong sales of the TRACE radio-frequency automated meter reading system continued to contribute significantly to the company's revenues for both the quarter and year-to-date periods. Marketing and administrative costs increased 10% for the quarter and 9% for the six-month period ended June 30, 1997, as compared to the same periods of 1996 due to general wage and personnel increases. Research and engineering expenses increased 24% for the quarter and 22% for the six-month period ended June 30, 1997, as compared to the same periods of 1996 due to costs associated with continued product development initiatives. The effective tax rates for the second quarter of 1997 and for the first six months of 1997 were estimated to be 37.0%, which are approximately the same rates for the same periods in 1996. -7-
8 Earnings for the second quarter of 1997 were $1,900,000, an increase of 37% over second quarter 1996 earnings of $1,389,000, due primarily to the higher sales, improved margins and general cost controls. The 1997 year-to-date earnings of $3,210,000 increased 41% over the same period of 1996 earnings of $2,277,000 due primarily to higher sales and general cost controls. The percentage increases in earnings per share were slightly lower for both periods due to the impact of dilutive options in 1997. Other Matters The company is subject to contingencies relative to environmental laws and regulations. Currently, the company is in the process of resolving a suit alleging violation of California's Proposition 65. The company does not believe the ultimate resolution of this suit will have a material adverse effect on the company's financial position or results of operations. Provision has been made for 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. In June of 1997, the company announced plans for a 52,000 square foot addition to its facility in Brown Deer, Wisconsin. The addition is estimated to cost $8 million and is expected to begin in August of 1997, with completion scheduled for early 1999. -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 25, 1997. (b) Proxies were solicited for the election of ten directors. There was no solicitation in opposition to management's nominees and all nominees were re-elected. As of the record date, February 28, 1997, the total number of votes represented by shares of Common Stock and Class B Common Stock was 6,841,754. (c) 1. The Badger Meter, Inc. 1997 Stock Option Plan ("Option Plan") was approved. The Option Plan provides for the grant of options representing up to an aggregate of 200,000 shares (post-split) of Common Stock to approximately 250 employees eligible to participate in the Option Plan. The option price will be fixed by the Management Review Committee of the Board of Directors, but Incentive Stock Options will not be less than 100% of fair market value on the date of grant. <TABLE> <CAPTION> Votes Votes Votes Broker FOR AGAINST ABSTAIN Non-Votes --- ------- ------- --------- <S> <C> <C> <C> <C> STOCK OPTION PLAN 5,796,120 708,379 7,854 132,496 </TABLE> (c) 2. 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> James L.Forbes 6,079,463 565,386 196,905 Robert M. Hoffer 6,078,627 566,222 196,905 Charles F. James, Jr. 6,079,463 565,386 196,905 Kenneth P. Manning 6,079,263 565,586 196,905 Andrew J. Policano 6,079,163 565,686 196,905 Donald J. Schuenke 6,078,962 565,887 196,905 John J. Stollenwerk 6,079,463 565,386 196,905 Pamela B. Strobel 6,079,263 565,586 196,905 James O. Wright 6,079,413 565,436 196,905 James O. Wright, Jr. 6,079,463 565,386 196,905 </TABLE> (d) Not applicable. Item 6 Exhibits and Reports on Form 8-K (a) Exhibits: (10.0) The Badger Meter, Inc. 1997 Stock Option Plan (11.0) Computation of fully diluted earnings per share (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, 1997. -9-
10 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 22, 1997 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 -10-
11 EXHIBIT INDEX Page Number (10.0) The Badger Meter, Inc. 1997 Stock Option Plan 12 (11.0) Computation of fully diluted earnings per share 17 (27.0) Financial Data Schedule -11-