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, 1998 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 27, 1998 - ----------------------------- ---------------------------- Common Stock, $1.00 par value 2,514,904 Class B Common Stock, $.10 par value 1,119,268
2 BADGER METER, INC. INDEX <TABLE> <CAPTION> Page No. Part I. Financial Information: <S> <C> <C> Item 1 Financial Statements: Consolidated Condensed Balance Sheets - - June 30, 1998 and December 31, 1997 3 Consolidated Condensed Statements of Operations - - Three and Six Months Ended June 30, 1998 and 1997 4 Consolidated Condensed Statements of Cash Flows - - Six Months Ended June 30, 1998 and 1997 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 Matters 10 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, 1998 1997 ---- ---- (Unaudited) <S> <C> <C> Current assets: Cash $ 260 $ 1,055 Receivables 19,409 19,193 Inventories: Finished goods 3,895 4,095 Work in process 10,143 10,871 Raw materials and purchased parts 6,656 6,632 ----------- ----------- Total inventories 20,694 21,598 Prepaid expenses 689 693 ----------- ----------- Total current assets 41,052 42,539 Property, plant and equipment, at cost 72,737 64,407 Less accumulated depreciation (41,625) (40,423) ------------ ----------- 31,112 23,984 Intangible assets, at cost less accumulated amortization 1,551 650 Prepaid pension 6,461 6,751 Deferred income taxes 2,264 2,264 Deferred charges and other assets 3,860 6,109 ----------- ----------- Total assets $ 86,300 $ 82,297 =========== =========== </TABLE> <TABLE> Liabilities and Shareholders' Equity <S> <C> <C> Current liabilities: Short-term debt $ 11,557 $ 11,245 Payables 7,136 7,196 Accrued compensation and employee benefits 4,962 5,339 Other accrued liabilities 4,077 3,630 Income and other taxes 715 1,259 ----------- ----------- Total current liabilities 28,447 28,669 Accrued non-pension postretirement benefits 7,546 7,807 Other accrued employee benefits 3,764 3,426 Long-term debt 797 928 Shareholders' equity: Common Stock 3,323 3,240 Class B Common Stock 112 112 Capital in excess of par value 10,247 8,315 Reinvested earnings 35,893 33,057 Less: Employee benefit stock (811) (917) Treasury stock, at cost (3,018) (2,340) ----------- ----------- Total shareholders' equity 45,746 41,467 ----------- ----------- Total liabilities and shareholders' equity $ 86,300 $ 82,297 =========== =========== </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, -------- -------- 1998 1997 1998 1997 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net sales $ 36,430 $ 34,104 $ 69,929 $ 65,806 Operating costs and expenses: Cost of sales 22,163 21,480 42,219 41,704 Marketing and administrative 8,309 7,562 16,928 15,009 Research and engineering 2,221 1,949 4,308 3,800 ----------- ----------- ----------- ----------- 32,693 30,991 63,455 60,513 ----------- ----------- ----------- ----------- Operating earnings 3,737 3,113 6,474 5,293 Interest expense 104 97 248 198 ----------- ----------- ----------- ----------- Earnings before income taxes 3,633 3,016 6,226 5,095 Provision for income taxes 1,338 1,116 2,334 1,885 ----------- ----------- ----------- ----------- Net earnings $ 2,295 $ 1,900 $ 3,892 $ 3,210 =========== =========== =========== =========== Per share amounts: * Net earnings: Basic $ .63 $ .53 $ 1.07 $ .90 =========== =========== =========== =========== Diluted $ .59 $ .50 $ 1.00 $ .85 =========== =========== =========== =========== Dividends declared - Common Stock $ .15 $ .12 $ .30 $ .23 =========== =========== =========== =========== Dividends declared - Class B Common Stock $ .14 $ .11 $ .27 $ .21 =========== =========== =========== =========== Weighted-average shares used in computation: Basic 3,632,886 3,567,471 3,622,874 3,584,438 Impact of dilutive stock options 269,990 227,387 278,057 214,511 ----------- ----------- ----------- ----------- Diluted 3,902,876 3,794,858 3,900,931 3,798,949 =========== =========== =========== =========== </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, -------- 1998 1997 ---- ---- <S> <C> <C> Operating activities: Net earnings $ 3,892 $ 3,210 Adjustments to reconcile net earnings to net cash provided by (used for) operations: Depreciation 2,609 1,993 Amortization 77 114 Noncurrent employee benefits 473 594 Changes in: Receivables (216) (1,738) Inventory 904 (1,643) Current liabilities other than short-term debt (534) 1,533 Prepaid expenses and other 4 70 ----------- ----------- Total adjustments 3,317 923 ----------- ----------- Net cash provided by (used for) operations 7,209 4,133 ----------- ----------- Investing activities: Property, plant and equipment (9,737) (2,693) Other - net 1,271 (761) ----------- ----------- Net cash provided by (used for) investing activities (8,466) (3,454) ----------- ----------- Financing activities: Bank borrowings (repayments) 181 363 Dividends (1,056) (806) Stock options and ESSOP 2,015 395 Treasury stock transactions (678) (1,285) ----------- ----------- Net cash provided by (used for) financing activities 462 (1,333) ----------- ----------- Increase (decrease) in cash (795) (654) Beginning of year 1,055 1,123 ----------- ----------- End of period $ 260 $ 469 =========== ============ Supplemental disclosures of cash flow information: Cash paid (refunded) during the period for: Income taxes $ 2,178 $ 1,576 =========== ============ Interest $ 335 $ 192 =========== ============ </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, 1998 and the results of operations for the three and six-month periods ended June 30, 1998 and 1997 and the cash flows for the six-month periods ended June 30, 1998 and 1997. 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 1997 data to conform with the 1998 presentation. 2. The consolidated condensed balance sheet at December 31, 1997, 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, 1997. 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, 1998, the company repurchased 13,058 shares of common stock for an aggregate purchase price of $678,000. 4. In February of 1998, the company entered into an interest rate swap agreement which fixes the interest rate on $5 million of commercial paper at 5.7% for three years. 5. 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, 1997. All upgrades are expected to be completed by the second quarter of 1999 and management does not expect to incur any significant costs in excess of normal software upgrade costs. Testing will begin as soon as the implementation is complete. The company does not expect to have any problems with its products as a result of this issue. 6. During the past three and a half calendar years, the various trust beneficiaries of the Wright Family Voting Trust ("WFVT") have sold the company common stock for diversification purposes. These sales totaled 34,984 shares in 1995, 38,850 shares in 1996, 21,400 in 1997 and 10,950 through June 30, 1998. The WFVT has indicated that its beneficiaries presently intend to continue diversifying in the future. The company does not have a commitment to purchase any of these shares. 7. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards Number 133 "Accounting for Derivative Instruments and Hedging Activities", which is required to be adopted in years beginning after June 15, 1999. Because of the company's minimal use of derivatives, management does not anticipate that the adoption of the new Statement will have a significant effect on earnings or the financial position of the company. 8. On May 15, 1998, the Board of Directors of the company adopted a Shareholder Rights Plan declaring a dividend of one right for each share of the company's common stock outstanding on or after June 1, 1998. In the event a person or group acquires or seeks to acquire 20% or more of the outstanding common stock of the company, the rights may be exercised (except by the acquiring person whose rights are canceled). Upon exercise, each right entitles the holder to purchase from the company one share of common stock at an initial exercise price of $140 (subject to adjustment) or, upon the occurrence of certain events, common stock of the company or the acquiring company having a market value equivalent to two times the exercise price. Subject to certain conditions, the rights are redeemable by the Board of Directors for $.01 per right and are exchangeable for shares of common stock. The rights have no voting power and expire on May 26, 2008. -6-
7 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations Financial Condition Receivables increased 1.1%, or $216,000, from the December 31, 1997 balance due to increased sales. Inventories decreased 4.2%, or $904,000, as increased production requirements were offset by efficient inventory management. Intangible assets increased $901,000 due to goodwill and other intangible assets recorded in connection with the acquisition of a fire service product line. Property, plant and equipment (at cost) increased $8,330,000 due to regular payments in connection with the Milwaukee facility expansion plus other equipment purchases. Prepaid pension decreased $290,000 due to the recording of normal pension expense with no funding payments required due to the overfunded status of the plan. Deferred charges and other assets decreased $2,249,000, due primarily to the completion of the acquisition of the fire service product line. Funds paid into escrow in 1997 were recorded as deferred charges until the second quarter of 1998, at which time the purchase price was allocated to the appropriate inventory, equipment and intangibles accounts. Payables remained relatively stable since December 31, 1997. Accrued compensation and employee benefits decreased 7%, or $377,000, due primarily to payments of 1997 incentive compensation during the first quarter of 1998. Other accrued liabilities increased 12.3%, or $447,000, due primarily to additional reserves for after-sale costs. Income and other taxes payable decreased $544,000 due to the timing of estimated tax payments. Accrued non-pension postretirement benefits decreased $261,000 since December 31, 1997, and other accrued employee benefits increased $338,000 due to timing of benefit payments. Long-term debt decreased $131,000 due primarily to a $100,000 regular payment made on the debt related to the Employee Savings and Stock Ownership Plan ("The ESSOP"). Since December 31, 1997, 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. Short-term debt increased $312,000 since December 31, 1997, as cash required for fixed asset additions (primarily the facility expansion) exceeded cash generated by net earnings. As of June 30, 1998, the company had approximately $38,000,000 of credit lines with domestic and foreign banks of which $11,557,000 was in use. This compares to $2,967,000 in use at June 30, 1997, and $11,245,000 at December 31, 1997. 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 1998 of $36,430,000 reflect a 6.8% increase over sales of $34,104,000 for the same period in 1997. Likewise, net sales for the first six months of 1998 increased 6.3% or $4,123,000 over the same period in 1997. These increases were primarily related to higher unit sales of lubrication meters and residential water meters, including shipments in connection with the City of Philadelphia project. These and other domestic sales offset decreases in international water meter sales during 1998 as compared to the same periods in 1997. Gross profit margins increased from 37.0% in the second quarter of 1997 to 39.2% in the second quarter of 1998. For the six month periods, gross profit margins increased from 36.6% in 1997 to 39.6% in 1998. These increases were primarily due to efficiencies generated by increased manufacturing capacity utilization related to residential water meters. -7-
8 Marketing and administrative costs increased 9.9% for the quarter and 12.8% for the six-month period ended June 30, 1998, as compared to the same periods of 1997 due to general wage and cost increases, plus additional staffing to support increased sales. Research and engineering expenses increased 14% for the quarter and 13.4% for the six-month period ended June 30, 1998, as compared to the same periods of 1997 due to increased staffing and other costs associated with continued product development initiatives. Interest expense increased between the periods due to higher debt balances. The effective tax rate for the first six months of 1998 was estimated to be 37.5%, which is slightly higher than the 37.0% for the first six months of 1997 due to reduced tax benefits on lower international sales and other changes in tax credit estimates. Earnings for the second quarter of 1998 were $2,295,000, an increase of 20.8% over second quarter 1997 earnings of $1,900,000. The 1998 year-to-date earnings of $3,892,000 increased 21.2% over the same period of 1997 earnings of $3,210,000. These increases were due primarily to higher sales and improved margins. The percentage increases in earnings per share were lower for both periods due to the impact of dilutive options and increased shares outstanding. Other Matters The company is subject to contingencies relative to environmental laws and regulations. Currently, the company is in the process of resolving an issue relative to a landfill site and a suit alleging violation of California's Proposition 65. 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 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 24, 1998. (b) 1. Proxies were solicited for the amendment of Article Fifth of the Restated Articles of Incorporation to classify the Board of Directors, make the removal of directors possible only for cause, and permit the future amendments of Article Fifth only with a supermajority. There was no solicitation in opposition to these amendments, and all passed with at least 94.3% votes in favor of the amendment. As of the record date, February 27, 1998, the total number of votes represented by shares of Common Stock and Class B Common Stock was 13,758,082. 2. Proxies were solicited for the election of ten directors, divided into three classes. There was no solicitation in opposition to management's nominees and all nominees were re-elected with at least 99% of the votes cast. 3. Proxies were solicited for the amendment of the Restated Articles of Incorporation to increase the authorized shares of Common Stock from 5,000,000 to 20,000,000 and Class B Common Stock from 5,000,000 to 20,000,000. 98.5% of the votes were cast in favor of the amendment. <TABLE> <CAPTION> Votes Votes Votes Broker (c) 1. Amendments to Article Fifth: FOR AGAINST ABSTAIN Non-Votes --- ------- ------- --------- <S> <C> <C> <C> <C> Classified Board 11,523,501 642,919 15,602 430,139 Director Removal for Cause 11,515,415 636,472 30,135 430,139 Supermajority to Amend Article 11,488,034 661,437 32,551 430,139 </TABLE> 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> CLASS ONE - ONE-YEAR TERM James L. Forbes 12,607,041 5,120 1,145,921 Charles F. James, Jr. 12,607,041 5,120 1,145,921 John J. Stollenwerk 12,607,081 5,080 1,145,921 James O. Wright, Jr. 12,606,436 5,725 1,145,921 CLASS TWO - TWO-YEAR TERM James O. Wright 12,606,216 5,945 1,145,921 Robert M. Hoffer 12,606,941 5,220 1,145,921 Andrew J. Policano 12,607,041 5,120 1,145,921 CLASS THREE - THREE-YEAR TERM Kenneth P. Manning 12,607,041 5,120 1,145,921 Donald J. Schuenke 12,606,921 5,240 1,145,921 Pamela B. Strobel 12,604,427 7,734 1,145,921 </TABLE> -9-
10 <TABLE> <CAPTION> Votes Votes Votes FOR AGAINST ABSTAIN --- ------- ------- <S> <C> <C> <C> 3. Amendment to Increase Number of Authorized Shares 12,418,863 172,778 20,520 </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 1999 Annual Meeting of Shareholders must forward the proposal to the company by November 24, 1998. After February 10, 1999, notice to the company of a shareholder proposal submitted other than pursuant to Rule 14a-8 will be considered untimely, and the persons named in the proxies solicited by the Board of Directors for the 1999 Annual Meeting of Shareholders may exercise discretionary voting power with respect to any such proposal as to which the company does not receive timely notice. Item 6 Exhibits and Reports on Form 8-K (a) Exhibits: ( 3.0) (i) Articles of Incorporation ( 3.0) (ii) By-laws ( 4.0) Rights Agreement, dated as of May 26, 1998, between Badger Meter, Inc. and Firstar Trust Company. [Incorporated by reference to Exhibit (4.1) to the Registration Statement on Form 8-A of Badger Meter, Inc., dated as of May 26, 1998 (Commission File No. 1-67706)]. (27.0) Financial Data Schedule (b) Reports on Form 8-K: A current report on Form 8-K, dated May 26, 1998, reporting under Item 5 "Other Events" the adoption of a Shareholder Rights Plan was filed with the Securities and Exchange Commission. -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 29, 1998 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 <TABLE> <CAPTION> Page Number <S> <C> <C> ( 3.0) (i) Articles of Incorporation 13 ( 3.0) (ii) By-laws 19 ( 4.0) Rights Agreement, dated as of May 26, 1998, between Badger Meter, Inc. and Firstar Trust Company. [Incorporated by reference to Exhibit (4.1) to the Registration Statement on Form 8-A of Badger Meter, Inc., dated as of May 26, 1998 (Commission File No. 1-6706)]. (27.0) Financial Data Schedule </TABLE> -12-