Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
for the quarterly period ended JUNE 30, 2004
BADGER METER, INC.
4545 W. BROWN DEER ROAD
MILWAUKEE, WISCONSIN 53223
(414) 355-0400
A Wisconsin Corporation
IRS Employer Identification No. 39-0143280
Commission File No. 1-6706
The company 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, and
has been subject to such filing requirements for the past 90 days.
The company is an accelerated filer (as defined in Rule 12b-2 of the
Exchange Act).
As of July 23, 2004, there were 3,325,296 shares of Common Stock
outstanding with a par value of $1.00 per share.
BADGER METER, INC.
QUARTERLY REPORT ON FORM 10-Q FOR PERIOD ENDED JUNE 30, 2004
INDEX
Page No.
--------
Part I. Financial Information:
Item 1 Financial Statements:
Consolidated Condensed Balance Sheets - -
June 30, 2004 and December 31, 2003 4
Consolidated Condensed Statements of Operations - -
Three and Six Months Ended June 30, 2004 and 2003 5
Consolidated Condensed Statements of Cash Flows - -
Six Months Ended June 30, 2004 and 2003 6
Notes to Consolidated Condensed Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3 Quantitative and Qualitative Disclosures about Market Risk 13
Item 4 Controls and Procedures 13
Part II. Other Information:
Item 2 Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities 13
Item 4 Submission of Matters to a Vote of Security Holders 14
Item 6(a) Exhibits 14
Item 6(b) Reports on Form 8-K 14
Exhibit Index 16
2
Special Note Regarding Forward Looking Statements
Certain statements contained in this Form 10-Q, 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. 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:
- the continued shift in the Company's business from lower cost,
local-read meters towards more expensive, value-added automatic meter
reading (AMR) systems;
- the success or failure of new Company products, including the Orion
radio frequency drive-by AMR meter, the absolute digital encoder (ADE) and
the proposed Galaxy fixed network AMR system;
- changes in competitive pricing and bids in the marketplace, and
particularly continued intense price competition on government bid
contracts for lower cost, local read meters;
- the actions (or lack thereof) of the Company's competitors;
- the Company's relationships with its alliance partners, particularly
its alliance partners that provide AMR connectivity solutions;
- the general health of the United States economy, particularly including
housing starts and the overall industrial activity;
- increases in the cost and/or availability of needed raw materials and
parts, including recent increases in the cost of brass housings as a
result of increases in the commodity prices for copper and zinc at the
supplier level;
- changes in foreign economic conditions, including currency fluctuations
such as the recent increase in the euro versus the United States dollar;
and
- changes in laws and regulations, particularly laws dealing with the use
of lead (which can be used in the manufacture of certain meters
incorporating brass housings) and Federal Communications Commission rules
affecting the use and/or licensing of radio frequencies necessary for AMR
products.
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 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.
3
Part I - Financial Information
Item 1 Financial Statements
BADGER METER, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Thousands)
June 30, December 31,
2004 2003
----------- -----------
(Unaudited)
Assets
Current assets:
Cash $ 2,858 $ 2,089
Receivables 29,842 26,304
Inventories:
Finished goods 11,182 8,010
Work in process 9,195 8,494
Raw materials 10,521 13,150
--------- ---------
Total inventories 30,898 29,654
Prepaid expenses 1,759 1,193
Deferred income taxes 3,758 3,758
--------- ---------
Total current assets 69,115 62,998
Property, plant and equipment, at cost 104,413 104,081
Less accumulated depreciation (62,832) (61,243)
--------- ---------
Net property, plant and equipment 41,581 42,838
Intangible assets, at cost less accumulated amortization 1,241 1,336
Prepaid pension 15,763 16,236
Other assets 3,605 3,354
Goodwill 6,964 7,089
--------- ---------
Total assets $ 138,269 $ 133,851
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Short-term debt $ 8,213 $ 3,543
Current portion of long-term debt 5,739 5,645
Payables 14,429 14,895
Accrued compensation and employee benefits 5,864 6,619
Warranty and after-sale costs 3,808 3,767
Income and other taxes 3,239 2,583
--------- ---------
Total current liabilities 41,292 37,052
Deferred income taxes 5,728 5,699
Accrued non-pension postretirement benefits 5,002 5,069
Other accrued employee benefits 5,931 6,410
Long-term debt 20,947 24,450
Commitments and contingencies
Shareholders' equity:
Common Stock 4,882 4,846
Capital in excess of par value 21,081 20,079
Reinvested earnings 62,581 58,928
Accumulated other comprehensive income 1,053 1,280
Less: Employee benefit stock (1,065) (1,285)
Treasury stock, at cost (29,163) (28,677)
--------- ---------
Total shareholders' equity 59,369 55,171
--------- ---------
Total liabilities and shareholders' equity $ 138,269 $ 133,851
========= =========
See accompanying notes to consolidated condensed financial statements.
4
BADGER METER, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Dollars in Thousands Except Share and Per Share Amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2004 2003 2004 2003
---------- ----------- ---------- -----------
Net sales $ 53,550 $ 47,516 $ 103,152 $ 87,091
Cost of sales 36,569 31,492 69,545 58,124
---------- ----------- ---------- -----------
Gross margin 16,981 16,024 33,607 28,967
Selling, engineering and
administration 11,614 12,598 23,642 23,872
---------- ----------- ---------- -----------
Operating earnings 5,367 3,426 9,965 5,095
Interest expense 454 412 882 968
Other expense (income), net 73 (1,179) 200 (1,222)
---------- ----------- ---------- -----------
Earnings before income taxes 4,840 4,193 8,883 5,349
Provision for income taxes 1,863 1,587 3,456 2,037
---------- ----------- ---------- -----------
Net earnings $ 2,977 $ 2,606 $ 5,427 $ 3,312
========== =========== ========== ===========
Per share amounts: *
Earnings per share:
Basic $ .91 $ .81 $ 1.65 $ 1.03
Diluted $ .88 $ .78 $ 1.61 $ 1.00
Dividends declared: $ .27 $ .26 $ .54 $ .52
Shares used in computation of:
Basic 3,288,577 3,221,003 3,281,635 3,207,961
Impact of dilutive stock
options 109,379 117,370 95,268 118,970
---------- ----------- ---------- -----------
Diluted 3,397,956 3,338,373 3,376,903 3,326,931
========== =========== ========== ===========
*Earnings per share is computed independently for each of the periods 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.
5
BADGER METER, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Six Months Ended
June 30,
----------------
2004 2003
------ ------
Operating activities:
Net earnings $5,427 $3,312
Adjustments to reconcile net
earnings to net cash provided
by (used for) operations:
Depreciation 3,550 3,594
Amortization 81 32
Tax benefit on stock options 163 264
Deferred income taxes 29 (452)
Noncurrent employee benefits 147 799
Changes in:
Receivables (3,411) (6,438)
Inventories (1,264) (3,785)
Prepaid expenses (566) (421)
Current liabilities other than debt (524) 3,015
------ ------
Total adjustments (1,795) (3,392)
------ ------
Net cash provided by (used for) operations 3,632 (80)
------ ------
Investing activities:
Property, plant and equipment (2,488) (3,857)
Other - net (251) 816
------ ------
Net cash used for investing activities (2,739) (3,041)
------ ------
Financing activities:
Net increase in short-term debt 4,670 8,389
Repayments of long-term debt (3,409) (4,501)
Dividends paid (1,774) (1,670)
Proceeds from exercise of stock options 750 405
Treasury stock purchases (694) (555)
Issuance of treasury stock 333 242
------ ------
Net cash provided by (used for)
financing activities (124) 2,310
------ ------
Increase (decrease) in cash 769 (811)
Cash - beginning of period 2,089 3,779
------ ------
Cash - end of period $2,858 $2,968
====== ======
See accompanying notes to consolidated condensed financial statements.
6
BADGER METER, INC.
NOTES TO UNAUDITED 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, 2004, the results of operations for the three and six-month
periods ended June 30, 2004 and 2003, and the cash flows for the six-month
periods ended June 30, 2004 and 2003. 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 accounting
principles generally accepted in the United States 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.
2. The consolidated condensed balance sheet at December 31, 2003 was derived
from amounts included in the Company's Annual Report on Form 10-K for the
year ended December 31, 2003. Refer to the footnotes to the financial
statements included in that report for a description of the Company's
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 adjustments in the interim.
GOODWILL Goodwill decreased from $7,089,000 at December 31, 2003 to
$6,964,000 at June 30, 2004 as a result of translation adjustments for
goodwill denominated in foreign currencies.
WARRANTY AND AFTER-SALE COSTS The Company estimates and records provisions
for warranties and other after-sale costs in the period the sale is
reported. 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, 2004 and 2003 are
as follows:
Balance at Additions Balance
beginning charged to Costs at
(In thousands) of year earnings incurred June 30
- -------------- ---------- ---------- ---------- --------
2004 $ 3,767 $ 526 $ (485) $ 3,808
2003 $ 3,597 $ 690 $ (593) $ 3,694
STOCK OPTION PLANS The Company has six stock option plans which provide
for the issuance of options to key employees and directors of the Company.
Each plan authorizes the issuance of options to purchase up to an
aggregate of 200,000 shares of Common Stock, with vesting periods of up to
ten years and maximum option terms of ten years. As of June 30, 2004,
options to purchase 148,702 shares are available for grant.
As allowed by Financial Accounting Standards Board Statement No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123), and Statement No.
148, "Accounting for Stock-based Compensation - Transition and
Disclosure," the Company has elected to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), in
accounting for its stock option plans. Under APB 25, the Company does not
recognize compensation expense upon the issuance of its stock options
because the option terms are fixed and the exercise price equals the
market price of the underlying stock on the grant date.
7
The following table illustrates the effect on net earnings and earnings
per share if the Company had applied the fair value recognition provisions
of SFAS 123 to stock-based employee compensation. These pro forma
calculations only include the effects of options granted since January 1,
1995. As such, the impacts are not necessarily indicative of the effects
on net earnings of future years.
Three months Six months
ended June 30, ended June 30,
------------------------- ------------------------
(In thousands except per share amounts) 2004 2003 2004 2003
- --------------------------------------- -------- -------- --------- --------
Net earnings, as reported $ 2,977 $ 2,606 $ 5,427 $ 3,312
Deduct: Total stock-based compensation
determined under fair value based method
for all awards since January 1, 1995,
net of related tax effects 91 80 194 163
-------- -------- --------- --------
Pro forma net earnings $ 2,886 $ 2,526 $ 5,233 $ 3,149
======== ======== ========= ========
Earnings per share:
Basic, as reported $ .91 $ .81 $ 1.65 $ 1.03
Basic, pro forma $ .88 $ .78 $ 1.59 $ .98
Diluted, as reported $ .88 $ .78 $ 1.61 $ 1.00
Diluted, pro forma $ .85 $ .76 $ 1.55 $ .95
3. During 2003, the Company established a reserve of $757,000 related to
severance costs for the termination of several employees at its
subsidiary, MecaPlus Equipements SA, which was acquired in 2002. The
corresponding offset was to goodwill. At June 30, 2004, $268,000 related
to the severances remains reserved.
4. The Company maintains a non-contributory defined benefit pension plan for
its employees. The following table sets forth the components of net
periodic pension cost for the three months ended June 30, 2004 and 2003
based on a September 30 measurement date:
Other
postretirement
Pension benefits benefits
--------------------------------- -------------------------------------
(In thousands) 2004 2003 2004 2003
- ---------------------------------- -------------- -------------- --------------- ---------------
Service cost $ 406 $ 395 $ 52 $ 26
Interest cost 628 657 117 126
Expected return on plan assets (928) (991) - -
Amortization of prior service cost (34) (34) (44) (44)
Amortization of net loss 164 102 38 30
-------------- -------------- --------------- ---------------
Net periodic pension cost $ 236 $ 129 $ 163 $ 138
============== ============== =============== ===============
The following table sets forth the components of net periodic pension cost
for the six months ended June 30, 2004 and 2003 based on a September 30
measurement date:
Other
postretirement
Pension benefits benefits
--------------------------------- -------------------------------------
(In thousands) 2004 2003 2004 2003
- --------------------------------- -------------- -------------- --------------- ---------------
Service cost $ 813 $ 789 $ 84 $ 52
Interest cost 1,255 1,315 237 251
Expected return on plan assets (1,855) (1,982) - -
Amortization of prior service cost (68) (68) (87) (87)
Amortization of net loss 328 204 77 60
-------------- -------------- --------------- ---------------
Net periodic pension cost $ 473 $ 258 $ 311 $ 276
============== ============== =============== ===============
The Company previously disclosed in its financial statements for the year
ended December 31, 2003 that it did not expect to contribute funds to its
pension plan in 2004. As of June 30, 2004, no contributions have been
made. Based on plan asset returns to date, the Company is uncertain as to
whether a contribution will need to be made to its pension plan in the
second half of 2004.
The Company also disclosed in its financial statements for the year ended
December 31, 2003 that it estimated it would pay $1,276,000 in other
postretirement benefits in 2004. As of June 30, 2004, $501,000 of such
benefits were paid, which was less than anticipated due to the timing of
payments. The Company
8
continues to believe that its estimated payments for the full year are
reasonable. Note that the amount of benefits paid in calendar year 2004
will not impact the expense for postretirement benefits for the current
year.
FASB Financial Staff Position No. FAS 106-2, "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003" (the Act), addresses the impact of the Act
enacted in December 2003. The Act provides a prescription drug benefit for
Medicare eligible employees starting in 2006. The Company does not believe
that the Act will have an impact on the Company's postretirement benefits
because benefit levels of the Company's plan do not meet the criteria set
forth by the Act to qualify for the subsidy.
5. The Company guarantees the debt of the Badger Meter Officers' Voting Trust
(BMOVT), from which the trust obtained loans from a bank on behalf of the
officers of the Company in order to purchase shares of the Company's
Common Stock. The officers' loan amounts are collateralized by the
Company's shares that were purchased with the loans' proceeds. There have
been no loans made to officers by the BMOVT since July 2002. The amount of
such debt that the Company guaranteed was $1,634,000 and $1,754,000 at
June 30, 2004 and December 31, 2003, respectively. The current loan
matures in April 2005, at which time it is expected to be renewed. The
fair market value of this guarantee at June 30, 2004 continues to be
insignificant because the collateral value of the shares exceeds the loan
amount.
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
$220,000 in the first quarter of 2004 reduced the loan from $1,285,000 at
December 31, 2003 to $1,065,000 at June 30, 2004.
6. Total comprehensive income was $2,864,000 and $3,017,000 for the
three-month periods ended June 30, 2004 and 2003, respectively. Included
in the three months ended June 30, 2004 and 2003 is ($113,000) of other
comprehensive loss and $411,000 of other comprehensive gain, respectively,
related to foreign currency translation adjustments. Total comprehensive
income was $5,200,000 and $4,314,000 for the six-month periods ended June
30, 2004 and 2003, respectively. Included in the six months ended June 30,
2004 and 2003 is ($227,000) of other comprehensive loss and $1,002,000 of
other comprehensive income, respectively, related to foreign currency
translation adjustments.
7. 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 discussed below.
The Company is subject to contingencies relating to environmental laws and
regulations. Currently, the Company is in the process of resolving an
issue relating to a landfill site. Provision has been made for all known
settlement costs, which are not material.
The Company is also a defendant in several multi-party asbestos suits
generally as a result of its membership in certain trade organizations.
The cases are pending in state courts in Mississippi, Texas and Illinois.
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.
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. The Company does not believe that there are
any significant risks. However, the Company does rely on single suppliers
for certain castings and components in several of its product lines.
Although 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 exposures on a periodic basis and makes
adjustments to reserves as appropriate.
9
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations
Business Description and Overview
Badger Meter is a leading marketer and manufacturer of products using flow
measurement and control technologies developed both internally and with other
technology companies. Its products are used to measure and control the flow of
liquids in a variety of applications. The Company's product lines fall into two
general categories, utility and industrial. Two product lines, residential and
commercial water meters (with various meter reading technology systems), are
generally sold to water utilities. Industrial sales comprise the remainder of
the Company's sales and include automotive fluid meters and systems, small
precision valves, electromagnetic meters, impeller flow meters and industrial
process meters (all with related accessories and instrumentation).
Residential and commercial water meters and related systems provide the
majority of the Company's sales. Sales are classified as local (or manual) read
meters or automatic meter reading (AMR) products. Local read meters consist of a
water meter and a register. If the device is automatic, the register digitally
encodes the mechanical reading and its radio frequency transmitter communicates
the data to a computerized system that collects the data and sends it to
specific utility computerized programs. Net sales and the corresponding net
earnings depend on unit volume and mix of products, with generally higher
margins on AMR products. There is a base level of annual business driven by
replacement units, and to a lesser extent, housing starts. It is the Company's
belief that conversion from local read meters to AMR products can accelerate
replacements of meters and result in growth. Badger Meter's strategy is to solve
customers' metering needs with its proprietary meter reading systems or other
systems available through alliances within the marketplace.
The industrial products generally serve niche markets and have in the past
utilized technology derived from utility products to serve industrial uses. As
these markets evolve, these products are becoming more specialized to meet
industrial flow measurement and communication protocol requirements. Serving
these markets allows the Company to expand its technologies into other areas of
flow measurement and control, as well as utilizing existing capacity and
spreading fixed costs over a larger sales base.
Results of Operations - Three Months Ended June 30
Net sales for the three-month period ended June 30, 2004 increased $6.0
million, or 12.7%, over the same period in 2003. Residential and commercial
water meter sales represented 74.1% of sales in the second quarter of 2004
compared to 72.1% in the second quarter of 2003. These sales increased $5.4
million to $39.7 million compared to $34.3 million in the same period in 2003.
While local (or manual) read water meter sales volumes declined slightly
compared to the same period in 2003, the second quarter of 2004 saw significant
increases in the number of units utilizing AMR technologies, which carry higher
prices and contributed to the increase in net sales for the quarter.
Industrial sales are affected by economic conditions, domestically and
internationally, in each of the markets served by the various product lines. In
total, industrial products represented 25.9% of total sales for the three months
ending June 30, 2004 compared to 27.9% for the same period in 2003. The change
was due to a higher percentage increase in water meter sales compared to
industrial sales and to the effects of exchange rates which favorably affected
sales (approximately $0.4 million). Industrial sales increased $0.6 million to
$13.8 million in the second quarter of 2004 compared to $13.2 million in the
second quarter of 2003, due primarily to higher sales of automotive fluid meters
and the effects of favorable exchange rates.
Gross margins for the second quarter of 2004 were 31.7% compared to 33.7%
in the second quarter 2003. The decrease was due to continuing price pressures
due to competition, higher brass costs and the effects of the stronger euro on
certain foreign-sourced components, offset somewhat by the higher mix of AMR
products which carry higher margins.
Selling, engineering and administration costs decreased $1.0 million, or
7.8%, in the second quarter of 2004 compared to the same period in 2003 due to
lower costs associated with the timing of recognizing certain incentive
compensation programs as well as continuing cost control efforts, offset
somewhat by normal inflationary increases. Interest expense for the second
quarter of 2004 was $42,000 higher than the same period in the prior year
primarily due to higher interest rates as a result of the Company converting
lower interest rate short-term debt to higher interest rate long-term debt in
late December 2003.
Other expense (income), net, for the three-month period ending June 30,
2004 compared to the same period in 2003 has an unfavorable variation of
$1,252,000 due primarily to transactions that took place in the second quarter
of 2003 resulting in the recognition of income, including $0.8 million in
foreign exchange gains
10
and $0.2 million from the sale of stock received when an insurance company from
which the Company purchased life insurance policies converted from a mutual
structure to a public structure. There were no similar transactions in the
second quarter of 2004.
As a result of the above, net earnings for the second quarter of 2004 were
$2,977,000 compared to net earnings in the second quarter of 2003 of $2,606,000.
On a diluted earnings per share basis, this equated to $0.88 per share for the
second quarter of 2004 compared to $0.78 for the same period in 2003.
Results of Operations - Six Months Ended June 30
Net sales for the six months ended June 30, 2004 increased nearly $16.1
million, or 18.4%, to $103.2 million from $87.1 million for the same period in
2003. Residential and commercial water meter sales represented 72.7% of sales in
the first six months of 2004 compared to 70.1% in the first six months of 2003.
These sales increased $13.9 million to $75.0 million compared to $61.1 million
in the same period in 2003. While local (or manual) read water meter sales
volumes declined slightly compared to the same period in 2003, the first six
months of 2004 saw significant increases in the number of units utilizing AMR
technologies, which carry higher prices and contributed to the increase in net
sales for the quarter. The Company's net sales in the first quarter of 2003 were
negatively influenced by the soft general economy and geopolitical concerns,
including security concerns. As a result, the company experienced longer sales
cycles (and lower sales volumes) during the first quarter of 2003 as water
utilities, the Company's principal customers, evaluated the requirements and
costs of increased security.
Industrial sales are affected by economic conditions, domestically and
internationally, in each of the markets served by the various product lines. In
total, industrial products represented 27.3% of total sales for the six months
ending June 30, 2004 compared to 29.9% for the same period in 2003. The change
was due to a higher percentage increase in water meter sales compared to
industrial sales and to the effects of exchange rates which favorably affected
sales (approximately $1.4 million). Industrial sales increased $2.2 million to
$28.2 million in the first six months of 2004 compared to $26.0 million in the
same period in 2003 due to slightly higher volumes in most product lines.
Gross margins for the first six months of 2004 were 32.6% compared to
33.3% in the same period in 2003. The decrease was due to continuing price
pressures due to competition, higher brass costs and the effects of the stronger
euro on certain foreign-sourced components, offset somewhat by the higher mix of
AMR products which carry higher margins.
Selling, engineering and administration costs decreased $0.2 million, or
1.0%, in the six-month period ending June 30, 2004 compared to the same period
in 2003 due to continuing cost control efforts offset somewhat by normal
inflationary increases. Interest expense for the six months ending June 30, 2004
was $86,000 lower due to lower debt balances offset by higher interest rates as
a result of the Company converting lower interest rate short-term debt to higher
interest rate long-term debt in late December 2003.
Other expense (income), net, for the six-month period ending June 30, 2004
compared to the same period in 2003 has an unfavorable variation of $1,422,000
due primarily to transactions that took place in the second quarter of 2003
resulting in the recognition of income, including $0.9 million in foreign
exchange gains and recognizing a gain of $0.2 million of stock received when an
insurance company from which the Company purchased life insurance policies
converted from a mutual structure to a public structure. There were no similar
transactions in 2004.
As a result of the above, net earnings for the first six months of 2004
were $5,427,000 compared to net earnings for the first six months of 2003 of
$3,312,000. On a diluted earnings per share basis, this equated to $1.61 per
share for the first six months of 2004 compared to $1.00 for the same period in
2003.
Liquidity and Capital Resources
The main sources of liquidity for the Company typically are cash from
operations and borrowing capacity. For the first six months of 2004, $3.6
million of cash was provided by operations, primarily as the net result of
increased earnings, offset by increases in receivables and inventory balances
associated with increased business and decreases in current liabilities.
The change in the receivables balance from $26.3 million at December 31,
2003 to $29.8 million at June 30, 2004 was primarily due to increased sales and
the timing of certain customer payments.
11
Inventories at June 30, 2004 increased nearly $1.3 million, or 4.2%. This
increase was primarily due to a build up of certain longer lead-time electronic
materials and stock for new product offerings (some of which was affected by the
strength of the euro) as well as increased costs of certain metal alloys.
Capital expenditures of $2.5 million were less than depreciation expense
of $3.6 million for the first six months of 2004 resulting in a net decrease in
net property, plant and equipment balances from December 31, 2003.
Prepaid pension declined from $16.2 million at December 31, 2003 to $15.8
million at June 30, 2004 due to pension expense. Goodwill decreased due to the
effects of foreign currency translation adjustments.
Short-term debt and the current portion of long-term debt at June 30, 2004
increased to a combined $14.0 million versus a balance at the end of 2003 of
$9.2 million. This increase was primarily due to cash required for increased
receivables and inventory balances, capital expenditures, repayments of
long-term debt and dividends. The long-term debt amounts declined as a result of
regularly scheduled payments.
Payables decreased to $14.4 million at June 30, 2004 from $14.9 million at
December 31, 2003 primarily as a result of the timing of payments. Income and
other taxes increased to $3.2 million from nearly $2.6 million at December 31,
2003 as a result of the timing of tax payments and increased earnings in the
current year.
Common stock and capital in excess of par value have increased from
December 31, 2003 due to new shares issued in connection with the exercise of
stock options and purchases by the Employee Savings and Stock Ownership Plan
(ESSOP). Treasury stock increased due to shares repurchased during the period.
Employee benefit stock decreased $220,000 due to shares released as a result of
a payment made on the ESSOP loan during the first quarter of 2004.
Badger Meter's financial condition remains strong. The Company believes
that its operating cash flows, available borrowing capacity including $27.5
million of unused credit lines, and its ability to raise additional capital
provide adequate resources to fund ongoing operating requirements, future
capital requirements and the development of new products.
Other Matters
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 relative to environmental laws and
regulations. Currently, the Company is in the process of resolving an issue
relative to a landfill site. Provision has been made for all known settlement
costs, which are not material.
The Company is also a defendant in several multi-party asbestos suits
generally as a result of its membership in certain trade organizations. The
cases are pending in state courts in Mississippi, Texas and Illinois. 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.
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.
Off-Balance Sheet Arrangements and Contractual Obligations
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, 2003, and have not materially
changed since that report was filed.
12
Item 3 Quantitative and Qualitative Disclosures about Market Risk
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 Risk"
in the Company's Annual Report on Form 10-K for the year ended December 31,
2003, and have not materially changed since that report was filed.
Item 4 Controls and Procedures
In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934
(the "Exchange Act"), as of the end of the second quarter 2004, an evaluation
was carried out under the supervision and with the participation of the
Company's management, including the Company's Chairman, President and Chief
Executive Officer and the Company's Senior Vice President - Finance, Chief
Financial Officer and Treasurer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures (as defined in the
rules promulgated under the Exchange Act). 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 second quarter 2004 to ensure
that material information relating to the Company, including its consolidated
subsidiaries, was made known to them by others within those entities,
particularly during the period in which this Quarterly Report on Form 10-Q was
being prepared.
There was no change in the Company's internal control over financial
reporting that occurred during the second quarter 2004 that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
Part II - Other Information
Item 2 Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
The Company has undertaken stock repurchases from time to time to offset
dilution created by shares issued for stock options and other corporate
purposes, as well as to repurchase shares when market conditions are favorable.
For the first half of 2004, the Company repurchased 17,989 shares of Common
Stock for $694,000. As of the end of the second quarter of 2004, the Company has
remaining availability to repurchase up to an additional $11.3 million in Common
Stock pursuant to the Board of Directors' authorizations. The purchase of Common
Stock is at the Company's discretion, subject to prevailing financial and market
conditions.
The following chart discloses information regarding the shares of the
Company's Common Stock repurchased during the second quarter of fiscal 2004, all
of which were purchased pursuant to the Board of Directors' authorizations:
Total Number of Maximum Number
Shares Purchased of Shares that May
as Part of Publicly Yet Be Purchased
Total Number of Average Price Paid Announced Plans or under the Plans or
Period Shares Purchased Per Share Programs Programs
- ------------------------------------------------------------------------------------------------------------------------------
January 1 to January 31 5,650 $37.01 5,650 268,189
- ------------------------------------------------------------------------------------------------------------------------------
February 1 to February 29 1,828 $36.63 1,828 266,361
- ------------------------------------------------------------------------------------------------------------------------------
March 1 to March 31 4,945 $36.87 4,945 261,416
- ------------------------------------------------------------------------------------------------------------------------------
April 1 to April 30 2,280 $41.79 2,280 259,136
- ------------------------------------------------------------------------------------------------------------------------------
May 1 to May 31 2,920 $42.86 2,920 256,216
- ------------------------------------------------------------------------------------------------------------------------------
June 1 to June 30 366 $42.31 366 255,850
- ------------------------------------------------------------------------------------------------------------------------------
Total/Average 17,989 $38.59 17,989 255,850
- ------------------------------------------------------------------------------------------------------------------------------
13
On December 4, 2000, the Board of Directors authorized the repurchase of
up to 600,000 shares of Badger Meter, Inc. Common Stock over a three-year
period. The Company publicly announced the stock repurchase plan in a press
release issued on December 4, 2000. At November 14, 2003, the Company had
repurchased a total of 320,945 shares. The Board authorized a two-year extension
of the repurchase plan, effective December 1, 2003, allowing the Company to
repurchase up to the remaining 279,055 shares prior to December 1, 2005. The
Company publicly announced the extension of the stock repurchase plan in a press
release issued on November 14, 2003.
Item 4 Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Shareholders held on April 23, 2004,
the following individuals were elected to the Board of Directors:
Votes Votes
NAME FOR WITHHELD Not Voted
- ---- --------- -------- ---------
DIRECTORS ELECTED TO THREE-YEAR
TERMS EXPIRING AT THE 2007 ANNUAL MEETING
Kenneth P. Manning 3,095,612 11,665 193,546
John J. Stollenwerk 3,077,576 29,701 193,546
DIRECTORS CONTINUING IN OFFICE WITH TERMS EXPIRING AT THE 2005 ANNUAL MEETING
Thomas J. Fischer
James L. Forbes
Richard A. Meeusen
DIRECTORS CONTINUING IN OFFICE WITH TERMS EXPIRING AT THE 2006 ANNUAL MEETING
Ulice Payne, Jr.
Andrew J. Policano
Steven J. Smith
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit No. Description
- ----------- -----------
31.1 Certification by the Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification by the Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32 Certification of Periodic Financial Report by the Chief Executive
Officer and Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
A current report was filed on May 27, 2004 under Items 4 and 7 of Form 8-K
disclosing a change in the independent auditors for the Company's Badger Meter
Employee Savings and Stock Ownership Plan, and an amendment to such current
report was filed on June 4, 2004.
A current report was furnished on July 19, 2004 under Items 7 and 12 of
Form 8-K to disclose the full contents of the Company's press release that
reported the results of the three and six-month periods ended June 30, 2004.
14
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, 2004 By /s/ Richard A. Meeusen
------------------------
Richard A. Meeusen
Chairman, President and Chief Executive
Officer
By /s/ Richard E. Johnson
------------------------
Richard E. Johnson
Senior Vice President - Finance,
Chief Financial Officer and Treasurer
By /s/ Beverly L.P. Smiley
------------------------
Beverly L.P. Smiley
Vice President - Controller
15
BADGER METER, INC.
QUARTERLY REPORT ON FORM 10-Q FOR PERIOD ENDED JUNE 30, 2004
EXHIBIT INDEX
Exhibit No. Description
- ---------- -----------
31.1 Certification by the Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification by the Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32 Certification of Periodic Financial Report by the Chief Executive
Officer and Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
16