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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 SEPTEMBER 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 October 15, 2004, there were 3,335,465 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 SEPTEMBER 30, 2004
INDEX
Page No.
Part I. Financial Information:
Item 1 Financial Statements:
Consolidated Condensed Balance Sheets --
September 30, 2004 and December 31, 2003 4
Consolidated Condensed Statements of Operations --
Three and Nine Months Ended September 30, 2004 and 2003 5
Consolidated Condensed Statements of Cash Flows --
Nine Months Ended September 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 Unregistered Sales of Equity Securities and Use of Proceeds 13
Item 6 Exhibits 14
Signatures 15
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 toward more expensive, value-added automatic meter
reading (AMR) systems;
- the success or failure of new Company products, including the Orion(R)
radio frequency drive-by AMR meter, the absolute digital encoder (ADE)
and the proposed Galaxy(TM) fixed network AMR system;
- changes in competitive pricing and bids in both the domestic and
foreign marketplaces, and particularly in 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 and foreign economies,
particularly including housing starts in the United States and 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 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.
All of these factors are beyond the Company's control to varying
degrees. Shareholders, potential investors and other readers are urged to
consider these factors carefully in evaluating the forward looking statements
and are cautioned not to place undue reliance on such forward looking
statements. The forward looking statements made in this document are made only
as of the date of this document and the Company assumes no obligation, and
disclaims any obligation, to update any such forward looking statements to
reflect subsequent events or circumstances.
3
Part I - Financial Information
Item 1 Financial Statements
BADGER METER, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Thousands)
September 30, December 31,
2004 2003
---- ----
(Unaudited)
Assets
Current assets:
Cash $ 2,015 $ 2,089
Receivables 31,024 26,304
Inventories:
Finished goods 11,510 8,010
Work in process 9,851 8,494
Raw materials 10,854 13,150
--------- ---------
Total inventories 32,215 29,654
Prepaid expenses 1,649 1,193
Deferred income taxes 3,779 3,758
--------- ---------
Total current assets 70,682 62,998
Property, plant and equipment, at cost 105,784 104,081
Less accumulated depreciation (64,383) (61,243)
--------- ---------
Net property, plant and equipment 41,401 42,838
Intangible assets, at cost less accumulated amortization 1,215 1,336
Prepaid pension 17,526 16,236
Other assets 3,531 3,354
Goodwill 6,754 7,089
--------- ---------
Total assets $ 141,109 $ 133,851
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Short-term debt $ 8,910 $ 3,543
Current portion of long-term debt 5,662 5,645
Payables 13,841 14,895
Accrued compensation and employee benefits 6,593 6,619
Warranty and after-sale costs 3,888 3,767
Income and other taxes 3,499 2,583
--------- ---------
Total current liabilities 42,393 37,052
Deferred income taxes 5,764 5,699
Accrued non-pension postretirement benefits 4,874 5,069
Other accrued employee benefits 6,027 6,410
Long-term debt 19,797 24,450
Commitments and contingencies
Shareholders' equity:
Common Stock 4,904 4,846
Capital in excess of par value 21,541 20,079
Reinvested earnings 65,043 58,928
Accumulated other comprehensive income 1,150 1,280
Less: Employee benefit stock (1,065) (1,285)
Treasury stock, at cost (29,319) (28,677)
--------- ---------
Total shareholders' equity 62,254 55,171
--------- ---------
Total liabilities and shareholders' equity $ 141,109 $ 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 Nine Months Ended
September 30, September 30,
------------ ------------
2004 2003 2004 2003
---- ---- ---- ----
Net sales $ 53,340 $ 48,613 $ 156,492 $ 135,704
Cost of sales 35,437 32,516 104,982 90,640
----------- ----------- ----------- -----------
Gross margin 17,903 16,097 51,510 45,064
Selling, engineering and
administration 11,323 11,317 34,965 35,189
----------- ----------- ----------- -----------
Operating earnings 6,580 4,780 16,545 9,875
Interest expense 406 423 1,288 1,391
Other expense (income), net 114 68 314 (1,154)
----------- ----------- ----------- -----------
Earnings before income taxes 6,060 4,289 14,943 9,638
Provision for income taxes 2,671 1,645 6,127 3,682
----------- ----------- ----------- -----------
Net earnings $ 3,389 $ 2,644 $ 8,816 $ 5,956
=========== =========== =========== ===========
Per share amounts: *
Earnings per share:
Basic $ 1.02 $ .82 $ 2.68 $ 1.85
Diluted $ .99 $ .80 $ 2.60 $ 1.81
Dividends declared: $ .28 $ .27 $ .82 $ .79
Shares used in computation of:
Basic 3,306,633 3,237,605 3,290,027 3,216,267
Impact of dilutive stock
options 122,006 79,873 98,917 69,699
----------- ----------- ----------- -----------
Diluted 3,428,639 3,317,478 3,388,944 3,285,966
=========== =========== =========== ===========
*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 to date.
See accompanying notes to consolidated condensed financial statements.
5
BADGER METER, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Nine Months Ended
September 30,
-------------
2004 2003
---- ----
Operating activities:
Net earnings $ 8,816 $ 5,956
Adjustments to reconcile net
earnings to net cash provided
by (used for) operations:
Depreciation 5,331 5,426
Amortization 113 88
Tax benefit on stock options 374 397
Deferred income taxes 44 (758)
Noncurrent employee benefits 352 880
Contributions to pension plan (2,000) 0
Changes in:
Receivables (4,670) (3,975)
Inventories (2,635) (4,171)
Prepaid expenses (456) (579)
Current liabilities other than debt 292 5,040
------- -------
Total adjustments (3,255) 2,348
------- -------
Net cash provided by operations 5,561 8,304
------- -------
Investing activities:
Property, plant and equipment (4,022) (5,350)
Other - net (177) 234
------- -------
Net cash used for investing activities (4,199) (5,116)
------- -------
Financing activities:
Net increase in short-term debt 5,367 5,885
Repayments of long-term debt (4,606) (5,392)
Dividends paid (2,701) (2,545)
Proceeds from exercise of stock options 930 533
Treasury stock purchases (917) (865)
Issuance of treasury stock 491 358
------- -------
Net cash used for
financing activities (1,436) (2,026)
------- -------
Increase (decrease) in cash (74) 1,162
Cash - beginning of period 2,089 3,779
------- -------
Cash -- end of period $ 2,015 $ 4,941
======= =======
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 Company's consolidated condensed financial
position at September 30, 2004, results of operations for the three and
nine-month periods ended September 30, 2004 and 2003, and cash flows for
the nine-month periods ended September 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
$6,754,000 at September 30, 2004 as a result of translation adjustments for
goodwill denominated in foreign currencies and as a result of reversing the
remaining unused severance accrual of $273,000 related to the termination
of several employees in conjunction with the company's acquisition of
MecaPlus Equipments SA in 2002.
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 nine-month periods ended September 30, 2004 and 2003 are as follows:
Balance at Additions Balance
beginning charged to Costs at
(In thousands) of year earnings incurred September 30
-----------------------------------------------------------------------------------
2004 $3,767 $ 947 $(826) $3,888
2003 $3,597 $1,086 $(923) $3,760
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 September 30, 2004, options to
purchase 149,002 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 Nine months
ended September 30, ended September 30,
------------------- -------------------
(In thousands except per share amounts) 2004 2003 2004 2003
--------------------------------------------------------------------------------------------------------------------
Net earnings, as reported $ 3,389 $ 2,644 $ 8,816 $ 5,956
Deduct: Total stock-based compensation
determined under fair value based method
for all awards since January 1, 1995,
net of related tax effects 88 93 283 269
--------- --------- --------- --------
Pro forma net earnings $ 3,301 $ 2,551 $ 8,533 $ 5,687
========= ========= ========= =========
Earnings per share:
Basic, as reported $ 1.02 $ .82 $ 2.68 $ 1.85
Basic, pro forma $ 1.00 $ .79 $ 2.59 $ 1.77
Diluted, as reported $ .99 $ .80 $ 2.60 $ 1.81
Diluted, pro forma $ .96 $ .77 $ 2.47 $ 1.73
3. The Company maintains a non-contributory defined benefit pension plan for
its domestic employees and a non-contributory postretirement plan that
provides medical benefits for certain domestic retirees and eligible
dependents. The following table sets forth the components of net periodic
benefit cost for the three months ended September 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 $ 41 $ 26
Interest cost 628 657 119 126
Expected return on plan assets (928) (991) - -
Amortization of prior service cost (34) (34) (43) (44)
Amortization of net loss 164 102 38 30
--------- --------- ------ -------
Net periodic benefit cost $ 236 $ 129 $ 155 $ 138
========= ========= ====== =======
The following table sets forth the components of net periodic benefit cost
for the nine months ended September 30, 2004 and 2003 based on a September
30 measurement date:
Other
postretirement
Pension benefits benefits
- -------------------------------------------------------------------------------------------------------------------
(In thousands) 2004 2003 2004 2003
-------------- ---- ---- ---- ----
Service cost $ 1,219 $ 1,184 $ 125 $ 78
Interest cost 1,883 1,972 356 377
Expected return on plan assets (2,783) (2,973) - -
Amortization of prior service cost (102) (102) (130) (131)
Amortization of net loss 492 306 115 90
--------- --------- ------ -------
Net periodic benefit cost $ 709 $ 387 $ 466 $ 414
========= ========= ====== =======
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 the year progressed and the return on assets
declined, the Company elected to make a $2 million contribution to fully
fund the plan at the end of the third quarter of 2004. The Company will not
make any additional contributions for the remainder 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 September 30, 2004, $848,000 of such
benefits were paid, which was less than anticipated due to the timing of
payments and lower than expected benefit payment obligations. Therefore,
the Company believes that its estimated payments for the full year may be
slightly less than originally expected. The amount of actual benefits paid
in 2004 will not impact the expense recognized for postretirement benefits
for the year as that amount is based upon an actuarial valuation.
8
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 benefit
obligation because benefit levels of the Company's plan currently do not
meet the criteria set forth by the Act to qualify for the subsidy.
4. 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 Company had
guaranteed $1,634,000 and $1,754,000 at September 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
September 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 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 September 30, 2004.
5. Total comprehensive income was $3,486,000 and $2,749,000 for the
three-month periods ended September 30, 2004 and 2003, respectively.
Included in the three months ended September 30, 2004 and 2003 was $97,000
and $105,000 of other comprehensive income, respectively, related to
foreign currency translation adjustments. Total comprehensive income was
$8,686,000 and $7,063,000 for the nine-month periods ended September 30,
2004 and 2003, respectively. Included in the nine months ended September
30, 2004 and 2003 was ($130,000) of other comprehensive loss and $1,107,000
of other comprehensive income, respectively, related to foreign currency
translation adjustments.
6 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 lawsuits
pending in various state courts. These lawsuits assert claims alleging that
certain industrial products were manufactured by the defendants and were
the cause of injury and harm. The Company is vigorously defending itself
against these alleged claims. Although it is not possible to predict the
ultimate outcome of these matters, the Company does not believe the
ultimate resolution of these issues will have a material adverse effect on
the Company's financial position or results of operations, either from a
cash flow perspective or on the financial statements as a whole.
The Company is currently involved in negotiating a collective bargaining
agreement with District 10 of the International Association of Machinists
for the nearly 230 employees covered by such agreement. The Company is
presently operating under a four-year contract with the union that expires
October 31, 2004 and believes it will successfully negotiate a new
contract.
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 product line 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. With AMR meters, 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 the Company generally earning 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 September 30
Net sales for the three-month period ended September 30, 2004 increased
$4.7 million, or 9.7%, over the same period in 2003. Residential and commercial
water meter sales represented 76.3% of total sales in the third quarter of 2004
compared to 75.1% in the third quarter of 2003. These sales increased $4.2
million to $40.7 million compared to $36.5 million in the same period in 2003.
While local (or manual) read water meter unit sales declined slightly compared
to the same period in 2003, the third 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 23.7% of total sales for the three months
ended September 30, 2004 compared to 24.9% for the same period in 2003. The
change was due to a higher percentage increase in water meter sales compared to
industrial product sales. Industrial sales increased $0.5 million to $12.6
million in the third quarter of 2004 compared to $12.1 million in the third
quarter of 2003 as most product lines saw modest increases in sales, much of
which was due to foreign exchange effects of $0.4 million.
Gross margins for the second quarter of 2004 were 33.6% compared to
33.1% in the second quarter of 2003. The increase was due to the higher mix of
AMR products which carry higher margins, offset somewhat by continuing price
pressures due to competition, higher costs of metal alloys, and the effects of
the stronger euro on certain foreign-sourced components. Margins were also
negatively affected by weak economic conditions and warranty charges for the
automotive systems product line, which is the primary business of the Company's
French subsidiary.
Selling, engineering and administration costs were comparable to the
third quarter of 2003 due to continuing cost control efforts, offset somewhat by
normal inflationary increases. Interest expense for the third quarter of 2004
was $17,000 lower than the same period in the prior year primarily due to lower
debt balances offset somewhat 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.
10
The effective tax rate for the third quarter of 2004 was 44.1% compared
to 38.4%. With continuing losses of the Company's French subsidiary, it is not
certain that net operating loss carry forwards generated during the quarter will
be realized through future profits. As such, consistent with prior periods, a
valuation reserve was established against net operating loss carry forwards,
which resulted in the effective tax rate increase.
As a result of the factors discussed above, net earnings for the third
quarter of 2004 were $3,389,000 compared to net earnings in the third quarter of
2003 of $2,644,000. On a diluted earnings per share basis, this equated to $0.99
per share for the third quarter of 2004 compared to $0.80 for the same period in
2003.
Results of Operations - Nine Months Ended September 30
Net sales for the nine months ended September 30, 2004 increased nearly
$20.8 million, or 15.3%, to $156.5 million from $135.7 million for the same
period in 2003. Residential and commercial water meter sales represented 73.9%
of total sales in the first nine months of 2004 compared to 71.9% in the first
nine months of 2003. These sales increased $18.1 million to $115.6 million
compared to $97.5 million in the same period in 2003. While local (or manual)
read water meter unit sales declined slightly compared to the same period in
2003, the first nine 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 26.1% of total sales for the nine months
ended September 30, 2004 compared to 28.1% for the same period in 2003.
Industrial sales increased $2.7 million to $40.9 million in the first nine
months of 2004 compared to $38.2 million in the same period in 2003 due to
slightly higher volumes in most product lines. The change was due to a higher
percentage increase in water meter sales compared to industrial product sales
and to the effects of foreign currency exchange rates which favorably affected
sales by $1.8 million.
Gross margins for the first nine months of 2004 were 32.9% compared to
33.2% in the same period in 2003. The decrease was due to continuing price
pressures due to competition, higher costs of metal alloys, and the effects of
the stronger euro on certain foreign-sourced components, offset somewhat by the
higher percentage of AMR products sold, which carry higher margins. Margins were
also negatively affected by weak economic conditions and warranty charges for
the automotive systems product line, which is the primary business of the
Company's French subsidiary.
Selling, engineering and administration costs decreased $0.2 million,
or 0.6%, in the nine-month period ended September 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 nine months ended September 30,
2004 was $0.1 million 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 nine-month period ended September
30, 2004 compared to the same period in 2003 has an unfavorable variation of
$1.5 million 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 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.
The effective tax rate for the nine months ended September 30, 2004 was
41.0% compared to 38.2% for the same period in 2003. With continuing losses of
the Company's French subsidiary, it is not certain that net operating loss carry
forwards generated during the nine months ended September 30, 2004 will be
realized through future profits. As such, consistent with prior periods, a
valuation reserve was established against net operating loss carry forwards,
which resulted in the effective tax rate increase.
As a result of the factors discussed above, net earnings for the first
nine months of 2004 were $8,816,000 compared to net earnings for the first nine
months of 2003 of $5,956,000. On a diluted earnings per share basis, this
equated to $2.60 per share for the first nine months of 2004 compared to $1.81
for the same period in 2003.
11
Liquidity and Capital Resources
The main sources of liquidity for the Company typically are cash from
operations and borrowing capacity. For the first nine months of 2004, nearly
$5.6 million of cash was provided by operations, primarily as the net result of
increased earnings adjusted for depreciation and amortization, offset by
increases in receivables and inventory balances associated with increased
business and contributions to the pension plan.
The change in the receivables balance from $26.3 million at December
31, 2003 to $31.0 million at September 30, 2004 was primarily due to increased
sales and the timing of certain customer payments.
Inventories at September 30, 2004 increased $2.6 million, or 8.6%.
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 $4.0 million were less than the depreciation
expense of $5.3 million for the first nine months of 2004 resulting in a net
decrease in net property, plant and equipment balances from December 31, 2003.
Prepaid pension increased from $16.2 million at December 31, 2003 to
$17.5 million at September 30, 2004 due to the Company's election to make a
payment of $2.0 million into the pension plan offset by pension expense.
Goodwill decreased due to reversing the remaining unused severance accrual of
$273,000 related to the Company's acquisition of MecaPlus Equipements SA and the
effects of foreign currency translation adjustments.
Short-term debt and the current portion of long-term debt at September
30, 2004 increased to a combined $14.6 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 $13.8 million at September 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 $3.5 million from $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 $0.2 million 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 $27.0
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 a number of multi-party asbestos
lawsuits pending in various state courts. These lawsuits assert claims alleging
that certain industrial products were manufactured by the defendants and were
the cause of injury and harm. The Company is vigorously defending itself against
these alleged claims. Although it is not possible to predict the ultimate
outcome of these matters, the Company does not believe the ultimate resolution
of these issues will have a material adverse effect on the Company's financial
position or results of operations, either from a cash flow perspective or on the
financial statements as a whole.
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.
12
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.
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 third quarter of 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 third quarter of 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 third quarter of 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 Unregistered Sales of Equity Securities and Use of Proceeds
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 quarter ended September 30, 2004, the Company repurchased 5,069 shares
of Common Stock for $223,000. As of the end of the third quarter of 2004, the
Company has remaining availability to repurchase up to an additional 250,781
shares (which is currently valued at $11.4 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 quarter ended September 30, 2004,
all of which were purchased pursuant to the Board of Directors' authorizations:
Total number of shares Maximum number
purchased as part of of shares that may yet
Total number of Average price paid publicly announced be purchased under the
Period shares purchased per share plans or programs plans or programs
July 1 to July 31 3,088 $43.43 3,088 252,762
August 1 to August 31 1,177 $44.50 1,177 251,585
September 1 to September 30 804 $45.45 804 250,781
------ ------- ------ --------
Total/Average 5,069 $44.00 5,069 250,781
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 6 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.
14
SIGNATURES
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: October 27, 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 SEPTEMBER 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