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, 2005
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 18, 2005, there were 6,788,905 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, 2005
INDEX
Page No.
--------
Part I. Financial Information:
Item 1 Financial Statements:
Consolidated Condensed Balance Sheets - -
June 30, 2005 and December 31, 2004 4
Consolidated Condensed Statements of Operations - -
Three and Six Months Ended June 30, 2005 and 2004 5
Consolidated Condensed Statements of Cash Flows - -
Six Months Ended June 30, 2005 and 2004 6
Notes to Unaudited Consolidated Condensed Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3 Quantitative and Qualitative Disclosures about Market Risk 14
Item 4 Controls and Procedures 14
Part II. Other Information:
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 14
Item 4 Submission of Matters to a Vote of Security Holders 15
Item 6 Exhibits 15
Signatures 17
Exhibit Index 18
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 Badger Meter, Inc. (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 newer Company products, including the
Orion(R) radio frequency mobile AMR system, the absolute digital
encoder (ADE(TM)) and the 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,
including housing starts in the United States and overall industrial
activity;
- increases in the cost and/or availability of needed raw materials
and parts;
- changes in foreign economic conditions, particularly currency
fluctuations between the United States dollar and the euro; 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
June 30, December 31,
2005 2004
----------- ------------
(Unaudited)
(In thousands)
ASSETS
Current assets:
Cash $ 2,143 $ 2,834
Receivables 34,579 26,879
Inventories:
Finished goods 13,367 14,121
Work in process 9,678 9,054
Raw materials 11,401 12,471
----------- ---------
Total inventories 34,446 35,646
Prepaid expenses 2,755 2,016
Deferred income taxes 3,969 4,007
----------- ---------
Total current assets 77,892 71,382
Property, plant and equipment, at cost 106,241 107,295
Less accumulated depreciation (66,278) (65,279)
----------- ---------
Net property, plant and equipment 39,963 42,016
Intangible assets, at cost less accumulated amortization 1,114 1,160
Prepaid pension 16,508 17,290
Other assets 4,246 4,009
Goodwill 6,667 7,104
----------- ---------
Total assets $ 146,390 $ 142,961
=========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 6,985 $ 17,539
Current portion of long-term debt 7,247 5,348
Payables 14,362 11,395
Accrued compensation and employee benefits 5,302 6,166
Warranty and after-sale costs 3,678 3,817
Income and other taxes 4,429 982
----------- ---------
Total current liabilities 42,003 45,247
Deferred income taxes 7,408 7,437
Accrued non-pension postretirement benefits 4,247 4,490
Other accrued employee benefits 6,386 6,902
Long-term debt 17,855 14,819
Commitments and contingencies
Shareholders' equity:
Common Stock 9,973 9,872
Capital in excess of par value 20,246 18,313
Reinvested earnings 70,761 64,928
Accumulated other comprehensive income 364 2,024
Less: Employee benefit stock (1,452) (1,065)
Treasury stock, at cost (31,401) (30,006)
----------- ---------
Total shareholders' equity 68,491 64,066
----------- ---------
Total liabilities and shareholders' equity $ 146,390 $ 142,961
=========== =========
See accompanying notes to consolidated condensed financial statements.
4
BADGER METER, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
(Unaudited) (Unaudited)
(In thousands except share and per
share amounts)
2005 2004 2005 2004
----------- ----------- ----------- -----------
Net sales $ 57,432 $ 53,550 $ 111,864 $ 103,152
Cost of sales 37,333 36,569 72,803 69,545
----------- ----------- ----------- -----------
Gross margin 20,099 16,981 39,061 33,607
Selling, engineering and
administration 12,544 11,614 25,364 23,642
----------- ----------- ----------- -----------
Operating earnings 7,555 5,367 13,697 9,965
Interest expense 317 454 775 882
Other expense (income), net 56 73 (288) 200
----------- ----------- ----------- -----------
Earnings before income taxes 7,182 4,840 13,210 8,883
Provision for income taxes 3,023 1,863 5,495 3,456
----------- ----------- ----------- -----------
Net earnings $ 4,159 $ 2,977 $ 7,715 $ 5,427
=========== =========== =========== ===========
Per share amounts:
Earnings per share:
Basic $ .62 $ .46 $ 1.15 $ .83
Diluted $ .59 $ .44 $ 1.11 $ .80
Dividends declared: $ .14 $ .14 $ .28 $ .27
Shares used in computation of
earnings per share:
Basic 6,724,827 6,577,154 6,713,221 6,563,270
Impact of stock-based
compensation 273,505 213,176 249,958 185,673
----------- ----------- ----------- -----------
Diluted 6,998,332 6,790,330 6,963,179 6,748,943
=========== =========== =========== ===========
See accompanying notes to consolidated condensed financial statements.
5
BADGER METER, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
----------------
(Unaudited)
(In thousands)
2005 2004
-------- --------
Operating activities:
Net earnings $ 7,715 $ 5,427
Adjustments to reconcile net
earnings to net cash provided
by (used for) operations:
Depreciation 3,449 3,564
Amortization 117 81
Tax benefit on stock options 550 163
Deferred income taxes (31) 26
Noncurrent employee benefits 1,158 1,077
Changes in:
Receivables (8,412) (3,756)
Inventories 349 (1,392)
Prepaid expenses (786) (594)
Current liabilities other than debt 4,573 (1,367)
-------- --------
Total adjustments 967 (2,198)
-------- --------
Net cash provided by operations 8,682 3,229
-------- --------
Investing activities:
Property, plant and equipment (2,302) (2,549)
Other - net (409) (263)
-------- --------
Net cash used for investing activities (2,711) (2,812)
-------- --------
Financing activities:
Net increase (decrease) in short-term debt (10,100) 5,017
Issuance of long-term debt 10,000 -
Repayments of long-term debt (5,066) (3,628)
Dividends paid (1,882) (1,774)
Proceeds from exercise of stock options 1,148 826
Treasury stock purchases (1,653) (694)
Issuance of treasury stock 576 333
-------- --------
Net cash provided by (used for)
financing activities (6,977) 80
-------- --------
Effect of exchange rate on cash 315 272
-------- --------
Increase (decrease) in cash (691) 769
Cash - beginning of period 2,834 2,089
-------- --------
Cash - end of period $ 2,143 $ 2,858
======== ========
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 June 30, 2005, results of operations for the three- and
six-month periods ended June 30, 2005 and 2004, and cash flows for the
six-month periods ended June 30, 2005 and 2004. 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 U.S. generally
accepted accounting principles 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.
Certain reclassifications have been made to the 2004 consolidated
condensed financial statements to conform to the 2005 presentation.
2. The consolidated condensed balance sheet at December 31, 2004 was derived
from amounts included in the Company's Annual Report on Form 10-K for the
year ended December 31, 2004. 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 $7,104,000 at December 31, 2004 to
$6,667,000 at June 30, 2005 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, 2005 and 2004 are
as follows:
Balance at Additions Balance
beginning charged to Costs at
(In thousands) of year earnings incurred June 30
- -------------- ---------- ---------- -------- -------
2005 $3,817 $803 $(942) $ 3,678
2004 $3,767 $662 $(621) $ 3,808
STOCK-BASED COMPENSATION 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 400,000 shares of Common Stock, with vesting periods
of up to ten years and maximum option terms of ten years. As of June 30,
2005, options to purchase 291,148 shares remain available for grant under
four of these plans.
On April 29, 2005, a restricted stock plan was approved which provides for
the issuance of non-vested Common Stock to certain eligible employees. The
plan authorizes the issuance of shares up to an aggregate of 50,000 shares
of Common Stock, of which 15,500 were issued in May 2005. The May issue
requires a three-year cliff vesting period contingent on employment.
Compensation expense related to this issue was $32,000 for the quarter
ended June 30, 2005.
As allowed by Financial Accounting Standards Board (FASB) Statement No.
123 (SFAS 123), "Accounting for Stock-Based Compensation," and Statement
No. 148 (SFAS 148), "Accounting for Stock-Based Compensation - Transition
and Disclosure," the Company has elected to follow Accounting Principles
Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees,"
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 stock-based compensation 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) 2005 2004 2005 2004
- --------------------------------------------- --------- --------- --------- ---------
Net earnings, as reported $ 4,159 $ 2,977 $ 7,715 $ 5,427
Deduct: Incremental stock-based compensation
determined under fair value based method
for all awards since January 1, 1995,
net of related tax effects 62 91 138 194
--------- --------- --------- ---------
Pro forma net earnings $ 4,097 $ 2,886 $ 7,577 $ 5,233
========= ========= ========= =========
Earnings per share:
Basic, as reported $ .62 $ .46 $ 1.15 $ .83
Basic, pro forma $ .61 $ .44 $ 1.13 $ .80
Diluted, as reported $ .59 $ .44 $ 1.11 $ .80
Diluted, pro forma $ .58 $ .43 $ 1.08 $ .78
In December 2004, the FASB issued Statement No. 123(R) (SFAS 123(R)),
"Share-Based Payment," which changed the accounting rules relating to
equity compensation programs. On April 15, 2005, the Security and Exchange
Commission provided a phased-in implementation process for SFAS 123(R),
which will now be effective for the Company on January 1, 2006. Refer to
the Notes to Consolidated Financial Statements included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2004 for
additional information regarding SFAS 123(R) and the anticipated impact of
adoption.
3. Included in other expense (income), net are foreign currency gains and
losses, which are recognized as incurred. The Company's functional
currency for all of its foreign subsidiaries is the U.S. dollar, with the
exception of Badger Meter France (the French parent holding company of
MecaPlus Equipements SAS (MPE)), MPE and Badger Meter Czech Republic,
whose functional currency is the euro. A foreign currency gain of $354,000
and a loss of $(67,000) was reported for the six months ended June 30,
2005 and 2004, respectively, primarily related to the recent strengthening
of the U.S. dollar versus the euro.
4. 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 June 30, 2005 and 2004 based on a
September 30 measurement date:
Other
postretirement
Pension benefits benefits
---------------- --------------
(In thousands) 2005 2004 2005 2004
- -------------- ----- ----- ----- -----
Service cost $ 457 $ 406 $ 44 $ 52
Interest cost 625 628 125 117
Expected return on plan assets (910) (928) - -
Amortization of prior service cost (29) (34) (45) (44)
Amortization of net loss 248 164 40 38
----- ----- ----- -----
Net periodic benefit cost $ 391 $ 236 $ 164 $ 163
===== ===== ===== =====
8
The following table sets forth the components of net periodic pension cost
for the six months ended June 30, 2005 and 2004 based on a September 30
measurement date:
Other
postretirement
Pension benefits benefits
------------------ ------------------
(In thousands) 2005 2004 2005 2004
- -------------- ------- ------- ------- -------
Service cost $ 914 $ 813 $ 88 $ 84
Interest cost 1,250 1,255 250 237
Expected return on plan assets (1,820) (1,855) - -
Amortization of prior service cost (58) (68) (90) (87)
Amortization of net loss 496 328 80 77
------- ------- ------- -------
Net periodic benefit cost $ 782 $ 473 $ 328 $ 311
======= ======= ======= =======
The Company previously disclosed in its financial statements for the year
ended December 31, 2004 that it did not expect to contribute funds to its
pension plan in 2005. While the Company believes that it will not be
required to make a contribution in 2005, such belief is based upon the
expected return on assets as of the annual measurement date of September
30, 2005.
The Company also disclosed in its financial statements for the year ended
December 31, 2004 that it estimated it would pay $688,000 in other
postretirement benefits in 2005. As of June 30, 2005, $396,000 of such
benefits were paid. While it is difficult to estimate future payments, the
Company estimates at June 30, 2005 that payments for the full year may be
closer to $800,000. Note that the amount of benefits paid in calendar year
2005 will not impact the expense for postretirement benefits for the
current year.
5. The Company guarantees the debt of the Badger Meter Officers' Voting Trust
(BMOVT), from which the BMOVT 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
has guaranteed debt of $1,428,000 and $1,593,000 of the BMOVT's debt at
June 30, 2005 and December 31, 2004, respectively. The current loan
matures in April 2006, at which time it is expected to be renewed. The
fair market value of this guarantee at June 30, 2005 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 $150,000 in the
first quarter of 2005 reduced the loan from $1,065,000 at December 31,
2004 to $915,000 at June 30, 2005.
6. Total comprehensive income was $3,257,000 and $2,864,000 for the
three-month periods ended June 30, 2005 and 2004, respectively. Included
in the three-month periods ended June 30, 2005 and 2004 was $902,000 and
$113,000, respectively, of other comprehensive loss related to foreign
currency translation adjustments. Total comprehensive income was
$6,055,000 and $5,200,000 for the six-month periods ended June 30, 2005
and 2004, respectively. Included in the six-month periods ended June 30,
2005 and 2004 is $1,660,000 and $227,000 of other comprehensive loss,
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 as follows.
The Company is subject to contingencies relating to environmental laws and
regulations. Currently, the Company is in the process of resolving issues
relating to two landfill sites and other matters. 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
9
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.
10
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BUSINESS DESCRIPTION AND OVERVIEW
Badger Meter, Inc. (the "Company") 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 and
constitute a majority of the Company's sales. 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 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 for these products driven by replacement units and, to a
lesser extent, housing starts. Sales above the base level depend on conversions
to AMR. The Company believes that conversion from local read meters to AMR
products can accelerate replacements of meters and result in growth, because it
is estimated that only 15% of the water meter market has been converted to AMR.
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, 2005 increased $3.9
million, or 7.2%, over the same period in 2004. Residential and commercial water
meter sales represented 75.0% of total sales in the second quarter of 2005
compared to 74.1% in the second quarter of 2004. These sales increased $3.4
million to nearly $43.1 million compared to $39.7 million in the same period in
2004. These increases were driven by higher sales of AMR products offset
somewhat by slightly lower sales of local (or manual) read water meter units.
Units utilizing AMR technologies carry higher prices. Most notable in the
increased sales of AMR products was the increase in sales of the Company's
proprietary AMR product, Orion(R), which increased more than two-fold over the
amount sold in the second quarter of 2004, while other AMR products had low or
declining sales growth.
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 25.0% of total sales for the three months
ended June 30, 2005 compared to 25.9% for the same period in 2004. 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 $14.3
million in the second quarter of 2005 compared to $13.9 million in the second
quarter of 2004. This was the net effect of increases in sales of small
precision valves and electromagnetic meters offset somewhat by declines in
automotive fluid meters and systems.
Gross margins for the first quarter of 2005 were 35.0% compared to 31.7%
in the second quarter of 2004. The increase was due to the higher mix of AMR
products, particularly the Orion(R) product that carries higher margins, price
increases instituted on select products, and the effects of a slightly weaker
euro on foreign sourced parts. These factors were offset somewhat by continuing
price pressures due to competition.
Selling, engineering and administration costs in the second quarter of
2005 were $0.9 million, or 8.0%, higher than the same period in 2004 due to
higher research and development costs, increased costs associated with increased
sales, expenses associated with the Company's 100th anniversary celebration and
normal inflationary pressures, offset somewhat by continuing cost control
efforts.
11
Interest expense for the second quarter of 2005 was $137,000 lower than
the same period in the prior year primarily due to lower debt balances offset
somewhat by higher interest rates.
The effective tax rate for the second quarter of 2005 was 42.1% compared
to 38.5% due principally to higher Federal and state tax rates and increased net
earnings, offset somewhat by a decreased impact of the valuation reserve for the
operating loss of the Company's French subsidiary.
As a result of the above-mentioned items, net earnings for the second
quarter of 2005 were nearly $4.2 million compared to net earnings in the second
quarter of 2004 of $3.0 million. On a diluted earnings per share basis, this
equated to $0.59 per share for the second quarter of 2005 compared to $0.44 for
the same period in 2004.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30
Net sales for the six-month period ended June 30, 2005 increased $8.7
million, or 8.4%, over the same period in 2004. Residential and commercial water
meter sales represented 74.1% of total sales in the first half of 2005 compared
to 72.7% for the same period in 2004. These sales increased $7.9 million to
nearly $82.9 million compared to $75.0 million in the same period in 2004. These
increases were driven by higher sales of AMR products and slightly higher sales
of local (or manual) read water meter units. Units utilizing AMR technologies
carry higher prices. Most notable in the increased sales of AMR products was the
increase in sales of the Company's proprietary AMR product, Orion(R), which
increased more than 250% over the amount sold in the first half of 2004. This
was mitigated somewhat by sales decreases in other AMR products.
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 six months
ended June 30, 2005 compared to 27.3% for the same period in 2004. The change
was due to a higher percentage increase in water meter sales compared to
industrial product sales. Industrial sales increased $0.8 million to $29.0
million in the first half of 2005 compared to $28.2 million for the same period
in 2004. This was the net effect of increases in sales of small precision
valves, electromagnetic meters, and concrete and impeller meters offset somewhat
by declines in automotive fluid meters and systems.
Gross margins for the six months ended June 30, 2005 were 34.9% compared
to 32.6% for the same period in 2004. The increase was due to the higher mix of
AMR products, particularly the Orion(R) product that carries higher margins,
price increases instituted on select products, and the effects of a slightly
weaker euro on foreign sourced parts. These factors were offset somewhat by
continuing price pressures due to competition.
Selling, engineering and administration costs for the six months ended
June 30, 2005 were $1.7 million, or 7.3%, higher than the same period in 2004
due to higher research and development costs, increased costs associated with
increased sales, expenses associated with the Company's 100th anniversary
celebration and normal inflationary pressures, offset somewhat by continuing
cost control efforts.
Interest expense for the six months ended June 30, 2005 was $107,000 lower
than the same period in the prior year primarily due to lower debt balances
offset somewhat by higher interest rates.
The effective tax rate for the second half of 2005 was 41.6% compared to
38.9% due principally to higher Federal and state tax rates and increased net
earnings, offset somewhat by a decreased impact of the valuation reserve for the
operating loss of the Company's French subsidiary.
Other expense (income), net changed nearly $0.5 million between periods
primarily due to the favorable effects of foreign currency translations.
As a result of the above-mentioned items, net earnings for the six months
ended June 30, 2005 were $7.7 million compared to net earnings in the same
period of 2004 of $5.4 million. On a diluted earnings per share basis, this
equated to $1.11 per share for the first six months of 2005 compared to $0.80
for the same period in 2004.
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 2005, $8.7
million of cash was provided by operations, primarily as the net result of
increased earnings adjusted for depreciation and amortization and decreased
inventory levels offset by increases in receivables due to increased sales.
12
The change in the receivables balance from $26.9 million at December 31,
2004 to $34.6 million at June 30, 2005 was primarily due to increased sales, the
timing of certain customer payments and the strengthening of the U.S. dollar
against the euro.
Inventories at June 30, 2005 have declined $1.2 million to $34.4 million
from the December 31, 2004 balance of $35.6 million due primarily to the higher
sales in the six months ended June 30, 2005 and the effects of a strengthening
U.S. dollar.
Capital expenditures of $2.3 million were less than the depreciation
expense of $3.4 million for the first six months of 2005 resulting in a decrease
in net property, plant and equipment balances from December 31, 2004.
Short-term debt and the current portion of long-term debt at June 30, 2005
decreased nearly $8.7 million to a combined $14.2 million versus a balance at
the end of 2004 of $22.9 million. This decrease was primarily due to securing a
$10 million term loan in the second quarter of 2005, which was used to replace
short-term borrowings. As a result, long-term debt increased net of regularly
scheduled debt payments.
Payables increased to $14.4 million at June 30, 2005 from $11.4 million at
December 31, 2004 primarily as a result of the timing of payments. Income and
other taxes increased to $4.4 million from $1.0 million at December 31, 2004 as
a result of the timing of tax payments.
Common stock and capital in excess of par value have increased from
December 31, 2004 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 increased due to a restricted stock plan implemented in
the second quarter of 2005, offset by a $150,000 reduction due to shares
released as a result of a payment made on the ESSOP loan during the first
quarter of 2005.
Badger Meter's financial condition remains strong. The Company believes
that its operating cash flows, available borrowing capacity, including $39.2
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 as follows.
The Company is subject to contingencies relative to environmental laws and
regulations. Currently, the Company is in the process of resolving issues
relative to two landfill sites and other matters. 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.
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, 2004, and have not materially
changed since that report was filed.
13
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 Risks"
in the Company's Annual Report on Form 10-K for the year ended December 31,
2004, and have not materially changed since that report was filed.
ITEM 4 CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934
(the "Exchange Act"), the Company's management evaluated, with the participation
of the Company's Chairman, President and Chief Executive Officer and the
Company's Senior Vice President - Finance, Chief Financial Officer and
Treasurer, the effectiveness of the design and operation of the Company's
disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Exchange Act) as of the end of the quarter ended June 30, 2005. 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 quarter
ended June 30, 2005 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.
Changes in Internal Control over Financial Reporting
There was no change in the Company's internal control over financial
reporting that occurred during the quarter ended June 30, 2005 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 June 30, 2005, the Company repurchased 29,544 shares of
Common Stock for $1,020,128. As of the end of the second quarter of 2005, the
Company has remaining availability to repurchase up to an additional 419,836
shares of Common Stock (which were valued at $17.3 million at the June 30, 2005
closing price of $41.30 per share) 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 June 30, 2005, all
of which were purchased pursuant to the Board of Directors' authorizations:
14
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 (1) PROGRAMS (1)
- ------------------- ---------------- ------------------ ------------------- -------------------
April 1 to April 30 14,507 $ 30.67 14,507 434,873
May 1 to May 31 11,152 $ 37.81 11,152 423,721
June 1 to June 30 3,885 $ 40.05 3,885 419,836
------ ------- ------ -------
Total/Average 29,544 $ 34.60 29,544 419,836
====== ======= ====== =======
(1) On December 4, 2000, the Board of Directors authorized the repurchase of
up to 1,200,000 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 641,890 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 558,110
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 29, 2005,
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 2008 Annual Meeting:
Ronald H. Dix 5,859,540 383,762 502,139
Thomas J. Fischer 5,856,484 386,818 502,139
Richard A. Meeusen 5,866,539 376,763 502,139
Directors continuing in office with terms expiring at the 2007 Annual
Meeting:
Kenneth P. Manning
John J. Stollenwerk
Directors continuing in office with terms expiring at the 2006 Annual
Meeting:
Ulice Payne, Jr.
Andrew J. Policano
Steven J. Smith
At the Company's Annual Meeting of Shareholders held on April 29, 2005,
the shareholders voted to adopt the Badger Meter, Inc. 2005 Restricted Stock
Plan. There were 3,581,708 shares voted FOR this plan; 729,029 shares voted
AGAINST this plan; and 140,904 shares ABSTAINED, with 1,791,659 broker
non-votes.
ITEM 6 EXHIBITS
EXHIBIT NO. DESCRIPTION
4.1 Note Modification Agreement and Amendment to Loan Agreement dated
June 20, 2003 between JPMorgan Chase Bank, N.A. and the Badger Meter
Employee Savings and Stock Ownership Plan and Trust, dated April 18,
2005.
4.2 Loan Agreement dated May 20, 2005 between Badger Meter, Inc. and the
M&I Marshall & Ilsley Bank relating to Badger Meter, Inc.'s business
note.
10.1 Badger Meter, Inc. 2005 Restricted Stock Plan. [Incorporated by
reference to Appendix A to Badger Meter, Inc.'s Proxy statement for
the Annual Meeting of Shareholders on April 29, 2005].
10.2 Form of Restricted Stock Award Agreement under Badger Meter, Inc.
2005 Restricted Stock Plan.
15
[Incorporated by reference from Badger Meter, Inc.'s Report on Form
8-K dated May 5, 2005].
10.3 2005 Director Compensation Summary. [Incorporated by reference from
Badger Meter, Inc.'s Report on Form 8-K dated May 5, 2005].
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
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: August 5, 2005 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
17
BADGER METER, INC.
QUARTERLY REPORT ON FORM 10-Q FOR PERIOD ENDED JUNE 30, 2005
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
4.1 Note Modification Agreement and Amendment to Loan Agreement dated June 20,
2003 between JPMorgan Chase Bank, N.A. and the Badger Meter Employee
Savings and Stock Ownership Plan and Trust, dated April 18, 2005.
4.2 Loan Agreement dated May 20, 2005 between Badger Meter, Inc. and the M&I
Marshall & Ilsley Bank relating to Badger Meter, Inc.'s business note.
10.1 Badger Meter, Inc. 2005 Restricted Stock Plan. [Incorporated by reference
to Appendix A to Badger Meter, Inc.'s Proxy statement for the Annual
Meeting of Shareholders on April 29, 2005].
10.2 Form of Restricted Stock Award Agreement under Badger Meter, Inc. 2005
Restricted Stock Plan. [Incorporated by reference from Badger Meter,
Inc.'s Report on Form 8-K dated May 5, 2005].
10.3 2005 Director Compensation Summary. [Incorporated by reference from Badger
Meter, Inc.'s Report on Form 8-K dated May 5, 2005].
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.
18