Quarterly Report (10-q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 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, 2019

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File No. 001-06706

BADGER METER, INC.

(Exact name of registrant as specified in its charter)

Wisconsin		39-0143280
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

4545 W. Brown Deer Road Milwaukee, Wisconsin		53233
(Address of principal executive offices)		(Zip code)

	(414) 355-0400
	(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	BMI	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.

Large accelerated filer	☒	Smaller reporting company	☐
Accelerated filer	☐	Emerging growth company	☐
Non‑accelerated filer	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of October 14, 2019, there were 29,111,332 shares of Common stock outstanding with a par value of $1 per share.

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BADGER METER, INC.

Quarterly Report on Form 10-Q for the Period Ended September 30, 2019

Index

		Page No.

Part I. Financial Information:

Item 1	Financial Statements (unaudited):	5

	Consolidated Condensed Balance Sheets - September 30, 2019 and December 31, 2018	5

	Consolidated Condensed Statements of Operations - Three and Nine Months Ended September 30, 2019 and 2018	6

	Consolidated Condensed Statements of Comprehensive Income - Three and Nine Months Ended September 30, 2019 and 2018	7

	Consolidated Condensed Statements of Cash Flows - Nine Months Ended September 30, 2019 and 2018	8

	Consolidated Condensed Statements of Shareholders’ Equity – Three and Nine Months Ended September 30, 2019 and 2018	9

	Notes to Unaudited Consolidated Condensed Financial Statements	10

Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	18

Item 3	Quantitative and Qualitative Disclosures about Market Risk	23

Item 4	Controls and Procedures	23

Part II. Other Information:

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	24

Item 6	Exhibits	24

Signatures		25

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Special Note Regarding Forward Looking Statements

Certain statements contained in this Quarterly Report on Form 10-Q, as well as other information provided from time to time by Badger Meter, Inc. (the “Company” or “Badger Meter”) 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,” “could” 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. Some risks and uncertainties that could cause actual results to differ materially from those expressed or implied in forward looking statements include those described in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 and include, among other things:

•

the continued shift in the Company’s business from lower cost, manually read meters toward more expensive, value-added automatic meter reading (AMR) systems, advanced metering infrastructure (AMI) systems and advanced metering analytics (AMA) systems that offer more comprehensive solutions to customers’ metering needs;

•

the success or failure of newer Company products;

•

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, manually read meters;

•

the actions (or lack thereof) of the Company’s competitors;

•

changes in the general conditions of the United States and foreign economies, including to some extent such things as the length and severity of global economic downturns, international or civil conflicts that affect international trade, the ability of municipal water utility customers to authorize and finance purchases of the Company’s products, the Company’s ability to obtain financing, housing starts in the United States, and overall industrial activity;

•

unusual weather, weather patterns or other natural phenomena, including related economic and other ancillary effects of any such events;

•

economic policy changes, including but not limited to, trade policy and corporate taxation;

•

the timing and impact of government funding programs that stimulate national and global economies, as well as the impact of government budget cuts or partial shutdowns of governmental operations;

•

changes in the cost and/or availability of needed raw materials and parts, such as volatility in the cost of brass castings as a result of fluctuations in commodity prices, particularly for copper and scrap metal at the supplier level, foreign-sourced electronic components as a result of currency exchange fluctuations and/or lead times, and plastic resin as a result of changes in petroleum and natural gas prices;

•

the Company’s ability to successfully integrate acquired businesses or products;

•

changes in foreign economic conditions, particularly currency fluctuations in the United States dollar, the Euro and the Mexican peso;

•

the inability to develop technologically advanced products;

•

the failure of the Company’s products to operate as intended;

•

the inability to protect the Company’s proprietary rights to its products;

•

the Company’s expanded role as a prime contractor for providing complete technology systems to governmental entities, which brings with it added risks, including but not limited to, the Company’s responsibility for subcontractor performance, additional costs and expenses if the Company and its subcontractors fail to meet the timetable agreed to with the governmental entity, and the Company’s expanded warranty and performance obligations;

•

disruptions and other damages to information technology, other networks, operations and property (Company or third party owned) due to breaches in data security or any other cybersecurity attack;

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•

transportation delays or interruptions;

•

violations or alleged violations of laws that impose requirements for the conduct of the Company’s operations, including the U.S. Foreign Corrupt Practices Act (FCPA) or other anti-corruption laws, trade sanctions and sanctioned parties restrictions;

•

the loss of or disruption in certain single-source suppliers; and

•

changes in laws and regulations, particularly laws dealing with the content or handling of materials used in the Company's 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 contained in this Quarterly Report on Form 10-Q 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.

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Part I – Financial Information

Item 1 Financial Statements

BADGER METER, INC.

Consolidated Condensed Balance Sheets

	September 30,			December 31,
	(Unaudited)
	(In thousands)
	2019			2018
Assets
Current assets:
Cash	$	37,728		$	13,086
Receivables		61,406			66,300
Inventories:
Finished goods		24,646			23,476
Work in process		18,097			17,097
Raw materials		42,092			40,231
Total inventories		84,835			80,804
Prepaid expenses and other current assets		7,572			4,469
Total current assets		191,541			164,659
Property, plant and equipment, at cost		208,315			213,722
Less accumulated depreciation		(121,658	)		(123,401	)
Net property, plant and equipment		86,657			90,321
Intangible assets, at cost less accumulated amortization		49,934			55,418
Other assets		16,126			8,872
Deferred income taxes		1,974			2,163
Goodwill		71,258			71,258
Total assets	$	417,490		$	392,691
Liabilities and shareholders’ equity
Current liabilities:
Short-term debt	$	4,360		$	18,060
Payables		32,363			22,469
Accrued compensation and employee benefits		12,814			13,768
Warranty and after-sale costs		6,807			4,206
Other current liabilities		2,501			1,512
Total current liabilities		58,845			60,015
Other long-term liabilities		22,863			13,972
Deferred income taxes		3,077			3,332
Accrued non-pension postretirement benefits		5,163			5,184
Other accrued employee benefits		3,903			6,685
Commitments and contingencies (Note 6)
Shareholders’ equity:
Common stock		37,200			37,198
Capital in excess of par value		40,306			38,082
Reinvested earnings		278,551			257,313
Accumulated other comprehensive income		404			580
Less: Employee benefit stock		(306	)		(306	)
Treasury stock, at cost		(32,516	)		(29,364	)
Total shareholders’ equity		323,639			303,503
Total liabilities and shareholders’ equity	$	417,490		$	392,691

See accompanying notes to unaudited consolidated condensed financial statements.

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BADGER METER, INC.

Consolidated Condensed Statements of Operations

	Three Months Ended September 30,				Nine Months Ended September 30,
	(Unaudited)				(Unaudited)
	(In thousands except share and per share amounts)
	2019		2018		2019		2018
Net sales	$	108,646	$	110,630	$	317,069	$	329,319
Cost of sales		66,976		66,684		194,666		207,121
Gross margin		41,670		43,946		122,403		122,198
Selling, engineering and administration		25,225		28,212		76,598		80,139
Operating earnings		16,445		15,734		45,805		42,059
Interest expense, net		66		295		280		994
Other pension and postretirement costs		41		11,787		123		19,799
Earnings before income taxes		16,338		3,652		45,402		21,266
Provision for income taxes		3,617		801		10,499		4,715
Net earnings	$	12,721	$	2,851	$	34,903	$	16,551

Earnings per share:
Basic	$	0.44	$	0.10	$	1.20	$	0.57
Diluted	$	0.44	$	0.10	$	1.19	$	0.57

Dividends declared per common share	$	0.17	$	0.15	$	0.47	$	0.41

Shares used in computation of earnings per share:
Basic		29,013,573		28,989,205		29,022,080		28,983,115
Impact of dilutive securities		179,765		207,955		193,112		198,428
Diluted		29,193,338		29,197,160		29,215,192		29,181,543

See accompanying notes to unaudited consolidated condensed financial statements.

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BADGER METER, INC.

Consolidated Condensed Statements of Comprehensive Income

	Three Months Ended September 30,					Nine Months Ended September 30,
	(Unaudited)					(Unaudited)
	(In thousands)
	2019			2018		2019			2018
Net earnings	$	12,721		$	2,851	$	34,903		$	16,551
Other comprehensive income:
Foreign currency translation adjustments		(646	)		106		(509	)		(281	)
Pension and postretirement benefits, net of tax		(16	)		7,396		333			13,168
Comprehensive income	$	12,059		$	10,353	$	34,727		$	29,438

See accompanying notes to unaudited consolidated condensed financial statements.

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BADGER METER, INC.

Consolidated Condensed Statements of Cash Flows

	Nine Months Ended September 30,
	(Unaudited) (In thousands)
	2019			2018
Operating activities:
Net earnings	$	34,903		$	16,551
Adjustments to reconcile net earnings to net cash provided by operations:
Depreciation		8,688			8,796
Amortization		9,323			9,675
Deferred income taxes		18			132
Noncurrent employee benefits		(150	)		261
Pension termination settlement charge		-			19,900
Contribution to pension plan		-			(2,860	)
Stock-based compensation expense		882			3,374
Changes in:
Receivables		4,555			(11,462	)
Inventories		(4,259	)		1,409
Payables		10,885			(2,468	)
Prepaid expenses and other current assets		(5,806	)		(5,573	)
Other liabilities		2,100			2,148
Total adjustments		26,236			23,332
Net cash provided by operations		61,139			39,883
Investing activities:
Property, plant and equipment expenditures		(5,589	)		(7,219	)
Acquisitions, net of cash acquired and future payments		-			(8,048	)
Net cash used for investing activities		(5,589	)		(15,267	)
Financing activities:
Net decrease in short-term debt		(13,500	)		(8,433	)
Payment of contingent acquisition consideration		(1,650	)		(2,034	)
Dividends paid		(13,652	)		(11,895	)
Proceeds from exercise of stock options		963			933
Repurchase of treasury stock		(3,358	)		(4,451	)
Issuance of treasury stock		142			529
Net cash used for financing activities		(31,055	)		(25,351	)
Effect of foreign exchange rates on cash		147			200
Increase (decrease) in cash		24,642			(535	)
Cash – beginning of period		13,086			11,164
Cash – end of period	$	37,728		$	10,629

See accompanying notes to unaudited consolidated condensed financial statements.

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BADGER METER, INC.

Consolidated Condensed Statements of Shareholders’ Equity

	Quarter and year-to-date ended September 30,
	Common Stock at $1 par value*		Capital in excess of par value		Reinvested earnings			Accumulated other comprehensive income (loss)			Employee benefit stock			Treasury stock (at cost)			Total
	(Unaudited)
	(In thousands except share and per share amounts)
Balance, June 30, 2018	$	37,177	$	33,681	$	250,242		$	(5,508	)	$	(461	)	$	(26,661	)	$	288,470
Net earnings		-		-		2,851			-			-			-			2,851
Pension and postretirement benefits (net of $3,080 tax effect)		-		-		-			7,396			-			-			7,396
Foreign currency translation		-		-		-			106			-			-			106
Cash dividends of $0.15 per share		-		-		(4,361	)		-			-			-			(4,361	)
Stock options exercised		21		681		-			-			-			-			702
ASU 2018-02 adoption		-		-		1,700			(1,700	)		-			-			-
Stock-based compensation		-		2,430		-			-			-			-			2,430
Purchase of common stock for treasury stock		-		-		-			-			-			(2,462	)		(2,462	)
Issuance of treasury stock (9 shares)		-		17		-			-			-			81			98
Balance, September 30, 2018	$	37,198	$	36,809	$	250,432		$	294		$	(461	)	$	(29,042	)	$	295,230

Balance, December 31, 2017	$	37,165	$	32,182	$	244,224		$	(10,893	)	$	(461	)	$	(24,766	)	$	277,451
Net earnings		-		-		16,551			-			-			-			16,551
ASU 2014-09 adoption impact		-		-		(128	)		-			-			-			(128	)
Pension and postretirement benefits (net of $4,994 tax effect)		-		-		-			13,168			-			-			13,168
Foreign currency translation		-		-		-			(281	)		-			-			(281	)
Cash dividends of $0.41 per share		-		-		(11,915	)		-			-			-			(11,915	)
Stock options exercised		33		900		-			-			-			-			933
ASU 2018-02 adoption		-		-		1,700			(1,700	)		-			-			-
Stock-based compensation		-		3,374		-			-			-			-			3,374
Purchase of common stock for treasury stock		-		-		-			-			-			(4,451	)		(4,451	)
Issuance of treasury stock (39 shares)		-		353		-			-			-			175			528
Balance, September 30, 2018	$	37,198	$	36,809	$	250,432		$	294		$	(461	)	$	(29,042	)	$	295,230

Balance, June 30, 2019	$	37,200	$	39,746	$	270,772		$	1,066		$	(306	)	$	(32,026	)	$	316,452
Net earnings		-		-		12,721			-			-			-			12,721
Pension and postretirement benefits (net of ($4) tax effect)		-		-		-			(16	)		-			-			(16	)
Foreign currency translation		-		-		-			(646	)		-			-			(646	)
Cash dividends of $0.17 per share		-		-		(4,942	)		-			-			-			(4,942	)
Stock options exercised		-		192		-			-			-			23			215
Stock-based compensation		-		328		-			-			-			-			328
Purchase of common stock for treasury stock		-		-		-			-			-			(521	)		(521	)
Issuance of treasury stock (21 shares)		-		40		-			-			-			8			48

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