The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company's management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2018 using the criteria set forth in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework). Based on this assessment, the Company's management believes that, as of December 31, 2018, the Company's internal control over financial reporting was effective based on those criteria.
Ernst & Young LLP, an independent registered public accounting firm, has audited the Consolidated Financial Statements included in this Annual Report on Form 10-K and, as part of its audit, has issued an attestation report, included herein, on the effectiveness of the Company's internal control over financial reporting.
Notes to Consolidated Financial Statements
December 31, 2018, 2017 and 2016
Note 1 Summary of Significant Accounting Policies
Profile
Badger Meter is an innovator in flow measurement, control and related communication solutions, serving water utilities, municipalities and commercial and industrial customers worldwide. The Company’s products measure water, oil, chemicals and other fluids, and are known for accuracy, long-lasting durability and for providing valuable and timely measurement data through various methods. The Company’s product lines fall into two categories: sales of water meters, radios and related technologies to municipal water utilities (municipal water) and sales of meters, valves and other products for industrial applications in water, wastewater and other industries (flow instrumentation). The Company estimates that over 85% of its products are used in water applications.
Municipal water, the largest sales category, is comprised of either mechanical or static (ultrasonic) water meters along with the related radio and software technologies and services used by municipal water utilities as the basis for generating their water and wastewater revenues. The largest geographic market for the Company’s municipal water products is North America, primarily the United States, because most of the Company's meters are designed and manufactured to conform to standards promulgated by the American Water Works Association. The majority of water meters sold by the Company continue to be mechanical in nature; however, ultrasonic meters are gaining in penetration due to a variety of factors, including their ability to maintain near absolute measurement accuracy over their useful life. Providing ultrasonic water meter technology, combined with advanced radio technology, provides the Company with the opportunity to sell into other geographical markets, for example the Middle East and Europe.
Flow instrumentation includes meters and valves sold worldwide to measure and control fluids going through a pipe or pipeline including water, air, steam, oil, and other liquids and gases. These products are used in a variety of industries and applications, with the Company’s primary market focus being water/wastewater; heating, ventilating and air conditioning (HVAC); oil and gas, and chemical and petrochemical. Flow instrumentation products are generally sold to original equipment manufacturers as the primary flow measurement device within a product or system, as well as through manufacturers’ representatives.
Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions have been eliminated in consolidation.
Receivables
Receivables consist primarily of trade receivables. The Company does not require collateral or other security and evaluates the collectability of its receivables based on a number of factors. An allowance for doubtful accounts is recorded for significant past due receivable balances based on a review of the past due items and the customer's ability and likelihood to pay, as well as applying a historical write-off ratio to the remaining balances. Changes in the Company's allowance for doubtful accounts are as follows:
|
|
Balance at
beginning
of year
|
|
|
Provision
and reserve
adjustments
|
|
|
Write-offs
less
recoveries
|
|
|
Balance
at end
of year
|
|
|
|
(In thousands)
|
|
2018
|
|
$
|
387
|
|
|
$
|
—
|
|
|
$
|
(27
|
)
|
|
$
|
360
|
|
2017
|
|
$
|
425
|
|
|
$
|
285
|
|
|
$
|
(323
|
)
|
|
$
|
387
|
|
2016
|
|
$
|
477
|
|
|
$
|
2
|
|
|
$
|
(54
|
)
|
|
$
|
425
|
|
32
Inventories
Inventories are valued at the lower of cost or market. Cost is determined using the first-in, first-out method. The Company estimates and records provisions for obsolete and excess inventories. Changes to the Company's obsolete and excess inventories reserve are as follows:
|
|
Balance at
beginning
of year
|
|
|
Net additions
charged to
earnings
|
|
|
Disposals
|
|
|
Balance
at end
of year
|
|
|
|
(In thousands)
|
|
2018
|
|
$
|
3,881
|
|
|
$
|
2,195
|
|
|
$
|
(1,945
|
)
|
|
$
|
4,131
|
|
2017
|
|
$
|
3,639
|
|
|
$
|
1,295
|
|
|
$
|
(1,053
|
)
|
|
$
|
3,881
|
|
2016
|
|
$
|
3,836
|
|
|
$
|
1,017
|
|
|
$
|
(1,214
|
)
|
|
$
|
3,639
|
|
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is provided over the estimated useful lives of the respective assets by the straight-line method. The estimated useful lives of assets are: for land improvements, 15 years; for buildings and improvements, 10 to 39 years; and for machinery and equipment, 3 to 20 years.
Capitalized Software and Hardware
Capitalized internal use software and hardware included in other assets in the Consolidated Balance Sheets were $5.2 million and $6.0 million at December 31, 2018 and 2017, respectively. These amounts are amortized on a straight-line basis over the estimated useful lives of the software and/or hardware, ranging from 1 to 5 years. Amortization expense recognized for the years ending December 31, 2018, 2017 and 2016 was $3.2 million, $2.8 million and $3.1 million, respectively.
Long-Lived Assets
Property, plant and equipment and identifiable intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected undiscounted cash flows is less than the carrying value of the related asset or group of assets, a loss is recognized for the difference between the fair value and carrying value of the asset or group of assets.
Intangible Assets
Intangible assets are amortized on a straight-line basis over their estimated useful lives, ranging from 5 to 20 years. The Company does not have any intangible assets deemed to have indefinite lives. Amortization expense recognized for 2018 was $7.5 million compared to $6.8 million in 2017 and $6.1 million in 2016. Amortization expense expected to be recognized is $7.2 million in 2019, $7.0 million in both 2020 and 2021, $5.9 million in 2022, $5.5 million in 2023 and $22.8 million thereafter. The carrying value and accumulated amortization by major class of intangible assets are as follows:
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
|
|
Gross carrying
amount
|
|
|
Accumulated
amortization
|
|
|
Gross carrying
amount
|
|
|
Accumulated
amortization
|
|
|
|
(In thousands)
|
|
Technologies
|
|
$
|
47,647
|
|
|
$
|
24,785
|
|
|
$
|
47,647
|
|
|
$
|
21,882
|
|
Intellectual property
|
|
|
10,000
|
|
|
|
833
|
|
|
|
10,000
|
|
|
|
333
|
|
Non-compete agreements
|
|
|
2,322
|
|
|
|
2,076
|
|
|
|
2,322
|
|
|
|
1,923
|
|
Licenses
|
|
|
650
|
|
|
|
492
|
|
|
|
650
|
|
|
|
475
|
|
Customer lists
|
|
|
8,023
|
|
|
|
2,623
|
|
|
|
8,023
|
|
|
|
2,011
|
|
Customer relationships
|
|
|
25,220
|
|
|
|
12,282
|
|
|
|
21,620
|
|
|
|
9,649
|
|
Trade names
|
|
|
9,595
|
|
|
|
4,948
|
|
|
|
9,595
|
|
|
|
4,258
|
|
Total intangibles
|
|
$
|
103,457
|
|
|
$
|
48,039
|
|
|
$
|
99,857
|
|
|
$
|
40,531
|
|
33
Goodwill
Goodwill is tested for impairment annually during the fourth fiscal quarter or more frequently if an event indicates that the goodwill might be impaired. Potential impairment is identified by comparing the fair value of a reporting unit with its carrying value. No adjustments were recorded to goodwill as a result of these reviews during 2018, 2017 and 2016.
Goodwill was $71.3 million and $67.4 million at December 31, 2018 and 2017, respectively. The increase resulted from the acquisition of Innovative Metering Solutions of Odessa, Florida in 2018. This acquisition is further described in Note 3 “Acquisitions.”
Warranty and After-Sale Costs
The Company estimates and records provisions for warranties and other after-sale costs in the period in which the sale is recorded, based on a lag factor and historical warranty claim experience. 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 are as follows:
|
|
Balance at
beginning
of year
|
|
|
Net additions
charged to
earnings
|
|
|
Adjustments
to pre-existing
warranties
|
|
|
Costs
incurred
|
|
|
Balance
at end
of year
|
|
|
|
(In thousands)
|
|
2018
|
|
$
|
3,367
|
|
|
$
|
3,269
|
|
|
$
|
5
|
|
|
$
|
(2,435
|
)
|
|
$
|
4,206
|
|
2017
|
|
$
|
2,779
|
|
|
$
|
4,520
|
|
|
$
|
(439
|
)
|
|
$
|
(3,493
|
)
|
|
$
|
3,367
|
|
2016
|
|
$
|
3,133
|
|
|
$
|
3,559
|
|
|
$
|
(554
|
)
|
|
$
|
(3,359
|
)
|
|
$
|
2,779
|
|
Research and Development
Research and development costs are charged to expense as incurred and amounted to $11.1 million in 2018 and $10.6 million in both 2017 and 2016.
Stock-Based Compensation Plans
As of December 31, 2018, the Company has an Omnibus Incentive Plan under which 1,400,000 shares are reserved for restricted stock and stock option grants for employees as well as stock grants for directors as described in Note 5 “Stock Compensation.” The plan was originally approved in 2011 and replaced all prior stock-based plans except for shares and options previously issued under those plans.
The Company recognizes the cost of stock-based awards in net earnings for all of its stock-based compensation plans on a straight-line basis over the service period of the awards. The Company estimates the fair value of its option awards using the Black-Scholes option-pricing formula, and records compensation expense for stock options ratably over the stock option grant's vesting period. The Company values restricted stock and stock grants for directors on the closing price of the Company's stock on the day the grant was awarded. Total stock compensation expense recognized by the Company was $4.2 million for 2018, $1.8 million for 2017 and $1.6 million for 2016.
Healthcare
The Company estimates and records provisions for healthcare claims incurred but not reported, based on medical cost trend analysis, reviews of subsequent payments made and estimates of unbilled amounts.
34
Accumulated Other Comprehensive
Income (
Loss
)
Components of accumulated other comprehensive income (loss) at December 31, 2018 are as follows:
|
|
Pension and
postretirement
benefits
|
|
|
Foreign currency
|
|
|
Total
|
|
|
|
(In thousands)
|
|
Balance at beginning of period
|
|
$
|
(11,597
|
)
|
|
$
|
704
|
|
|
$
|
(10,893
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
|
—
|
|
|
|
(484
|
)
|
|
|
(484
|
)
|
Amounts reclassified from accumulated other comprehensive income
(loss), net of tax of $(5.1 million)
|
|
|
13,657
|
|
|
|
—
|
|
|
|
13,657
|
|
Net current period other comprehensive income (loss), net
|
|
|
13,657
|
|
|
|
(484
|
)
|
|
|
13,173
|
|
Cumulative impact of adopting ASU 2018-02
|
|
|
(1,700
|
)
|
|
|
—
|
|
|
|
(1,700
|
)
|
Accumulated other comprehensive income
|
|
$
|
360
|
|
|
$
|
220
|
|
|
$
|
580
|
|
Details of reclassifications out of accumulated other comprehensive income during 2018 are as follows:
|
|
Amount
reclassified from
accumulated other
comprehensive
loss
|
|
|
|
(In thousands)
|
|
Amortization of employee benefit plan items:
|
|
|
|
|
Prior service cost (1)
|
|
$
|
(13
|
)
|
Settlement expense (1)
|
|
|
19,900
|
|
Actuarial loss (1)
|
|
|
(1,103
|
)
|
Total before tax
|
|
|
18,784
|
|
Income tax impact
|
|
|
(5,127
|
)
|
Amount reclassified out of accumulated other comprehensive income
|
|
$
|
13,657
|
|
(1)
|
These accumulated other comprehensive loss components are included in the computation of benefit plan costs in Note 7 “Employee Benefit Plans.”
|
Components of accumulated other comprehensive (loss) income at December 31, 2017 are as follows:
|
|
Pension and
postretirement
benefits
|
|
|
Foreign currency
|
|
|
Total
|
|
|
|
(In thousands)
|
|
Balance at beginning of period
|
|
$
|
(10,495
|
)
|
|
$
|
(1,140
|
)
|
|
$
|
(11,635
|
)
|
Other comprehensive income before reclassifications
|
|
|
—
|
|
|
|
1,844
|
|
|
|
1,844
|
|
Amounts reclassified from accumulated other comprehensive loss, net of
tax of $0.3 million
|
|
|
(1,102
|
)
|
|
|
—
|
|
|
|
(1,102
|
)
|
Net current period other comprehensive (loss) income, net
|
|
|
(1,102
|
)
|
|
|
1,844
|
|
|
|
742
|
|
Accumulated other comprehensive (loss) income
|
|
$
|
(11,597
|
)
|
|
$
|
704
|
|
|
$
|
(10,893
|
)
|
35
Details of reclassifications out of accumulated othe
r comprehensive loss during 2017
are as follows:
|
|
Amount
reclassified from
accumulated other
comprehensive
loss
|
|
|
|
(In thousands)
|
|
Amortization of employee benefit plan items:
|
|
|
|
|
Prior service cost (1)
|
|
$
|
(25
|
)
|
Settlement expense (1)
|
|
|
641
|
|
Actuarial loss (1)
|
|
|
(2,010
|
)
|
Total before tax
|
|
|
(1,394
|
)
|
Income tax impact
|
|
|
292
|
|
Amount reclassified out of accumulated other comprehensive loss
|
|
$
|
(1,102
|
)
|
(1)
|
These accumulated other comprehensive loss components are included in the computation of benefit plan costs in Note 7 “Employee Benefit Plans.”
|
Use of Estimates
The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) 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.
Fair Value Measurements of Financial Instruments
The carrying amounts of cash, receivables and payables in the financial statements approximate their fair values due to the short-term nature of these financial instruments. Short-term debt is comprised of notes payable drawn against the Company's lines of credit and commercial paper. Because of its short-term nature, the carrying amount of the short-term debt also approximates fair value. Included in other assets are insurance policies on various individuals who were associated with the Company. The carrying amounts of these insurance policies approximate their fair value.
Subsequent Events
The Company evaluates subsequent events at the date of the balance sheet as well as conditions that arise after the balance sheet date but before the financial statements are issued. The effects of conditions that existed at the balance sheet date are recognized in the financial statements. Events and conditions arising after the balance sheet date but before the financial statements are issued are evaluated to determine if disclosure is required to keep the financial statements from being misleading. To the extent such events and conditions exist, if any, disclosures are made regarding the nature of events and the estimated financial effects for those events and conditions. For purposes of preparing the accompanying consolidated financial statements and the notes to these financial statements, the Company evaluated subsequent events through the date the accompanying financial statements were issued.
New Pronouncements
In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-14 “Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20),” which modifies the annual disclosure requirements for defined benefit pension and other postretirement benefit plans. This ASU as modified added and deleted specific disclosures in an effort to improve the usefulness for financial statement users while also reducing unnecessary costs for companies. The ASU is effective for annual periods beginning after December 15, 2020 with early adoption being permitted in any interim reporting period within the annual reporting period. The Company is currently assessing the impact of adopting ASU 2018-14.
In August 2018, the FASB issued ASU No. 2018-13 “Fair Value Measurement (Topic 820),” which is designed to improve the effectiveness of disclosures related to fair value measurements. This ASU is effective for annual periods beginning after December 15, 2019 and early adoption is allowed in any interim reporting period within the annual reporting period. The Company is currently assessing the impact of adopting ASU 2018-13.
36
In February 2018, the FASB issued ASU 2018-02 “Income Statement - Reporting Comprehensive Income (Loss) (Topic 220).” Under existing U.S. GAAP, the effects of changes in tax rates and laws on deferred tax balances are recorded as a component of income tax expense in the period in which the law was enacted. When deferred tax balances related to items originally recorded in accumulated other comprehensive (loss) income are adjusted, certain tax effects become stranded in accumulated other comprehensive (loss) income. The Company’s provisional adjustments recorded in 2017 to account for the impact of the Tax Cuts and Jobs Act resulted in such stranded tax effects. The amendments in ASU 2018-02 allow a reclassification from accumulated other comprehensive (loss) income to reinvested earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017. The guidance is effective for annual years beginning after December 15, 2018 with early adoption permitted in any interim reporting period. The Company elected to early-adopt this standard in the quarter ended September 30, 2018. This election resulted in a reclassification of $1.7 million from accumulated other comprehensive income (loss) to reinvested earnings.
In May 2017, the FASB issued ASU 2017-09 “Compensation - Stock Compensation (Topic 718),” which clarifies when a change to terms or conditions of a share-based payment award must be accounted for as a modification. The new guidance requires modification accounting if the vesting condition, fair value or the award classification is not the same both before and after a change to the terms and conditions of the award. The new guidance was adopted on a prospective basis on January 1, 2018. The adoption of this standard did not have a significant impact on the Company's consolidated financial statements.
In March 2017, the FASB issued ASU 2017-07 “Compensation - Retirement Benefits (Topic 715),” which changes the presentation of defined benefit and post-retirement benefit plan expense on the income statement by requiring separation between operating and non-operating expense. Under the ASU, the service cost of net periodic benefit expense is an operating expense that will be reported with similar compensation costs. The non-operating components, which include all other components of net periodic benefit expense, are reported outside of operating income. The ASU also stipulates that only the service cost component of pension and postretirement (benefits) costs is eligible for capitalization. The ASU was adopted by the Company on January 1, 2018. Application was done retrospectively for the presentation of the components of these (benefits) costs. In the Consolidated Statements of Operations, the Company previously recorded service and other (benefits) costs in operating cost and expense accounts along with compensation costs. The adoption of the standard resulted in reclassification of those (benefits) costs to the other pension and postretirement (benefits) costs line in the Consolidated Statements of Operations. Adoption of the standard increased operating earnings for the year ended December 31, 2018 by $19.9 million and by $1.0 million for the year-ended December 31, 2017. A corresponding amount was reclassified to other pension and postretirement (benefits) costs for each of these years. The specific net periodic benefit components are disclosed in Note 7 “Employee Benefit Plans.”
In January 2017, the FASB issued ASU 2017-04 “Intangibles - Goodwill and Other (Topic 350).” The update requires a single-step quantitative test to measure potential impairment based on the excess of a reporting unit's carrying amount over its fair value. A qualitative assessment can still be completed first for an entity to determine if a quantitative impairment test is necessary. The ASU is effective on a prospective basis for annual periods beginning after December 15, 2019 and interim periods thereafter. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not anticipate that the adoption of ASU 2017-04 will have a significant impact on the Company’s financial statements.
In August 2016, the FASB issued ASU No. 2016-15 “Statement of Cash Flows (Topic 230),” which clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows. This ASU was effective for annual periods beginning after December 15, 2017, including interim periods within those annual reporting periods. The adoption of this ASU did not have a significant impact on the categorization of operating, investing and financing activities on the Consolidated Statements of Cash Flows.
37
In February 2016, the FASB issued A
SU 2016-02
“
Leases (Topic 842),
”
which requires lessees to record most leases on their balance sheets.
Lessees
initially recognize a lease liability (measured at the present value of the lea
se payments over the lease term) and a right-of-use (
“
ROU
”
) asset (measured at the lease
liability amount, adjusted for lease prepayments, lease incentives received and the lessee's initial direct costs).
Lessees can make an accounting policy election not
to recognize ROU assets and lease liabilities for leases with a lease term of 12 months or less as long as the leases do not include options to purchase the
underlying assets that the lessee is reasonably certain to exercise.
For lessors, the guidance mo
difies the classification criteria and the accounting for sales-type and
direct financing leases.
T
he ASU also provides several optional practical expedients for the ongoing accounting for leases.
The standard includes the use of a modified retrospective
approach for leases that exist or are entered into after the beginning of the earliest
comparative period in the financial statements.
Full retrospec
tive application is prohibited.
In July 2018, the FASB issued ASU No. 2018-11 “Targeted Improvements (Topic 842).” This ASU provides for an optional method of transition which allows companies to adopt the new leasing standard with a cumulative effect adjustment to reinvested earnings. Under this transition method, comparative periods would continue to be reported in accordance with the existing lease guidance under ASC 840 Leases. The Company plans to adopt the ASU with this optional transition methodology beginning on the effective date of January 1, 2019.
The Company also intends to elect the practical expedient which will exclude short-term leases from ROU asset or lease liability recognition on the consolidated balance sheet. In addition, the Company has elected the practical expedient to not separate lease and non-lease components.
The Company also plans to elect the package of practical expedients that is permitted under the transition guidance, which, among other things, allows the Company to carry forward historical lease classifications. The Company expects that upon adoption, the consolidated balance sheet will increase by $11
million for the recognition of ROU assets and lease liabilities which will also create corresponding deferred tax assets and liabilities.
Note 2 Common Stock
Common Stock
The Company has Common Stock. The Company had a Common Share Purchase Rights plan that was in effect since February 15, 2008, but it expired on May 26, 2018 and the Board of Directors elected not to renew it.
On August 12, 2016, the Company announced a 2-for-1 stock split in the form of a 100% stock dividend payable on September 15, 2016 to shareholders of record at the close of business on August 31, 2016. In this report, all per share amounts and number of shares have been restated to reflect the stock split for all periods presented.
Stock Options
Stock options to purchase 21,887 shares of the Company's Stock in 2018, 55,223 shares in 2017 and 91,330 shares in 2016 were not included in the computation of dilutive securities because their inclusion would have been anti-dilutive.
Note 3 Acquisitions
Acquisitions are accounted for under the purchase method, and accordingly, the results of operations were included in the Company's financial statements from the date of acquisition. The acquisitions did not have a material impact on the Company's consolidated financial statements or the notes thereto.
On April 2, 2018, the Company acquired 100% of the outstanding stock of Innovative Metering Solutions, Inc. (“IMS”) of Odessa, Florida, which was one of the Company's distributors serving Florida.
The total purchase consideration was approximately $12.0 million, which included $7.7 million in cash, a $0.3 million working capital adjustment, a balance sheet holdback of $0.7 million and a $3.3 million settlement of pre-existing Company receivables. The working capital adjustment was settled in the second quarter of 2018 and the balance sheet holdback is recorded in payables and other current liabilities on the Company's Consolidated Balance Sheets as it is anticipated to be paid in the next twelve months. The Company's preliminary allocation of the purchase price at December 31, 2018 included $3.8 million of receivables, $0.8 million of inventories, $0.1 million of machinery and equipment, $3.6 million of intangibles and $3.7 million of goodwill. The intangible assets acquired are customer relationships with an estimated average useful life of 10 years.
38
The preliminary allocation of the purchase price to the assets acquired was based upon the
estimated fair values at the date of
acquisition.
As of December 31
, 2018, the
Company had not completed its analysis for estimating the fair value of the assets
acquired.
On November 1, 2017, the Company acquired certain assets of Utility Metering Services, Inc.'s business Carolina Meter & Supply (“Carolina Meter”) of Wilmington, North Carolina, which was one of the Company's distributors serving North Carolina, South Carolina and Virginia.
The total purchase consideration for the Carolina Meter assets was $6.3 million, which included $2.1 million in cash and settlement of $4.2 million of pre-existing Company receivables. The Company's preliminary allocation of the purchase price included $0.6 million of receivables, $0.2 million of inventory, $3.3 million of intangibles and $2.2 million of goodwill. The intangible assets acquired are primarily customer relationships with an estimated average useful life of 12 years. The preliminary allocation of the purchase price to the assets acquired was based upon the estimated fair values at the date of acquisition
.
As of December 31, 2018, the Company completed its analysis for estimating the fair value of the assets acquired with no additional adjustments.
On May 1, 2017, the Company acquired 100% of the outstanding common stock of D-Flow Technology AB (“D-Flow”) of Luleå, Sweden. The D-Flow acquisition facilitates the continued advancement of the existing E-Series® ultrasonic product line while also adding a technology center for the Company.
The purchase price was approximately $23.2 million in cash, plus a small working capital adjustment. The purchase price included $2.0 million in payments that were made in 2018 and $3.0 million in payments that are anticipated to be made in 2019, which are recorded in payables and other accrued liabilities on the Consolidated Balance Sheets at December 31, 2018. The Company's preliminary allocation of the purchase price included approximately $0.3 million of receivables, $0.6 million of inventory, $0.2 million of property, plant and equipment, $10.9 million of intangibles and $16.1 million of goodwill. The majority of the intangible assets acquired related to ultrasonic technology. The Company also assumed $
4.9
million of liabilities as part of the acquisition. As of March 31, 2018, the Company completed its analysis for estimating the fair value of the assets acquired and liabilities assumed with no additional adjustments.
On October 20, 2016, the Company acquired certain assets of Precision Flow Measurement, Inc., doing business as Nice Instrumentation, of Manalapan Township, New Jersey. The acquisition added new technology for the measurement of steam to the Company's HVAC line of products. The total purchase consideration for the Nice Instrumentation assets was $2.0 million.
Note 4 Short-term Debt and Credit Lines
Short-term debt at December 31, 2018 and 2017 consisted of:
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Notes payable to banks
|
|
$
|
4,560
|
|
|
$
|
8,300
|
|
Commercial paper
|
|
|
13,500
|
|
|
|
36,250
|
|
Total short-term debt
|
|
$
|
18,060
|
|
|
$
|
44,550
|
|
Included in notes payable to banks at December 31, 2018 was $4.6 million outstanding under a 4.0 million Euro-based revolving loan facility that does not expire, and which bore interest at 1.14%. Included in notes payable to banks at December 31, 2017 was $4.8 million outstanding under a 4.0 million Euro-based revolving loan facility that does not expire, and which bore interest at 1.13%.
In June 2018, the Company amended its May 2012 credit agreement with its primary lender and extended its term until September 2021. The credit agreement includes a $125.0 million line of credit that supports commercial paper (up to $70.0 million) and includes $5.0 million of a Euro line of credit. Borrowings of commercial paper bore interest at 3.11% in 2018 and 2.10% in 2017. Under the principal line of credit, the Company had $111.5 million of unused credit lines available out of the total of $114.9 million available short-term credit lines at December 31, 2018. While the facility is unsecured, there are a number of financial covenants with which the Company must comply, and the Company was in compliance as of December 31, 2018.
39
Note 5 Stock Compensation
As of December 31, 2018, the Company has an Omnibus Incentive Plan under which 1,400,000 shares are reserved for restricted stock and stock options grants for employees, as well as stock grants for directors. The plan was originally approved in 2011 and replaced all prior stock-based plans except for shares and options previously issued under those plans. As of December 31, 2018 and 2017, there were 548,653 shares and 629,615 shares, respectively, of the Company’s Common Stock available for grant under the 2011 Omnibus Incentive Plan. The Company recognizes the cost of stock-based awards in net earnings for all of its stock-based compensation plans on a straight-line basis over the service period of the awards. Included in 2018 compensation expense is executive retirement charges incurred for the vesting of certain equity awards for the retiring chief executive officer, chief financial officer and chief accounting officer. The following sections describe the three types of grants in more detail.
Stock Options
The Company estimates the fair value of its option awards using the Black-Scholes option-pricing formula, and records compensation expense for stock options ratably over the stock option grant’s vesting period. Stock option compensation expense recognized by the Company for the year ended December 31, 2018 related to stock options was $2.1 million compared to $0.7 million in 2017 and $0.5 million in 2016.
The following table summarizes the transactions of the Company’s stock option plans for the three-year period ended December 31, 2018:
|
|
Number of shares
|
|
|
Weighted-
average
exercise price
|
|
Options outstanding - December 31, 2015
|
|
|
369,612
|
|
|
$
|
22.35
|
|
Options granted
|
|
|
42,302
|
|
|
$
|
33.98
|
|
Options exercised
|
|
|
(27,656
|
)
|
|
$
|
20.59
|
|
Options forfeited
|
|
|
—
|
|
|
n/a
|
|
Options outstanding - December 31, 2016
|
|
|
384,258
|
|
|
$
|
23.75
|
|
Options granted
|
|
|
55,223
|
|
|
$
|
36.75
|
|
Options exercised
|
|
|
(53,198
|
)
|
|
$
|
22.83
|
|
Options forfeited
|
|
|
—
|
|
|
n/a
|
|
Options outstanding - December 31, 2017
|
|
|
386,283
|
|
|
$
|
25.74
|
|
Options granted
|
|
|
43,778
|
|
|
$
|
48.20
|
|
Options modified
|
|
|
80,642
|
|
|
$
|
52.44
|
|
Options exercised
|
|
|
(53,161
|
)
|
|
$
|
21.47
|
|
Options canceled
|
|
|
(80,642
|
)
|
|
$
|
37.04
|
|
Options forfeited
|
|
|
—
|
|
|
n/a
|
|
Options outstanding - December 31, 2018
|
|
|
376,900
|
|
|
$
|
28.95
|
|
Price range $ 18.08 — $ 19.21
|
|
|
|
|
|
|
|
|
(weighted-average contractual life of 2.7 years)
|
|
|
118,900
|
|
|
$
|
18.35
|
|
Price range $ 19.30 — $ 28.33
|
|
|
|
|
|
|
|
|
(weighted-average contractual life of 5.3 years)
|
|
|
119,139
|
|
|
$
|
27.17
|
|
Price range $ 28.34 — $ 48.20
|
|
|
|
|
|
|
|
|
(weighted-average contractual life of 8.2 years)
|
|
|
138,861
|
|
|
$
|
39.55
|
|
Options outstanding - December 31, 2018
|
|
|
376,900
|
|
|
|
|
|
Exercisable options —
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
242,522
|
|
|
$
|
21.01
|
|
December 31, 2017
|
|
|
239,043
|
|
|
$
|
21.59
|
|
December 31, 2018
|
|
|
321,122
|
|
|
$
|
27.16
|
|
40
The following assumptions were used for valuing options granted in the years ended December 31:
|
|
2018
|
|
|
2017
|
|
Per share fair value of options granted during the period
|
|
$
|
18.50
|
|
|
$
|
14.38
|
|
Risk-free interest rate
|
|
|
2.59
|
%
|
|
|
2.06
|
%
|
Dividend yield
|
|
|
1.05
|
%
|
|
|
1.22
|
%
|
Volatility factor
|
|
|
43.2
|
%
|
|
|
46.6
|
%
|
Weighted-average expected life in years
|
|
|
5.3
|
|
|
|
5.3
|
|
The expected life is based on historical exercise behavior and the projected exercise of unexercised stock options. The risk-free interest rate is based on the U.S. Treasury yield curve in effect on the date of grant for the respective expected life of the option. The expected dividend yield is based on the expected annual dividends divided by the grant date market value of the Company’s Common Stock. The expected volatility is based on the historical volatility of the Company’s Common Stock.
The following table summarizes the aggregate intrinsic value related to options exercised, outstanding and exercisable as of and for the years ended December 31:
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Exercised
|
|
$
|
1,590
|
|
|
$
|
814
|
|
Outstanding
|
|
$
|
8,390
|
|
|
$
|
7,966
|
|
Exercisable
|
|
$
|
7,722
|
|
|
$
|
5,921
|
|
As of December 31, 2018, the unrecognized compensation cost related to stock options was approximately $0.7 million, which will be recognized over a weighted average period of 2.6 years.
Director Stock Grant
Non-employee directors receive an annual award of $57,000 worth of restricted shares of the Company’s Common Stock under the shareholder-approved 2011 Omnibus Incentive Plan. The Company values stock grants for directors on the closing price of the Company’s stock on the day the grant was awarded. The Company records compensation expense for this plan ratably over the annual service period beginning May 1. Director stock compensation expense recognized by the Company for the years ended December 31, 2018 and 2017 was $0.5 million compared to $0.4 million in 2016. As of December 31, 2018, the unrecognized compensation cost related to the director stock award that is expected to be recognized over the remaining three months is estimated to be approximately $0.1 million.
Restricted Stock
The Company periodically issues nonvested shares of the Company's Common Stock to certain eligible employees. The Company values restricted stock on the closing price of the Company's stock on the day the grant was awarded. The Company records compensation expense for this plan ratably over the vesting periods. Restricted stock compensation expense recognized by the Company for the year ended December 31, 2018 was $2.1 million compared to $1.1 million in 2017 and $1.0 million in 2016.
41
The fair value of nonvested shares is
determined based on the market price of the shares on the grant date.
|
Shares
|
|
|
Fair value
per share
|
|
Nonvested at December 31, 2015
|
|
120,248
|
|
|
$
|
26.99
|
|
Granted
|
|
29,268
|
|
|
$
|
33.98
|
|
Vested
|
|
(40,700
|
)
|
|
$
|
25.56
|
|
Forfeited
|
|
(3,500
|
)
|
|
$
|
29.18
|
|
Nonvested at December 31, 2016
|
|
105,316
|
|
|
$
|
29.41
|
|
Granted
|
|
50,519
|
|
|
$
|
40.69
|
|
Vested
|
|
(40,762
|
)
|
|
$
|
27.18
|
|
Forfeited
|
|
(3,600
|
)
|
|
$
|
33.37
|
|
Nonvested at December 31, 2017
|
|
111,473
|
|
|
$
|
35.21
|
|
Granted
|
|
32,268
|
|
|
$
|
49.10
|
|
Modified
|
|
30,488
|
|
|
$
|
52.47
|
|
Vested
|
|
(68,289
|
)
|
|
$
|
40.16
|
|
Canceled
|
|
(30,488
|
)
|
|
$
|
38.62
|
|
Forfeited
|
|
(2,550
|
)
|
|
$
|
36.83
|
|
Nonvested at December 31, 2018
|
|
72,902
|
|
|
$
|
42.58
|
|
As of December 31, 2018, there was $1.8 million of unrecognized compensation cost related to nonvested restricted stock that is expected to be recognized over a weighted average period of 2.0 years.
Note 6 Commitments and Contingencies
Commitments
The Company makes commitments in the normal course of business. The Company leases equipment, vehicles and facilities under non-cancelable operating leases, some of which contain renewal options. Total future minimum lease payments consisted of the following at December 31, 2018:
|
|
Total leases
|
|
|
|
(In thousands)
|
|
2019
|
|
$
|
3,371
|
|
2020
|
|
|
2,785
|
|
2021
|
|
|
2,219
|
|
2022
|
|
|
1,221
|
|
2023
|
|
|
1,191
|
|
Thereafter
|
|
|
2,190
|
|
Total lease obligations
|
|
$
|
12,977
|
|
Total rental expense charged to operations under all operating leases was $3.7 million, $3.6 million and $3.3 million in 2018, 2017 and 2016, respectively.
Contingencies
In the normal course of business, the Company is named in legal proceedings. There are currently no material legal proceedings pending with respect to the Company.
The Company is subject to contingencies related to environmental laws and regulations. A future change in circumstances with respect to specific matters or with respect to sites formerly or currently owned or operated by the Company, off-site disposal locations used by the Company, and property owned by third parties that is near such sites, could result in future costs to the Company and such amounts could be material. Expenditures for compliance with environmental control provisions and regulations during 2018, 2017 and 2016 were not material.
The Company relies on single suppliers for most brass castings and certain resin and electronic subassemblies in several of its product lines. The Company believes these items would be available from other sources, but that the loss of certain suppliers would result in a higher cost of materials, delivery delays, short-term increases in inventory and higher quality control costs 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.
42
The Company reevaluates its exposures on a periodic basis and makes adjustments to reserves as appropria
te.
Note 7 Employee Benefit Plans
Historically, the Company maintained a non-contributory defined benefit pension plan that covered substantially all U.S. employees who were employed at December 31, 2011. After that date, no further benefits were accrued in the plan. For the frozen pension plan, benefits were based primarily on years of service and, for certain employees, levels of compensation.
The Company maintains supplemental non-qualified plans for certain officers and other key employees, and an Employee Savings and Stock Option Plan (“ESSOP”) for the majority of the U.S. employees.
The Company also has a postretirement healthcare benefit plan that provides medical benefits for certain U.S. retirees and eligible dependents hired prior to November 1, 2004. Employees are eligible to receive postretirement healthcare benefits upon meeting certain age and service requirements. No employees hired after October 31, 2004 are eligible to receive these benefits. This plan requires employee contributions to offset benefit costs.
Amounts included in accumulated other comprehensive income (loss), net of tax, at December 31, 2018 that have not yet been recognized in net periodic benefit cost are as follows:
|
|
Pension
plans
|
|
|
Other
postretirement
benefits
|
|
|
|
(In thousands)
|
|
Net actuarial loss (gain)
|
|
$
|
129
|
|
|
$
|
(868
|
)
|
Amounts included in accumulated other comprehensive income (loss), net of tax, at December 31, 2018 expected to be recognized in net periodic benefit cost during the fiscal year ending December 31, 2019 are as follows:
|
|
Pension
plans
|
|
|
Other
postretirement
benefits
|
|
|
|
(In thousands)
|
|
Net actuarial loss (gain)
|
|
$
|
29
|
|
|
$
|
(77
|
)
|
Qualified Pension Plan
In 2018, the Company completed termination of its non-contributory defined benefit pension plan. In connection with the Company’s activities to terminate the plan, lump-sum distributions were made in the second quarter of 2018 to individuals who elected lump sum distributions, including rolling over their accounts or transferring them to a qualified Company plan. In the third quarter of 2018, annuity contracts were purchased to settle obligations for the remaining participants. As a result, the Company recorded pre-tax settlement charges of $8.2 million and $11.7 million during the second and third quarters of 2018, respectively.
The following table sets forth the components of net periodic pension cost for the years ended December 31, 2018, 2017 and 2016 based on a December 31 measurement date:
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Service cost - benefits earned during the year
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
3
|
|
Interest cost on projected benefit obligations
|
|
|
305
|
|
|
|
1,228
|
|
|
|
1,711
|
|
Expected return on plan assets
|
|
|
(835
|
)
|
|
|
(1,596
|
)
|
|
|
(2,199
|
)
|
Amortization of net loss
|
|
|
262
|
|
|
|
525
|
|
|
|
575
|
|
Settlement expense
|
|
|
19,900
|
|
|
|
641
|
|
|
|
1,510
|
|
Net periodic pension cost
|
|
$
|
19,632
|
|
|
$
|
800
|
|
|
$
|
1,600
|
|
43
Actuarial assumptions used in the determination of the net periodic pension cost are:
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Discount rate
|
|
|
2.00
|
%
|
|
|
3.90
|
%
|
|
|
4.14
|
%
|
Expected long-term return on plan assets
|
|
|
3.00
|
%
|
|
|
4.00
|
%
|
|
|
5.25
|
%
|
Rate of compensation increase
|
|
n/a
|
|
|
n/a
|
|
|
n/a
|
|
The Company's discount rate assumptions for the qualified pension plan are based on the average yield of a hypothetical high quality bond portfolio with maturities that approximately match the estimated cash flow needs of the plan. The assumptions for expected long-term rates of return on assets are based on historical experience and estimated future investment returns, taking into consideration anticipated asset allocations, investment strategies and the views of various investment professionals. The use of these assumptions can cause volatility if actual results differ from expected results.
The following table provides a reconciliation of benefit obligations, plan assets and funded status based on a December 31 measurement date:
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of plan year
|
|
$
|
42,898
|
|
|
$
|
42,030
|
|
Service cost
|
|
|
—
|
|
|
|
2
|
|
Interest cost
|
|
|
305
|
|
|
|
1,228
|
|
Actuarial loss
|
|
|
(198
|
)
|
|
|
2,940
|
|
Benefits paid
|
|
|
(43,005
|
)
|
|
|
(3,302
|
)
|
Projected benefit obligation at measurement date
|
|
$
|
—
|
|
|
$
|
42,898
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of plan year
|
|
$
|
41,517
|
|
|
$
|
42,061
|
|
Actual return on plan assets
|
|
|
(1,375
|
)
|
|
|
1,933
|
|
Company contribution
|
|
|
2,860
|
|
|
|
825
|
|
Benefits paid
|
|
|
(43,002
|
)
|
|
|
(3,302
|
)
|
Fair value of plan assets at measurement date
|
|
$
|
—
|
|
|
$
|
41,517
|
|
|
|
|
|
|
|
|
|
|
Funded status of the plan:
|
|
|
|
|
|
|
|
|
Benefit obligation in excess of plan assets
|
|
$
|
—
|
|
|
$
|
(1,381
|
)
|
Benefit plan assets in excess of benefit obligation
|
|
|
—
|
|
|
|
—
|
|
Pension liability
|
|
$
|
—
|
|
|
$
|
(1,381
|
)
|
The actuarial assumption used in the determination of the benefit obligation of the above data is:
|
|
2018
|
|
2017
|
|
Discount rate
|
|
N/A
|
|
2.0%
|
|
The fair value of the qualified pension plan assets was $0 at December 31, 2018 and $41.5 million at December 31, 2017.
The Company made net contributions of $1.6 million and $1.3 million in the second and third quarter of 2018, respectively, related to the 2017 plan year. No additional contributions will be required as the pension plan termination was finalized in 2018.
44
The fair value of the Company's qualified pension plan assets by c
ategory as of and for the year
ended December 31
,
2017 was
as follows:
|
|
2017
|
|
|
|
Market
value
|
|
|
Quoted
prices in active
markets for
identical assets
(Level 1)
|
|
|
Significant
observable
inputs
(Level 2)
|
|
|
Significant
unobservable
inputs
(Level 3)
|
|
|
|
(In thousands)
|
|
Fixed income funds (a)
|
|
$
|
40,776
|
|
|
|
—
|
|
|
$
|
40,776
|
|
|
|
—
|
|
Cash/cash equivalents (b)
|
|
|
741
|
|
|
|
741
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
41,517
|
|
|
$
|
741
|
|
|
$
|
40,776
|
|
|
$
|
—
|
|
(a)
|
The Fixed income funds consist of bonds. In aggregate, the funds seek to provide investment results approximating the return of the Plan’s obligations. The funds consist of long credit bonds, intermediate credit bonds, short duration government credit bonds and bank loans.
|
(b)
|
This category comprises the cash held to pay beneficiaries. The fair value of cash equals its book value.
|
Supplemental Non-qualified Unfunded Plans
The Company also maintains supplemental non-qualified unfunded plans for certain officers and other key employees. The expense for these plans was not material for 2018, 2017 or 2016. The discount rate used to measure the net periodic pension cost was 2.16% for 2018, 1.91% for 2017 and 4.14% for 2016. The amount accrued was $2.3 million and $2.1 million as of December 31, 2018 and 2017, respectively.
Other Postretirement Benefits
The Company has a postretirement plan that provides medical benefits for certain U.S. retirees and eligible dependents hired prior to November 1, 2004. The following table sets forth the components of net periodic postretirement benefit cost for the years ended December 31, 2018, 2017 and 2016:
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Service cost, benefits attributed for service of active
employees for the period
|
|
$
|
124
|
|
|
$
|
121
|
|
|
$
|
137
|
|
Interest cost on the accumulated postretirement benefit obligation
|
|
|
189
|
|
|
|
195
|
|
|
|
257
|
|
Net gain
|
|
|
(30
|
)
|
|
|
(49
|
)
|
|
|
—
|
|
Amortization of prior service credit
|
|
|
(13
|
)
|
|
|
(25
|
)
|
|
|
(25
|
)
|
Net periodic postretirement benefit cost
|
|
$
|
270
|
|
|
$
|
242
|
|
|
$
|
369
|
|
The discount rate used to measure the net periodic postretirement benefit cost was 3.65% for 2018, 4.16% for 2017 and 4.39% for 2016. It is the Company's policy to fund healthcare benefits on a cash basis. Because the plan is unfunded, there are no plan assets. The following table provides a reconciliation of the projected benefit obligation at the Company's December 31 measurement date:
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Benefit obligation at beginning of year
|
|
$
|
6,073
|
|
|
$
|
6,131
|
|
Service cost
|
|
|
124
|
|
|
|
121
|
|
Interest cost
|
|
|
189
|
|
|
|
195
|
|
Actuarial gain
|
|
|
(511
|
)
|
|
|
(180
|
)
|
Plan participants' contributions
|
|
|
547
|
|
|
|
564
|
|
Benefits paid
|
|
|
(871
|
)
|
|
|
(758
|
)
|
Benefit obligation and funded status at end of year
|
|
$
|
5,551
|
|
|
$
|
6,073
|
|
45
The amounts recognized in the Consolidated Balance Sheets at December 31 are:
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Accrued compensation and employee benefits
|
|
$
|
367
|
|
|
$
|
370
|
|
Accrued non-pension postretirement benefits
|
|
|
5,184
|
|
|
|
5,703
|
|
Amounts recognized at December 31
|
|
$
|
5,551
|
|
|
$
|
6,073
|
|
The discount rate used to measure the accumulated postretirement benefit obligation was 4.33% for 2018 and 3.65% for 2017. The Company's discount rate assumptions for its postretirement benefit plan are based on the average yield of a hypothetical high quality bond portfolio with maturities that approximately match the estimated cash flow needs of the plan. Because the plan requires the Company to establish fixed Company contribution amounts for retiree healthcare benefits, future healthcare cost trends do not generally impact the Company's accruals or provisions.
Estimated future benefit payments of postretirement benefits, assuming increased cost sharing, expected to be paid in each of the next five years beginning with 2019 are $0.4 million through 2023, with an aggregate of $2.0 million for the five years thereafter. These amounts can vary significantly from year to year because the cost sharing estimates can vary from actual expenses as the Company is self-insured.
Badger Meter Employee Savings and Stock Ownership Plan
The ESSOP includes a voluntary 401(k) savings plan that allows certain employees to defer up to 20% of their income on a pretax basis subject to limits on maximum amounts. The Company matches 25% of each employee’s contribution, with the match percentage applying to a maximum of 7% of each employee's salary. The match is paid using the Company's Common Stock released through the ESSOP loan payments. For ESSOP shares purchased prior to 1993, compensation expense is recognized based on the original purchase price of the shares released and dividends on unreleased shares are charged to compensation expense. For shares purchased in or after 1993, expense is based on the market value of the shares on the date released and dividends on unreleased shares are charged to compensation expense. Compensation expense of $0.5 million was recognized for the match in 2018 and 2017 compared to $0.4 in 2016.
On December 31, 2010, the Company froze the qualified pension plan for its non-union participants and formed a new defined contribution feature within the ESSOP plan in which each employee received a similar benefit. On December 31, 2011, the Company froze the qualified pension plan for its union participants and included them in the same defined contribution feature within the ESSOP. Compensation expense under the defined contribution feature totaled $3.0 million in 2018 and $2.8 million in 2017.
Note 8 Income Taxes
The Company is subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgment is required in determining the worldwide provision for income taxes and recording the related deferred tax assets and liabilities.
Details of earnings before income taxes are as follows:
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Domestic
|
|
$
|
31,584
|
|
|
$
|
52,745
|
|
|
$
|
47,407
|
|
Foreign
|
|
|
4,268
|
|
|
|
2,088
|
|
|
|
2,437
|
|
Total
|
|
$
|
35,852
|
|
|
$
|
54,833
|
|
|
$
|
49,844
|
|
46
The provision (benefit) for income taxes is as follows:
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
9,223
|
|
|
$
|
20,553
|
|
|
$
|
14,435
|
|
State
|
|
|
2,640
|
|
|
|
2,933
|
|
|
|
1,275
|
|
Foreign
|
|
|
1,468
|
|
|
|
876
|
|
|
|
1,129
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(2,890
|
)
|
|
|
(3,051
|
)
|
|
|
922
|
|
State
|
|
|
(1,765
|
)
|
|
|
(915
|
)
|
|
|
151
|
|
Foreign
|
|
|
(614
|
)
|
|
|
(134
|
)
|
|
|
(363
|
)
|
Total
|
|
$
|
8,062
|
|
|
$
|
20,262
|
|
|
$
|
17,549
|
|
The provision for income tax differs from the amount that would be provided by applying the statutory U.S. corporate income tax rate in each year due to the following items:
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Provision at statutory rate
|
|
$
|
7,529
|
|
|
$
|
19,192
|
|
|
$
|
17,445
|
|
State income taxes, net of federal tax benefit
|
|
|
717
|
|
|
|
1,292
|
|
|
|
923
|
|
Valuation allowance
|
|
|
—
|
|
|
|
564
|
|
|
|
—
|
|
Foreign - tax rate differential and other
|
|
|
159
|
|
|
|
29
|
|
|
|
(87
|
)
|
Domestic production activities deduction
|
|
|
—
|
|
|
|
(721
|
)
|
|
|
(560
|
)
|
Federal and state credits
|
|
|
(742
|
)
|
|
|
(542
|
)
|
|
|
—
|
|
Compensation subject to section 162(m)
|
|
|
562
|
|
|
|
—
|
|
|
|
—
|
|
Stock based compensation
|
|
|
(384
|
)
|
|
|
—
|
|
|
|
—
|
|
Tax rate difference on temporary adjustments
|
|
|
(460
|
)
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
681
|
|
|
|
448
|
|
|
|
(172
|
)
|
Actual provision
|
|
$
|
8,062
|
|
|
$
|
20,262
|
|
|
$
|
17,549
|
|
The components of deferred income taxes as of December 31 are as follows:
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Reserve for receivables and inventories
|
|
$
|
2,210
|
|
|
$
|
2,405
|
|
Accrued compensation
|
|
|
929
|
|
|
|
861
|
|
Payables
|
|
|
1,090
|
|
|
|
886
|
|
Non-pension postretirement benefits
|
|
|
1,110
|
|
|
|
1,561
|
|
Net operating loss and credit carryforwards
|
|
|
308
|
|
|
|
364
|
|
Accrued pension benefits and deferred compensation
|
|
|
1,552
|
|
|
|
1,071
|
|
Accrued employee benefits
|
|
|
2,534
|
|
|
|
3,219
|
|
Deferred revenue
|
|
|
1,858
|
|
|
|
1,504
|
|
Other
|
|
|
—
|
|
|
|
450
|
|
Total gross deferred tax assets
|
|
|
11,591
|
|
|
|
12,321
|
|
Less: valuation allowance
|
|
|
(366
|
)
|
|
|
(373
|
)
|
Total net deferred tax assets
|
|
|
11,225
|
|
|
|
11,948
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
4,679
|
|
|
|
3,778
|
|
Amortization
|
|
|
7,146
|
|
|
|
8,266
|
|
Prepaids
|
|
|
517
|
|
|
|
482
|
|
Other
|
|
|
52
|
|
|
|
—
|
|
Total deferred tax liabilities
|
|
|
12,394
|
|
|
|
12,526
|
|
Net deferred tax liabilities
|
|
$
|
(1,169
|
)
|
|
$
|
(578
|
)
|
47
The Company’s
U.S.
federal and state net operating loss and
U.S. federal general business credit
carryforwards are limited on an annual basis to $1.2
million under Internal Revenue Code Section 382 and Section 383. The federal net operating loss carryforwards must be fully utilized prior to the utilization of the federal credit carryforwards.
At December 31, 2017, the Company had an immaterial amount of U.S. federal net operating losses and general business credits, all of which were utilized in 2018. The Company’s remaining tax credit carryforward of $0.3 million relates to state specific tax credits that the Company expects to fully utilize in future tax periods.
No provision for federal income taxes was made on the earnings of foreign subsidiaries that are considered indefinitely invested or that would be offset by foreign tax credits upon distribution. Such undistributed earnings at December 31, 2018 were $23.6 million of which $21.7 million was previously taxed in the U.S. under the transition tax provisions (discussed below) and other provisions of the Internal Revenue Code.
Changes in the Company's gross liability for unrecognized tax benefits, excluding interest and penalties, were as follows:
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Balance at beginning of year
|
|
$
|
998
|
|
|
$
|
814
|
|
Increases in unrecognized tax benefits as a result of positions taken during the
prior period
|
|
|
127
|
|
|
|
6
|
|
Increases in unrecognized tax benefits as a result of positions taken during the
current period
|
|
|
190
|
|
|
|
230
|
|
Reductions to unrecognized tax benefits as a result of a lapse of the applicable
statute of limitations
|
|
|
(194
|
)
|
|
|
(52
|
)
|
Balance at end of year
|
|
$
|
1,121
|
|
|
$
|
998
|
|
The Company does not expect a significant increase or decrease to the total amounts of unrecognized tax benefits during the fiscal year ending December 31, 2019. To the extent these unrecognized tax benefits are ultimately recognized, they will impact the effective tax rate.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. The Company is no longer subject to U.S. federal income tax examinations by tax authorities for years prior to 2015 and, with few exceptions, state and local income tax examinations by tax authorities for years prior to 2014. The Company's policy is to recognize interest related to unrecognized tax benefits as interest expense and penalties as operating expenses. Accrued interest was less than $0.1 million at December 31, 2018 and 2017, respectively, and there were no penalties accrued in either year.
On December 22, 2017, the President signed H.R.1, “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018” (the “Tax Act”) (previously known as “The Tax Cuts and Jobs Act”). The Tax Act made broad and complex changes to the U.S. tax code that affected 2017, including, but not limited to (i) reducing the future U.S. federal corporate tax rate from 35% to 21%; (ii) requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries; and (iii) bonus depreciation that will allow for full expensing of qualified property.
The Tax Act also established new tax laws that affected 2018 and will affect future years, including, but not limited to (i) reduction of the U.S. federal corporate tax rate; (ii) a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries; (iii) a new provision designed to tax global intangible low-taxed income (“GILTI”); (iv) the repeal of the domestic production activity deductions; (v) limitations on the deductibility of certain executive compensation; (vi) limitations on the use of foreign tax credits to reduce the U.S. income tax liability; and (vii) a new provision that allows a domestic corporation an immediate deduction for a portion of its foreign derived intangible income (“FDII”). The Company considered the relevant provisions of the Tax Act in recording its 2018 provision.
48
T
he Securities and Exchange Commission staff issued Staff Accounting Bull
etin (
“
SAB
”
) 118
in December 2017, which provided
guidance on accounting for the tax effects o
f the Tax Act. SAB 118 provided
a measurement period
of up to one year from the Tax Act enactment date for companies to complete the accounting under ASC 740, Ac
counting for Income Taxes.
In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASU 2016-16 is complete. To the extent that a company’s accounting for a certain income ta
x effect of the Tax Act is incomplete, but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, i
t should continue to apply ASU 2016-16 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
As of December 31, 2017, the Company’s accounting for the certain elements of the Tax Act was incomplete. However, the Company was able to make reasonable estimates of the effect, and therefore recorded provisional estimates for those items. In connection with the initial analysis of the impact of the Tax Act, the Company recorded an immaterial discrete adjustment in the period ended December 31, 2017. This provisional estimate consisted of a net tax expense of $0.8 million for the one-time transition tax and a net tax benefit of $0.8 million related to revaluation of deferred tax assets and liabilities, caused by the new lower corporate tax rate. To determine the transition tax, the Company determined the amount of post-1986 accumulated earnings and profits of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. While the Company was able to make a reasonable estimate of the transition tax, the Company continued to gather additional information to more precisely compute the final amount reported in the 2017 U.S. federal income tax return filed in October 2018. This resulted in an immaterial adjustment to the provisional amount. During 2018, the Company recorded a net tax benefit of $1.2 million primarily attributable to pension contributions made in 2018 that were deductible on the 2017 tax return at the higher 35% federal tax rate and other changes to the 2017 tax provision related to the Tax Act and subsequently-issued tax guidance. During 2018, the Company recorded a favorable provision-to-return adjustment of $0.5 million primarily related to the difference in income tax rates between 2017 and 2018.
Due to the complexity of the new GILTI tax rules, the Company continued to evaluate this provision of the Tax Act and the application of ASC 740 “Income Taxes” throughout 2018. Under GAAP, the Company is allowed to make an accounting policy choice to either: (i) treat taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”); or (ii) factor in such amounts into a company’s measurement of its deferred taxes (the “deferred method”). The Company selected to apply the “period cost method” to account for the new GILTI tax, and treated it as a current period expense for 2018. The Company will continue to analyze the full effects of the Tax Act on its financial statements in 2019 as additional guidance is issued and interpretations evolve.
Note 9
Industry Segment and Geographic Areas
The Company is an innovator, manufacturer, marketer and distributor of products incorporating flow measurement, control and communication solutions, which comprise one reportable segment. The Company manages and evaluates its operations as one segment primarily due to similarities in the nature of the products, production processes, customers and methods of distribution.
Information regarding revenues by geographic area is as follows:
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
374,650
|
|
|
$
|
355,768
|
|
|
$
|
347,853
|
|
Foreign:
|
|
|
|
|
|
|
|
|
|
|
|
|
Asia
|
|
|
9,081
|
|
|
|
9,133
|
|
|
|
6,539
|
|
Canada
|
|
|
11,893
|
|
|
|
10,407
|
|
|
|
12,587
|
|
Europe
|
|
|
20,147
|
|
|
|
15,718
|
|
|
|
15,299
|
|
Mexico
|
|
|
3,603
|
|
|
|
3,601
|
|
|
|
3,460
|
|
Middle East
|
|
|
11,318
|
|
|
|
4,904
|
|
|
|
5,520
|
|
Other
|
|
|
3,040
|
|
|
|
2,909
|
|
|
|
2,503
|
|
Total
|
|
$
|
433,732
|
|
|
$
|
402,440
|
|
|
$
|
393,761
|
|
49
Information regarding assets by geographic area is as follows:
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Long-lived assets:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
54,904
|
|
|
$
|
56,980
|
|
Foreign:
|
|
|
|
|
|
|
|
|
Europe
|
|
|
15,247
|
|
|
|
15,806
|
|
Mexico
|
|
|
20,170
|
|
|
|
20,815
|
|
Total
|
|
$
|
90,321
|
|
|
$
|
93,601
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Total assets:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
293,943
|
|
|
$
|
300,688
|
|
Foreign:
|
|
|
|
|
|
|
|
|
Europe
|
|
|
74,707
|
|
|
|
66,862
|
|
Mexico
|
|
|
24,041
|
|
|
|
24,177
|
|
Total
|
|
$
|
392,691
|
|
|
$
|
391,727
|
|
Note 10 Unaudited: Quarterly Results of Operations, Common Stock Price and Dividends
|
|
Quarter ended
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
|
(In thousands except per share data)
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
105,041
|
|
|
$
|
113,648
|
|
|
$
|
110,630
|
|
|
$
|
104,413
|
|
Gross margin
|
|
$
|
36,748
|
|
|
$
|
41,504
|
|
|
$
|
43,946
|
|
|
$
|
40,151
|
|
Net earnings
|
|
$
|
7,546
|
|
|
$
|
6,154
|
|
|
$
|
2,851
|
|
|
$
|
11,239
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.26
|
|
|
$
|
0.21
|
|
|
$
|
0.10
|
|
|
$
|
0.39
|
|
Diluted
|
|
$
|
0.26
|
|
|
$
|
0.21
|
|
|
$
|
0.10
|
|
|
$
|
0.39
|
|
Dividends declared
|
|
$
|
0.13
|
|
|
$
|
0.13
|
|
|
$
|
0.15
|
|
|
$
|
0.15
|
|
Stock price:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
51.05
|
|
|
$
|
47.25
|
|
|
$
|
56.40
|
|
|
$
|
57.12
|
|
Low
|
|
$
|
45.45
|
|
|
$
|
41.00
|
|
|
$
|
50.75
|
|
|
$
|
46.70
|
|
Quarter-end close
|
|
$
|
47.15
|
|
|
$
|
44.70
|
|
|
$
|
52.95
|
|
|
$
|
49.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
101,606
|
|
|
$
|
104,176
|
|
|
$
|
100,008
|
|
|
$
|
96,650
|
|
Gross margin
|
|
$
|
38,650
|
|
|
$
|
41,054
|
|
|
$
|
37,039
|
|
|
$
|
39,003
|
|
Net earnings
|
|
$
|
8,749
|
|
|
$
|
10,614
|
|
|
$
|
7,975
|
|
|
$
|
7,233
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.30
|
|
|
$
|
0.37
|
|
|
$
|
0.28
|
|
|
$
|
0.25
|
|
Diluted
|
|
$
|
0.30
|
|
|
$
|
0.36
|
|
|
$
|
0.27
|
|
|
$
|
0.25
|
|
Dividends declared
|
|
$
|
0.115
|
|
|
$
|
0.115
|
|
|
$
|
0.130
|
|
|
$
|
0.130
|
|
Stock price:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
39.85
|
|
|
$
|
41.58
|
|
|
$
|
49.45
|
|
|
$
|
52.10
|
|
Low
|
|
$
|
34.40
|
|
|
$
|
35.15
|
|
|
$
|
39.10
|
|
|
$
|
42.00
|
|
Quarter-end close
|
|
$
|
36.75
|
|
|
$
|
39.85
|
|
|
$
|
49.00
|
|
|
$
|
47.80
|
|
The Company's Common Stock is listed on the New York Stock Exchange under the symbol BMI. Earnings per share are computed independently for each quarter. As such, the annual per share amount may not equal the sum of the quarterly amounts due to rounding. The Company currently anticipates continuing to pay cash dividends. Shareholders of record as of December 31, 2018 and 2017 totaled 906 and 909, respectively. Voting trusts and street name shareholders are counted as single shareholders for this purpose.
50
Note
1
1
Revenue Recognition
On January 1, 2018, the Company adopted ASU 2014-09 using the modified retrospective method applied to those contracts that were not completed or substantially complete as of January 1, 2018. Results for the reporting period beginning after January 1, 2018 are presented under ASC 606 “Revenue from Contracts with Customers”, while prior period amounts have not been adjusted and continue to be reported in accordance with the Company's historic accounting under ASC 605 “Revenue Recognition.” The Company recorded a net reduction to opening Reinvested earnings of $0.1 million as of January 1, 2018 as a result of the cumulative impact of adopting ASC 606. The impact to revenues as a result of applying ASC 606 in the year ended December 31, 2018 were not material.
Revenue for sales of products and services is derived from contracts with customers. The products and services promised in contracts include the sale of municipal water and flow instrumentation products, such as flow meters and radios, software access and other ancillary services. Contracts generally state the terms of sale, including the description, quantity and price of each product or service. Since the customer typically agrees to a stated rate and price in the contract that does not vary over the life of the contract, the majority of the Company's contracts do not contain variable consideration. The Company establishes a provision for estimated warranty and returns as well as certain after-sale costs as discussed in Note 1 “Summary of Significant Accounting Policies.”
In accordance with Topic 606, the Company disaggregates revenue from contracts with customers into geographical regions and by the timing of when goods and services are transferred. The Company determined that disaggregating revenue into these categories meets the disclosure objective in Topic 606 which is to depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by regional economic factors. Information regarding revenues disaggregated by geographic area is disclosed in Note 9 “Industry Segment and Geographic Areas”.
Information regarding revenues disaggregated by the timing of when goods and services are transferred is as follows:
|
|
Twelve Months Ended
|
|
|
|
December 31, 2018
|
|
|
|
(In thousands)
|
|
Revenue recognized over time
|
|
$
|
12,943
|
|
Revenue recognized at a point in time
|
|
|
420,789
|
|
Net Sales
|
|
$
|
433,732
|
|
The Company performs its obligations under a contract by shipping products or performing services in exchange for consideration. The Company typically invoices its customers as soon as control of an asset is transferred and a receivable to the Company is established. The Company, however, recognizes a contract liability when a customer prepays for goods or services and the Company has not transferred control of the goods or services.
The opening and closing balances of the Company's receivables and contract liabilities are as follows:
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
|
|
(In thousands)
|
|
Receivables
|
|
$
|
66,300
|
|
|
$
|
58,210
|
|
Contract liabilities
|
|
|
15,793
|
|
|
|
9,670
|
|
The balance of contract assets was immaterial as the Company did not have a significant amount of uninvoiced receivables at December 31, 2018.
The amount of revenue recognized in the year ended December 31, 2018 that was included in the opening contract liability balance was $1.2 million. The difference between the opening and closing balances of the Company's contract liabilities was the result of a timing difference between the Company's performance and the customers' prepayments. The increased receivables balance was due to higher sales compared to the prior year.
A performance obligation in a contract is a promise to transfer a distinct good or service to the customer, and is the unit of measurement in Topic 606. At contract inception, the Company assesses the products and services promised in its contracts with customers. The Company then identifies performance obligations to transfer distinct products or services to the customer. In order to identify performance obligations, the Company considers all of the products or services promised in the contract regardless of whether they are explicitly stated or are implied by customary business practices.
51
The Company's performance obligations are satisfied at a point in time or over time as work progresses.
Revenue from
products and services transferred to customers at a single point in
time accounted for
97.0% of net sales for the year
ended December 31
, 2018
.
The majority of the Company's revenue recognized at a point
in time is for the sale of municipal and flow instr
umentation products.
Revenue from these contracts is recognized when the
customer is able to direct the use of and obtain substantially all of the benefits from the product which generally coincides with
title transfer during the shipping process.
Revenue from services transferred to customers over time accounted for 3.0% of net sales for the year ended December 31, 2018. The majority of the Company's revenue that is recognized over time relates to the BEACON AMA software as a service.
As of December 31, 2018, the Company had certain contracts with unsatisfied performance obligations. For contracts recorded as long-term liabilities, $12.3 million was the aggregate amount of the transaction price allocated to performance obligations that were unsatisfied or partially unsatisfied as of the end of the reporting period. The Company estimates that revenue recognized from satisfying those performance obligations will be approximately $
3.2
million in each year from 2020 through 2022 and $2.7 million in 2023.
The Company records revenue for BEACON AMA services over time as the customer benefits from the use of the Company's software. Control of an asset is therefore transferred to the customer over time and the Company will recognize revenue for BEACON AMA services as service units are used by the customer.
Revenue is recorded for various ancillary services, such as project management and training, over time as the customer benefits from the services provided. The majority of this revenue will be recognized equally throughout the contract period as the customer receives benefits from the Company's promise to provide such services. If the service is not provided evenly over the contract period, revenue will be recognized by the associated input/output method that best measures the progress towards contract completion.
The Company also has contracts that include both the sale and installation of flow meters as performance obligations. In those cases, the Company records revenue for installed flow meters at the point in time when the flow meters have been accepted by the customer. The customer cannot control the use of and obtain substantially all of the benefits from the equipment until the customer has accepted the installed product. Therefore, for both the flow meter and the related installation, the Company has concluded that control is transferred to the customer upon customer acceptance of the installed flow meter. In addition, the Company has a variety of ancillary revenue streams which are minor. The types and composition of the Company's revenue streams did not materially change during the year ended December 31, 2018.
Certain customers may receive cash-based incentives or credits, which are accounted for as variable consideration. Variable consideration in contracts for the year ended December 31, 2018 was insignificant.
The transaction price for a contract is allocated to each distinct performance obligation and recognized as revenue when, or as, each performance obligation is satisfied. For contracts with multiple performance obligations, the Company allocates the contract's transaction price to each performance obligation using the best estimate of the standalone selling price of each distinct good or service in a contract. The primary method used to estimate standalone selling price is the observable price when the good or service is sold separately in similar circumstances and to similar customers. If standalone selling price is not directly observable, it is estimated using either a market adjustment or cost plus margin approach.
The recording of assets recognized from the costs to obtain and fulfill customer contracts primarily relate to the deferral of sales commissions on the Company's BEACON AMA software arrangements. The Company's costs incurred to obtain or fulfill a contract with a customer are amortized over the period of benefit of the related revenue. The Company expenses any costs incurred immediately when the amortization period would be one year or less. These costs are recorded within selling, engineering and administration expenses.
For the year ended December 31, 2018, the Company elected the following practical expedients:
In accordance with Subtopic 340-40 “Other Assets and Deferred Costs - Contracts with Customers,” the Company elected to expense the incremental costs of obtaining a contract when the amortization period for such contracts would have been one year or less. The Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less, and contracts for which it has the right to invoice for services performed.
The Company has made an accounting policy election to exclude all taxes by governmental authorities from the measurement of the transaction price.
52