UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.DC 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 orOR 15(d) of the Securities Exchange Act ofOF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File NumberNo. 001-06706
BADGER METER, INC.
(AddressExact 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 where 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 ☒ý No ☐¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ☒ý 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,” “non-accelerated filer,” “smaller reporting company,”company” and “emerging growth company” in Rule 12b-212b‑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 ☒ý
As of July 12, 2018,April 11, 2019, there were 29,113,58229,114,760 shares of Common stock outstanding with a par value of $1 per share.
Quarterly Report on Form 10-Q for the Period Ended June 30, 2018
Index
Page No. | |||
Item 1 | 5 | ||
5 | |||
6 | |||
7 | |||
8 | |||
9 | |||
Notes to Unaudited Consolidated Condensed Financial Statements | 10 | ||
Item 2 | 18 | ||
Item 3 | 22 | ||
Item 4 | 22 | ||
Item 6 | 23 | ||
24 |
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, 2017 that2018 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 healthconditions 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 tariffs, duties 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)party owned) due to breaches in data security or any other cybersecurity attack;
3
violations or alleged violations of the U.S. Foreign Corrupt Practices Act (FCPA) or other anti-corruption laws and the Foreign Account Tax Compliance provisions of the Hiring Incentives to Restore Employment Act (referred to as FATCA);laws;
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.
BADGER METER, INC.
Consolidated Condensed Balance Sheets
|
| March 31, |
|
| December 31, |
| ||
|
| (Unaudited) |
|
|
|
|
| |
|
| (In thousands) |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash |
| $ | 15,033 |
|
| $ | 13,086 |
|
Receivables |
|
| 68,095 |
|
|
| 66,300 |
|
Inventories: |
|
|
|
|
|
|
|
|
Finished goods |
|
| 21,811 |
|
|
| 23,476 |
|
Work in process |
|
| 16,076 |
|
|
| 17,097 |
|
Raw materials |
|
| 42,667 |
|
|
| 40,231 |
|
Total inventories |
|
| 80,554 |
|
|
| 80,804 |
|
Prepaid expenses and other current assets |
|
| 7,541 |
|
|
| 4,469 |
|
Total current assets |
|
| 171,223 |
|
|
| 164,659 |
|
Property, plant and equipment, at cost |
|
| 215,098 |
|
|
| 213,722 |
|
Less accumulated depreciation |
|
| (125,816 | ) |
|
| (123,401 | ) |
Net property, plant and equipment |
|
| 89,282 |
|
|
| 90,321 |
|
Intangible assets, at cost less accumulated amortization |
|
| 53,534 |
|
|
| 55,418 |
|
Other assets |
|
| 15,810 |
|
|
| 8,872 |
|
Deferred income taxes |
|
| 2,142 |
|
|
| 2,163 |
|
Goodwill |
|
| 71,258 |
|
|
| 71,258 |
|
Total assets |
| $ | 403,249 |
|
| $ | 392,691 |
|
Liabilities and shareholders’ equity |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Short-term debt |
| $ | 10,980 |
|
| $ | 18,060 |
|
Payables |
|
| 25,983 |
|
|
| 22,469 |
|
Accrued compensation and employee benefits |
|
| 9,583 |
|
|
| 13,768 |
|
Warranty and after-sale costs |
|
| 4,318 |
|
|
| 4,206 |
|
Other current liabilities |
|
| 7,060 |
|
|
| 1,512 |
|
Total current liabilities |
|
| 57,924 |
|
|
| 60,015 |
|
Other long-term liabilities |
|
| 21,494 |
|
|
| 13,972 |
|
Deferred income taxes |
|
| 3,217 |
|
|
| 3,332 |
|
Accrued non-pension postretirement benefits |
|
| 5,214 |
|
|
| 5,184 |
|
Other accrued employee benefits |
|
| 6,787 |
|
|
| 6,685 |
|
Commitments and contingencies (Note 6) |
|
|
|
|
|
|
|
|
Shareholders’ equity: |
|
|
|
|
|
|
|
|
Common stock |
|
| 37,200 |
|
|
| 37,198 |
|
Capital in excess of par value |
|
| 38,756 |
|
|
| 38,082 |
|
Reinvested earnings |
|
| 263,777 |
|
|
| 257,313 |
|
Accumulated other comprehensive income |
|
| 311 |
|
|
| 580 |
|
Less: Employee benefit stock |
|
| (306 | ) |
|
| (306 | ) |
Treasury stock, at cost |
|
| (31,125 | ) |
|
| (29,364 | ) |
Total shareholders’ equity |
|
| 308,613 |
|
|
| 303,503 |
|
Total liabilities and shareholders’ equity |
| $ | 403,249 |
|
| $ | 392,691 |
|
June 30, | December 31, | ||||||
(Unaudited) | |||||||
(In thousands) | |||||||
Assets | 2018 | 2017 | |||||
Current assets: | |||||||
Cash | $ | 12,125 | $ | 11,164 | |||
Receivables | 65,303 | 58,210 | |||||
Inventories: | |||||||
Finished goods | 25,199 | 23,125 | |||||
Work in process | 19,643 | 22,035 | |||||
Raw materials | 40,814 | 40,012 | |||||
Total inventories | 85,656 | 85,172 | |||||
Prepaid expenses and other current assets | 5,070 | 4,077 | |||||
Total current assets | 168,154 | 158,623 | |||||
Property, plant and equipment, at cost | 215,513 | 212,485 | |||||
Less accumulated depreciation | (122,838 | ) | (118,884 | ) | |||
Net property, plant and equipment | 92,675 | 93,601 | |||||
Intangible assets, at cost less accumulated amortization | 59,113 | 59,326 | |||||
Other assets | 9,240 | 9,897 | |||||
Deferred income taxes | 816 | 2,856 | |||||
Goodwill | 71,109 | 67,424 | |||||
Total assets | $ | 401,107 | $ | 391,727 | |||
Liabilities and shareholders’ equity | |||||||
Current liabilities: | |||||||
Short-term debt | $ | 42,430 | $ | 44,550 | |||
Payables and other current liabilities | 28,092 | 28,601 | |||||
Accrued compensation and employee benefits | 9,632 | 15,509 | |||||
Warranty and after-sale costs | 4,110 | 3,367 | |||||
Income and other taxes | 1,363 | 1,082 | |||||
Total current liabilities | 85,627 | 93,109 | |||||
Other long-term liabilities | 13,657 | 4,073 | |||||
Deferred income taxes | 1,294 | 3,434 | |||||
Accrued non-pension postretirement benefits | 5,718 | 5,703 | |||||
Other accrued employee benefits | 6,341 | 7,956 | |||||
Commitments and contingencies (Note 6) | |||||||
Shareholders’ equity: | |||||||
Common stock | 37,177 | 37,165 | |||||
Capital in excess of par value | 33,681 | 32,182 | |||||
Reinvested earnings | 250,242 | 244,224 | |||||
Accumulated other comprehensive loss | (5,508 | ) | (10,893 | ) | |||
Less: Employee benefit stock | (461 | ) | (460 | ) | |||
Treasury stock, at cost | (26,661 | ) | (24,766 | ) | |||
Total shareholders’ equity | 288,470 | 277,452 | |||||
Total liabilities and shareholders’ equity | $ | 401,107 | $ | 391,727 |
See accompanying notes to unaudited consolidated condensed financial statements.
Consolidated Condensed Statements of Operations
|
| Three Months Ended March 31, |
| |||||
|
| (Unaudited) |
| |||||
|
| (In thousands except share and per share amounts) |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Net sales |
| $ | 104,881 |
|
| $ | 105,041 |
|
Cost of sales |
|
| 64,424 |
|
|
| 68,293 |
|
Gross margin |
|
| 40,457 |
|
|
| 36,748 |
|
Selling, engineering and administration |
|
| 26,130 |
|
|
| 26,774 |
|
Operating earnings |
|
| 14,327 |
|
|
| 9,974 |
|
Interest expense, net |
|
| 129 |
|
|
| 290 |
|
Other pension and postretirement costs (benefits) |
|
| 47 |
|
|
| (19 | ) |
Earnings before income taxes |
|
| 14,151 |
|
|
| 9,703 |
|
Provision for income taxes |
|
| 3,327 |
|
|
| 2,157 |
|
Net earnings |
| $ | 10,824 |
|
| $ | 7,546 |
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
Basic |
| $ | 0.37 |
|
| $ | 0.26 |
|
Diluted |
| $ | 0.37 |
|
| $ | 0.26 |
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share |
| $ | 0.15 |
|
| $ | 0.13 |
|
|
|
|
|
|
|
|
|
|
Shares used in computation of earnings per share: |
|
|
|
|
|
|
|
|
Basic |
|
| 29,028,964 |
|
|
| 28,932,787 |
|
Impact of dilutive securities |
|
| 209,660 |
|
|
| 217,259 |
|
Diluted |
|
| 29,238,624 |
|
|
| 29,150,046 |
|
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
(Unaudited) | (Unaudited) | ||||||||||||||
(In thousands except share and per share amounts) | |||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
Net sales | $ | 113,648 | $ | 104,176 | $ | 218,689 | $ | 205,782 | |||||||
Cost of sales | 72,144 | 63,122 | 140,437 | 126,078 | |||||||||||
Gross margin | 41,504 | 41,054 | 78,252 | 79,704 | |||||||||||
Selling, engineering and administration | 25,153 | 24,214 | 51,927 | 49,299 | |||||||||||
Operating earnings | 16,351 | 16,840 | 26,325 | 30,405 | |||||||||||
Interest expense, net | 409 | 147 | 699 | 325 | |||||||||||
Other pension and postretirement costs | 8,031 | 249 | 8,012 | 345 | |||||||||||
Earnings before income taxes | 7,911 | 16,444 | 17,614 | 29,735 | |||||||||||
Provision for income taxes | 1,757 | 5,830 | 3,914 | 10,372 | |||||||||||
Net earnings | $ | 6,154 | $ | 10,614 | $ | 13,700 | $ | 19,363 | |||||||
Earnings per share: | |||||||||||||||
Basic | $ | 0.21 | $ | 0.37 | $ | 0.47 | $ | 0.67 | |||||||
Diluted | $ | 0.21 | $ | 0.36 | $ | 0.47 | $ | 0.67 | |||||||
Dividends declared per common share | $ | 0.130 | $ | 0.115 | $ | 0.260 | $ | 0.230 | |||||||
Shares used in computation of earnings per share: | |||||||||||||||
Basic | 28,963,373 | 28,938,451 | 28,965,735 | 28,938,851 | |||||||||||
Impact of dilutive securities | 170,070 | 159,369 | 193,665 | 170,824 | |||||||||||
Diluted | 29,133,443 | 29,097,820 | 29,159,400 | 29,109,675 |
See accompanying notes to unaudited consolidated condensed financial statements.
Consolidated Condensed Statements of Comprehensive Income
|
| Three Months Ended March 31, |
| |||||
|
| (Unaudited) |
| |||||
|
| (In thousands) |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Net earnings |
| $ | 10,824 |
|
| $ | 7,546 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
| (257 | ) |
|
| 421 |
|
Pension and postretirement benefits, net of tax |
|
| (12 | ) |
|
| 61 |
|
Comprehensive income |
| $ | 10,555 |
|
| $ | 8,028 |
|
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
(Unaudited) | (Unaudited) | ||||||||||||||
(In thousands) | |||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
Net earnings | $ | 6,154 | $ | 10,614 | $ | 13,700 | $ | 19,363 | |||||||
Other comprehensive income: | |||||||||||||||
Foreign currency translation adjustment | (808 | ) | 1,049 | (387 | ) | 1,340 | |||||||||
Pension and postretirement benefits, net of tax | 5,711 | 71 | 5,772 | 154 | |||||||||||
Comprehensive income | $ | 11,057 | $ | 11,734 | $ | 19,085 | $ | 20,857 |
See accompanying notes to unaudited consolidated condensed financial statements.
Consolidated Condensed Statements of Cash Flows
|
| Three Months Ended March 31, |
| |||||
|
| (Unaudited) (In thousands) |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Operating activities: |
|
|
|
|
|
|
|
|
Net earnings |
| $ | 10,824 |
|
| $ | 7,546 |
|
Adjustments to reconcile net earnings to net cash provided by operations: |
|
|
|
|
|
|
|
|
Depreciation |
|
| 2,978 |
|
|
| 3,175 |
|
Amortization |
|
| 3,264 |
|
|
| 3,537 |
|
Deferred income taxes |
|
| (1 | ) |
|
| 1 |
|
Noncurrent employee benefits |
|
| 117 |
|
|
| 94 |
|
Stock-based compensation expense |
|
| 265 |
|
|
| 471 |
|
Changes in: |
|
|
|
|
|
|
|
|
Receivables |
|
| (1,943 | ) |
|
| (4,919 | ) |
Inventories |
|
| 166 |
|
|
| 265 |
|
Payables |
|
| 4,540 |
|
|
| (4,479 | ) |
Prepaid expenses and other current assets |
|
| (2,101 | ) |
|
| (1,586 | ) |
Other liabilities |
|
| (294 | ) |
|
| 2,670 |
|
Total adjustments |
|
| 6,991 |
|
|
| (771 | ) |
Net cash provided by operations |
|
| 17,815 |
|
|
| 6,775 |
|
Investing activities: |
|
|
|
|
|
|
|
|
Property, plant and equipment expenditures |
|
| (2,160 | ) |
|
| (3,043 | ) |
Net cash used for investing activities |
|
| (2,160 | ) |
|
| (3,043 | ) |
Financing activities: |
|
|
|
|
|
|
|
|
Net (decrease) increase in short-term debt |
|
| (7,000 | ) |
|
| 3,500 |
|
Payment of contingent acquisition consideration |
|
| (1,000 | ) |
|
| - |
|
Dividends paid |
|
| (4,357 | ) |
|
| (3,770 | ) |
Proceeds from exercise of stock options |
|
| 471 |
|
|
| 231 |
|
Repurchase of treasury stock |
|
| (1,873 | ) |
|
| (1,619 | ) |
Issuance of treasury stock |
|
| 52 |
|
|
| 65 |
|
Net cash used for financing activities |
|
| (13,707 | ) |
|
| (1,593 | ) |
Effect of foreign exchange rates on cash |
|
| (1 | ) |
|
| 229 |
|
Increase in cash |
|
| 1,947 |
|
|
| 2,368 |
|
Cash – beginning of period |
|
| 13,086 |
|
|
| 11,164 |
|
Cash – end of period |
| $ | 15,033 |
|
| $ | 13,532 |
|
Six Months Ended | |||||||
June 30 | |||||||
(Unaudited) (In thousands) | |||||||
2018 | 2017 | ||||||
Operating activities: | |||||||
Net earnings | $ | 13,700 | $ | 19,363 | |||
Adjustments to reconcile net earnings to net cash provided by operations: | |||||||
Depreciation | 5,894 | 5,997 | |||||
Amortization | 6,543 | 5,994 | |||||
Deferred income taxes | 59 | (53 | ) | ||||
Noncurrent employee benefits | 84 | 541 | |||||
Pension termination settlement charge | 8,168 | — | |||||
Contribution to pension plan | (1,600 | ) | — | ||||
Stock-based compensation expense | 944 | 779 | |||||
Changes in: | |||||||
Receivables | (6,765 | ) | (3,754 | ) | |||
Inventories | 167 | 4,759 | |||||
Prepaid expenses and other assets | (3,101 | ) | (3,734 | ) | |||
Liabilities other than debt | 1,106 | 7,453 | |||||
Total adjustments | 11,499 | 17,982 | |||||
Net cash provided by operations | 25,199 | 37,345 | |||||
Investing activities: | |||||||
Property, plant and equipment expenditures | (5,242 | ) | (6,762 | ) | |||
Acquisitions, net of cash acquired and future payments | (8,048 | ) | (18,376 | ) | |||
Net cash used for investing activities | (13,290 | ) | (25,138 | ) | |||
Financing activities: | |||||||
Net (decrease) increase in short-term debt | (2,000 | ) | 2,161 | ||||
Dividends paid | (7,542 | ) | (6,673 | ) | |||
Proceeds from exercise of stock options | 231 | 1,014 | |||||
Repurchase of treasury stock | (1,989 | ) | (3,288 | ) | |||
Issuance of treasury stock | 431 | 533 | |||||
Net cash used for financing activities | (10,869 | ) | (6,253 | ) | |||
Effect of foreign exchange rates on cash | (79 | ) | 558 | ||||
Increase in cash | 961 | 6,512 | |||||
Cash – beginning of period | 11,164 | 7,338 | |||||
Cash – end of period | $ | 12,125 | $ | 13,850 |
See accompanying notes to unaudited consolidated condensed financial statements.
8
Consolidated Condensed Statements of Shareholders’ Equity
|
| Quarters ended March 31, |
| |||||||||||||||||||||||||
|
| 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, December 31, 2017 |
| $ | 37,165 |
|
| $ | 32,182 |
|
| $ | 244,224 |
|
| $ | (10,893 | ) |
| $ | (461 | ) |
| $ | (24,766 | ) |
| $ | 277,451 |
|
Net earnings |
|
| — |
|
|
| — |
|
|
| 7,546 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 7,546 |
|
ASU 2014-09 adoption impact |
|
| — |
|
|
| — |
|
|
| (128 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (128 | ) |
Pension and postretirement benefits (net of $21 tax effect) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 61 |
|
|
| — |
|
|
| — |
|
|
| 61 |
|
Foreign currency translation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 421 |
|
|
| — |
|
|
| — |
|
|
| 421 |
|
Cash dividends of $0.13 per share |
|
| — |
|
|
| — |
|
|
| (3,777 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3,777 | ) |
Stock options exercised |
|
| 12 |
|
|
| 219 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 231 |
|
Stock-based compensation |
|
| — |
|
|
| 471 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 471 |
|
Purchase of common stock for treasury stock |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,619 | ) |
|
| (1,619 | ) |
Issuance of treasury stock (21 shares) |
|
| — |
|
|
| (1 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 66 |
|
|
| 65 |
|
Balance, March 31, 2018 |
| $ | 37,177 |
|
| $ | 32,871 |
|
| $ | 247,865 |
|
| $ | (10,411 | ) |
| $ | (461 | ) |
| $ | (26,319 | ) |
| $ | 280,722 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2018 |
| $ | 37,198 |
|
| $ | 38,082 |
|
| $ | 257,313 |
|
| $ | 580 |
|
| $ | (306 | ) |
| $ | (29,364 | ) |
| $ | 303,503 |
|
Net earnings |
|
| — |
|
|
| — |
|
|
| 10,824 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 10,824 |
|
Pension and postretirement benefits (net of $4 tax effect) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (12 | ) |
|
| — |
|
|
| — |
|
|
| (12 | ) |
Foreign currency translation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (257 | ) |
|
| — |
|
|
| — |
|
|
| (257 | ) |
Cash dividends of $0.15 per share |
|
| — |
|
|
| — |
|
|
| (4,360 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (4,360 | ) |
Stock options exercised |
|
| 2 |
|
|
| 397 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 72 |
|
|
| 471 |
|
Stock-based compensation |
|
| — |
|
|
| 265 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 265 |
|
Purchase of common stock for treasury stock |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,873 | ) |
|
| (1,873 | ) |
Issuance of treasury stock (9 shares) |
|
| — |
|
|
| 12 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 40 |
|
|
| 52 |
|
Balance, March 31, 2019 |
| $ | 37,200 |
|
| $ | 38,756 |
|
| $ | 263,777 |
|
| $ | 311 |
|
| $ | (306 | ) |
| $ | (31,125 | ) |
| $ | 308,613 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Each common share of stock equals $1 par value; therefore, the number of common shares is the same as the dollar value.
See accompanying notes to unaudited consolidated condensed financial statements.
9
Notes to Unaudited Consolidated Condensed Financial Statements
Note 1 Basis of Presentation
In the opinion of management, the accompanying unaudited consolidated condensed financial statements of Badger Meter Inc. (the “Company” or “Badger Meter”) contain all adjustments (consisting only of normal recurring accruals except as otherwise discussed) necessary to present fairly the Company’s consolidated condensed financial position at June 30, 2018,March 31, 2019, results of operations, comprehensive income, cash flows and statements of shareholders’ equity for the three- and six-monththree-month periods ended June 30, 2018March 31, 2019 and 2017, comprehensive income for the three- and six-month periods ended June 30, 2018 and 2017, and cash flows for the six-month periods ended June 30, 2018 and 2017.2018. The results of operations for any interim period are not necessarily indicative of the results to be expected for the full year.
The preparation of financial statements in conformity with United States 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.
The consolidated condensed balance sheet at December 31, 20172018 was derived from amounts included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.2018. Refer to the footnotesnotes to the financial statements included in that report for a description of the Company’s accounting policies and for additional details of the Company’s financial condition. The details in those notes have not changed except as discussed below and as a result of normal adjustments in the interim.
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:
|
| Three months ended March 31, |
| |||||
(In thousands) |
| 2019 |
|
| 2018 |
| ||
Balance at beginning of period |
| $ | 4,206 |
|
| $ | 3,367 |
|
Net additions charged to earnings |
|
| 465 |
|
|
| 1,041 |
|
Adjustments to pre-existing warranties |
|
| - |
|
|
| (53 | ) |
Costs incurred |
|
| (353 | ) |
|
| (653 | ) |
Balance at end of period |
| $ | 4,318 |
|
| $ | 3,702 |
|
Three months ended | Six months ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
(In thousands) | 2018 | 2017 | 2018 | 2017 | |||||||||||
Balance at beginning of period | $ | 3,702 | $ | 2,548 | $ | 3,367 | $ | 2,779 | |||||||
Net additions charged to earnings | 1,274 | 1,231 | 2,315 | 1,983 | |||||||||||
Adjustments to pre-existing warranties | (48 | ) | 440 | (101 | ) | 46 | |||||||||
Costs incurred | (818 | ) | (1,155 | ) | (1,471 | ) | (1,744 | ) | |||||||
Balance at end of period | $ | 4,110 | $ | 3,064 | $ | 4,110 | $ | 3,064 |
Historically, the Company maintainsmaintained a non-contributory defined benefit pension plan that coverscovered substantially all U.S. employees who were employed at December 31, 2011. After that date, no further benefits are beingwere accrued in this plan. For the frozen pension plan, benefits arewere based primarily on years of service and, for certain plans,individuals, levels of compensation. TheIn 2018, the Company has taken steps towards terminating the pension plan and expectscompleted the termination to be finalized in the third quarter of 2018. The ultimate settlement obligation will depend upon the nature and timing of participant settlements at prevailing market conditions. During the three months ended June 30, 2018, in connection with the Company's ongoing activities to terminate the plan, lump-sum distributions to participants of the Plan exceeded the service and interest components of net periodicnon-contributory defined benefit pension cost. As a result, the company recorded a pre-tax settlement charge of $8.2 million during the second quarter of 2018 due for the most part to the initial transfer of pension funds to individuals who elected to rollover their accounts or transfer them to their plan.
The Company also maintains supplemental non-qualified plans for certain officers and other key employees, and an Employee Savings and Stock OptionOwnership Plan (“ESSOP”) for the majority of the U.S. employees.
The Company additionally 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.
10
Defined pension plan benefits | Other postretirement benefits | ||||||||||||||
(In thousands) | 2018 | 2017 | 2018 | 2017 | |||||||||||
Service cost (income) – benefits earned during the year | $ | 41 | $ | (11 | ) | $ | 28 | $ | 28 | ||||||
Interest cost on projected benefit obligations | 222 | 469 | 47 | 66 | |||||||||||
Expected return on plan assets | (591 | ) | (396 | ) | — | — | |||||||||
Amortization of prior service cost | — | — | — | (7 | ) | ||||||||||
Amortization of net loss (benefit) | 201 | 141 | (15 | ) | (24 | ) | |||||||||
Settlement expense | 8,168 | — | — | — | |||||||||||
Net periodic benefit cost | $ | 8,041 | $ | 203 | $ | 60 | $ | 63 |
The following table sets forth the components of net periodic benefit cost (income) for the sixthree months ended June 30,March 31, 2019 and 2018 and 2017 based on December 31, 20172018 and 20162017 actuarial measurement dates, respectively:
|
| Defined pension plan benefits |
|
| Other postretirement benefits |
| ||||||||||
(In thousands) |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
Service cost – benefits earned during the year |
| $ | 37 |
|
| $ | 29 |
|
| $ | 29 |
|
| $ | 34 |
|
Interest cost on projected benefit obligations |
|
| 9 |
|
|
| 95 |
|
|
| 53 |
|
|
| 48 |
|
Expected return on plan assets |
|
| - |
|
|
| (244 | ) |
|
| - |
|
|
| - |
|
Amortization of prior service benefit |
|
| - |
|
|
| - |
|
|
| (25 | ) |
|
| (6 | ) |
Amortization of net loss |
|
| 9 |
|
|
| 88 |
|
|
| - |
|
|
| - |
|
Net periodic benefit cost (income) |
| $ | 55 |
|
| $ | (32 | ) |
| $ | 57 |
|
| $ | 76 |
|
Defined pension plan benefits | Other postretirement benefits | ||||||||||||||
(In thousands) | 2018 | 2017 | 2018 | 2017 | |||||||||||
Service cost – benefits earned during the year | $ | 70 | $ | 13 | $ | 62 | $ | 63 | |||||||
Interest cost on projected benefit obligations | 317 | 787 | 95 | 117 | |||||||||||
Expected return on plan assets | (835 | ) | (798 | ) | — | — | |||||||||
Amortization of prior service cost | — | — | (7 | ) | (13 | ) | |||||||||
Amortization of net loss (benefit) | 289 | 276 | (15 | ) | (24 | ) | |||||||||
Settlement expense | 8,168 | — | — | — | |||||||||||
Net periodic benefit cost | $ | 8,009 | $ | 278 | $ | 135 | $ | 143 |
The Company disclosed in its financial statements for the year ended December 31, 2017 that it was not required to make a minimum contribution to the defined benefit pension plan for the 2018 calendar year. The Company made a $1.6 million payment in June 2018 related to the 2017 plan year. The Company believes that no additional contributions will be required during 2018 as it will be terminated prior to the end of 2018.
Note 4 Accumulated Other Comprehensive Loss
Components of and changes in accumulated other comprehensive lossincome (loss) at June 30, 2018March 31, 2019 are as follows:
(In thousands) |
| Unrecognized pension and postretirement benefits |
|
| Foreign currency |
|
| Total |
| |||
Balance at beginning of period |
| $ | 360 |
|
| $ | 220 |
|
| $ | 580 |
|
Other comprehensive income (loss) before reclassifications |
|
| - |
|
|
| (257 | ) |
|
| (257 | ) |
Amounts reclassified from accumulated other comprehensive income (loss), net of tax of $4 thousand |
|
| (12 | ) |
|
| - |
|
|
| (12 | ) |
Net current period other comprehensive income (loss), net of tax |
|
| (12 | ) |
|
| (257 | ) |
|
| (269 | ) |
Accumulated other comprehensive income (loss) |
| $ | 348 |
|
| $ | (37 | ) |
| $ | 311 |
|
(In thousands) | Unrecognized pension and postretirement benefits | Foreign currency | Total | ||||||||
Balance at beginning of period | $ | (11,597 | ) | $ | 704 | $ | (10,893 | ) | |||
Other comprehensive loss before reclassifications | — | (387 | ) | (387 | ) | ||||||
Amounts reclassified from accumulated other comprehensive loss, net of tax of $(1.9 million) | 5,772 | — | 5,772 | ||||||||
Net current period other comprehensive income (loss), net of tax | 5,772 | (387 | ) | 5,385 | |||||||
Accumulated other comprehensive (loss) income | $ | (5,825 | ) | $ | 317 | $ | (5,508 | ) |
Details of reclassifications out of accumulated other comprehensive lossincome (loss) during the sixthree months ended June 30, 2018March 31, 2019 are as follows:
(In thousands) |
| Amount reclassified from accumulated other comprehensive income (loss) |
| |
Amortization of pension and postretirement benefits items: |
|
|
|
|
Prior service benefit (1) |
| $ | (25 | ) |
Actuarial loss (1) |
|
| 9 |
|
Total before tax |
|
| (16 | ) |
Income tax |
|
| 4 |
|
Amount reclassified out of accumulated other comprehensive loss |
| $ | (12 | ) |
(In thousands) | Amount reclassified from accumulated other comprehensive loss | ||
Amortization of pension and postretirement benefits items: | |||
Prior service benefit (1) | $ | (756 | ) |
Settlement expense (1) | 8,168 | ||
Amortization of actuarial loss (1) | 274 | ||
Total before tax | 7,686 | ||
Income tax benefit | (1,914 | ) | |
Amount reclassified out of accumulated other comprehensive loss | $ | 5,772 |
(In thousands) | Unrecognized pension and postretirement benefits | Foreign currency | Total | ||||||||
Balance at beginning of period | $ | (10,495 | ) | $ | (1,140 | ) | $ | (11,635 | ) | ||
Other comprehensive income before reclassifications | — | 1,340 | 1,340 | ||||||||
Amounts reclassified from accumulated other comprehensive loss, net of tax of $(0.1) million | 154 | — | 154 | ||||||||
Net current period other comprehensive income, net of tax | 154 | 1,340 | 1,494 | ||||||||
Accumulated other comprehensive (loss) income | $ | (10,341 | ) | $ | 200 | $ | (10,141 | ) |
(In thousands) | Amount reclassified from accumulated other comprehensive loss | ||
Amortization of pension and postretirement benefits items: | |||
Prior service benefit (1) | $ | (13 | ) |
Amortization of actuarial loss (1) | 252 | ||
Total before tax | 239 | ||
Income tax benefit | (85 | ) | |
Amount reclassified out of accumulated other comprehensive loss | $ | 154 |
(1) | |
These accumulated other comprehensive |
11
Components of and changes in accumulated other comprehensive income (loss) at March 31, 2018 are as follows:
(In thousands) |
| Unrecognized pension and postretirement benefits |
|
| Foreign currency |
|
| Total |
| |||
Balance at beginning of period |
| $ | (11,597 | ) |
| $ | 704 |
|
| $ | (10,893 | ) |
Other comprehensive income (loss) before reclassifications |
|
| - |
|
|
| 421 |
|
|
| 421 |
|
Amounts reclassified from accumulated other comprehensive income (loss), net of tax of $21 thousand |
|
| 61 |
|
|
| - |
|
|
| 61 |
|
Net current period other comprehensive income (loss), net of tax |
|
| 61 |
|
|
| 421 |
|
|
| 482 |
|
Accumulated other comprehensive income (loss) |
| $ | (11,536 | ) |
| $ | 1,125 |
|
| $ | (10,411 | ) |
Details of reclassifications out of accumulated other comprehensive income (loss) during the three months ended March 31, 2018 are as follows:
(In thousands) |
| Amount reclassified from accumulated other comprehensive income (loss) |
| |
Amortization of pension and postretirement benefits items: |
|
|
|
|
Prior service benefit (1) |
| $ | (6 | ) |
Amortization of actuarial loss (1) |
|
| 88 |
|
Total before tax |
|
| 82 |
|
Income tax |
|
| (21 | ) |
Amount reclassified out of accumulated other comprehensive income |
| $ | 61 |
|
(1) | These accumulated other comprehensive income (loss) components are included in the computation of net periodic benefit cost (income) in Note 3 “Employee Benefit Plans.” |
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 settlement of $3.3 million of pre-existing Company receivables. The working capital adjustment was settled in the second quarter of 2018 and the balance sheet holdback has been included as a payableis recorded in payables on the Company's consolidated balance sheet.Consolidated Balance Sheet as it is anticipated to be paid in the next twelve months. The Company's preliminary allocation of the purchase price at June 30, 2018March 31, 2019 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. 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 June 30, 2018,March 31, 2019, the Company had not completed its analysis for estimating the fair value of the assets acquired.
In the first quarter of 2019, the Company made a contingent payment of $1.0 million related to the May 1, 2017 acquisition of 100% of the outstanding common stock of D-Flow Technology AB (“D-Flow”). There is an additional $2.0 million of contingent payments related to the D-Flow acquisition was accounted for under the purchase method, and accordingly, the results of operations were includedthat is anticipated to be made in the Company's financial statements from the date of acquisition. The acquisition did not have a material impact2019 which is recorded in payables on the Company's consolidated condensed financial statements or the notes thereto.
Note 6 Contingencies, Litigation and Commitments
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
12
future costs to the Company and such amounts could be material. Expenditures for compliance with environmental control provisions and regulations during 20172018 and the first halfquarter of 20182019 were not material.
The Company relies on single suppliers for most brass castings, and certain resinresins 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.
The Company reevaluates its exposures on a periodic basis and makes adjustments to reserves as appropriate.
The Company is subject to income taxes in the United States and numerous foreign jurisdictions. The Company’s income tax positions are based on interpretations of income tax laws and rulings in each of the jurisdictions that the Company operates. Significant judgment is required in determining the worldwide provision for income taxes as a percentage of earnings beforeand recording the related deferred tax assets and liabilities. The Company’s deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income taxes for the second quarter of 2018 was 22.2% comparedyears in which the assets or liabilities are expected to 35.5% in the second quarter of 2017. The provision for income taxes as a percentage of earnings before income taxes for the first half of 2018 was 22.2% compared to 34.9% for the first half of 2017.
The decrease between years was due almost entirely to the lower FederalCompany’s earnings before incomes taxes, income tax expense and effective income tax rate which declined from 35% in 2017 to 21% in 2018are as a result of U.S. tax reform that was enacted in December 2017. For the six-months ended June 30, 2018 and 2017, the Company recognized discrete tax benefits related to a pension plan payment (2018 only) and the excess tax benefits from stock-based compensation of $0.5 million and $0.2 million, respectively.
|
| Three Months Ended March 31, 2019 |
|
| Three Months Ended March 31, 2018 |
|
| ||
|
| (In thousands) |
|
| |||||
Earnings before income taxes |
| $ | 14,151 |
|
| $ | 9,703 |
|
|
Income tax expense |
| $ | 3,327 |
|
| $ | 2,157 |
|
|
Effective income tax rate |
|
| 23.5 | % |
|
| 22.2 | % |
|
Note 8 Fair Value Measurements of Financial Instruments
The Company applies the accounting standards for fair value measurements and disclosures for its financial assets and financial liabilities. 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 withpreviously employed by the Company. The carrying amounts of these insurance policies approximate their fair value.
Note 9 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 condensed financial statements and the notes to these financial statements, the Company evaluated subsequent events through the date that the accompanying financial statements were issued, and has determined that no material subsequent events exist through the date of this filing.
Note 10 New Pronouncements
In FebruaryAugust 2018, the Financial Accounting Standards Board ("FASB"(“FASB”) issued Accounting Standards Update ("ASU"(“ASU”) 2018-02 "Income StatementNo. 2018-14 “Compensation - Reporting Comprehensive Income (Topic 220)." Under existing U.S. generally accepted accounting principles,Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20),” which modifies the effects of changesannual disclosure requirements for defined benefit pension and other postretirement benefit plans. This ASU as modified added and deleted specific disclosures in tax rates and laws on deferred tax balances are recorded as a component of income tax expense inan effort to improve the period in which the law was enacted. When deferred tax balances related to items originally recorded in accumulated other comprehensive income are adjusted, certain tax effects become stranded in accumulated other comprehensive income.usefulness for financial statement users while also reducing unnecessary costs for companies. The amendments in ASU 2018-02 allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017. The amendments in this ASU also require certain disclosures about stranded tax effects. The guidance is effective for fiscal yearsannual periods beginning after December 15, 2018 and interim periods within those fiscal years. Early2020 with early adoption being permitted in any interim reporting period is permitted. The Company’s provisional adjustments recorded in 2017 to account forwithin the impact of the Tax Cuts and Jobs Act resulted in stranded tax effects.annual reporting period. The Company is currently evaluatingassessing the timing and impact of adopting ASU 2018-02.
13
In May 2017,August 2018, the FASB issued ASU 2017-09 “Compensation - Stock CompensationNo. 2018-13 “Fair Value Measurement (Topic 718)820),” which clarifies when a changeis designed to terms or conditionsimprove the effectiveness of a share-based payment award must be accounted for as a modification. The new guidance requires modification accounting if the vesting condition,disclosures related to fair value ormeasurements. This ASU is effective for annual periods beginning after December 15, 2019 and early adoption is allowed in any interim reporting period within the award classificationannual reporting period. The Company is notcurrently assessing the same both before and after a change to the terms and conditionsimpact of the award. The new guidance was adopted on a prospective basis on January 1, 2018. The adoption of this standard did not have an impact on the Company's consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04 "Intangibles“Intangibles - Goodwill and Other (Topic 350)."” The update requires
In June 2016, the FASB issued ASU No. 2016-13 “Financial Instruments - Credit Losses (Topic 326),” which amends the accounting for credit losses on purchased financial assets and available-for-sale debt securities with credit deterioration. This ASU requires the measurement of all expected credit losses for financial assets, including accounts receivables, held at the reporting date based upon current conditions, historical experience and reasonable forecasts. This ASU is effective for annual reporting 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 No. 2016-13.
In February 2016, the FASB issued ASU No. 2016-02 "Leases“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 lease 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 modifies the classification criteria and the accounting for sales-type and direct financing leases. The standard requiresincludes 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 retrospective application is prohibited.The Company plans to adopt the ASU beginning on the effective date of January 1, 2019. The Company expects that upon adoption the consolidated balance sheet will increase for the recognition of right of use assets and lease liabilities for operating leases. The Company is currently reviewing all of the available practical expedients for transition and is evaluating the impact that the adoption of this guidance will have on its financial condition, results of operations and the presentation of its consolidated financial statements.
Note 11 Revenue Recognition
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 with each customer generally state the terms of the sale, including the description, quantity and price of each product or service. Payment terms are stated in the contract. 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 2 "Additional Financial Information Disclosures."
In accordance with ASU No. 2016-10 “Revenue from Contracts with Customers” (“Topic 606,606”), 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.
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Information regarding revenues disaggregated by geographic area is as follows (in millions):follows:
|
| Three Months Ended March 31, 2019 |
|
| Three Months Ended March 31, 2018 |
| ||
|
| (In thousands) |
| |||||
Revenues: |
|
|
|
|
|
|
|
|
United States |
| $ | 91,499 |
|
| $ | 91,153 |
|
Foreign: |
|
|
|
|
|
|
|
|
Asia |
|
| 1,452 |
|
|
| 1,700 |
|
Canada |
|
| 3,497 |
|
|
| 3,260 |
|
Europe |
|
| 5,352 |
|
|
| 5,047 |
|
Mexico |
|
| 834 |
|
|
| 623 |
|
Middle East |
|
| 1,584 |
|
|
| 2,152 |
|
Other |
|
| 663 |
|
|
| 1,106 |
|
Total |
| $ | 104,881 |
|
| $ | 105,041 |
|
Three Months Ended | Six Months Ended | ||||||
June 30, 2018 | June 30, 2018 | ||||||
Revenues: | |||||||
United States | $ | 97,910 | $ | 189,063 | |||
Foreign: | |||||||
Asia | 3,161 | 4,861 | |||||
Canada | 3,529 | 6,789 | |||||
Europe | 5,101 | 10,148 | |||||
Mexico | 483 | 1,106 | |||||
Middle East | 3,204 | 5,356 | |||||
Other | 260 | 1,366 | |||||
Total | $ | 113,648 | $ | 218,689 |
Information regarding revenues disaggregated by the timing of when goods and services are transferred is as follows (in millions)
|
| Three Months Ended March 31, 2019 |
|
| Three Months Ended March 31, 2018 |
| ||
|
| (In thousands) |
| |||||
Revenue recognized over time |
| $ | 3,753 |
|
|
| 2,687 |
|
Revenue recognized at a point in time |
|
| 101,128 |
|
|
| 102,354 |
|
Total |
| $ | 104,881 |
|
| $ | 105,041 |
|
Three Months Ended | Six Months Ended | ||||||
June 30, 2018 | June 30, 2018 | ||||||
Revenue recognized over time | $ | 3,061 | 5,748 | ||||
Revenue recognized at a point in time | 110,587 | 212,941 | |||||
Total | $ | 113,648 | $ | 218,689 |
The Company performs its obligations under a contract with a customer by transferringshipping products and/or performing services in exchange for consideration from the customer.consideration. The Company typically invoices its customers as soon as control of an asset is transferred and a receivable forto the Company is established. The Company, however, recognizes a contract liability when a customer prepays for goods and/or services and the Company has not transferred control of the goods and/or services.
The opening and closing balances of the Company's receivables and contract liabilites and receivablesliabilities are as follows:
|
| March 31, 2019 |
|
| December 31, 2018 |
| ||
|
| (In thousands) |
| |||||
Receivables |
| $ | 68,095 |
|
| $ | 66,300 |
|
Contract liabilities |
| $ | 16,686 |
|
| $ | 15,793 |
|
June 30, 2018 | December 31, 2017 | ||||||
Receivables | $ | 65,303 | $ | 58,210 | |||
Contract liabilities | $ | 13,460 | $ | 9,670 |
The balance of contract assets was immaterial as the Company did not have a significant amount of uninvoiced receivables in the three- and six-month periods ended June 30, 2018at March 31, 2019 and December 31, 2017.
As of March 31, 2019, the Company had certain contracts where there were unsatisfied performance obligations. For contracts recorded as contract liabilities, $16.7 million was due to higher sales in the first half of 2018 compared to the fourth quarter of 2017. Generally, receivables balances are lower at year-end than at other timesaggregate amount of the year.
A performance obligation is a promise in a contract 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.
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 97.3%96.4% and 97.4% of net sales for the three- and six-monththree-month periods ended June 30,March 31, 2019 and 2018, respectively. The majority of the Company's revenue recognized at a
15
point in time is for the sale of municipal and flow instrumentation 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 2.7%3.6% and 2.6% of sales of net sales for the three- and six-monththree-month periods ended June 30,March 31, 2019 and 2018, respectively. The majority of the Company's revenue that is recognized over time relates to the BEACON AMA software as a service.
Note 12 Leases
On January 1, 2019, the Company had entered into contracts where there were unsatisfied performance obligations. For contracts recordedadopted ASU No. 2016-02 and ASU No. 2018-11 using the optional transition method. Under this transition method, comparative periods will continue to be reported in accordance with prior lease guidance under ASC 840 Leases. The Company has elected certain practical expedients permitted under the transition guidance, which, among other things, allows the Company to carry forward historical lease classifications.
The Company rents facilities, equipment and vehicles under operating leases, some of which contain renewal options. Upon inception of a rent agreement, the Company determines whether the arrangement contains a lease based on the unique conditions present. Leases that have a term over a year are recognized on the balance sheet as right-of-use assets and lease liabilities. Right-of-use assets are included in prepaid expenses and other current assets and other assets on the Company’s Consolidated Balance Sheet. Lease liabilities are included in other current liabilities and other long-term liabilities $10.8 million wason 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.Company’s Consolidated Balance Sheet. The Company estimateshas elected not to recognize leases that revenue recognized from satisfying those performance obligations will be approximately $1.2 million for the remainder of 2018, $2.5 million in each year from 2019 through 2021 and $2.1 million in 2022.
|
| March 31, 2019 |
|
| January 1, 2019 |
| ||
|
| (In thousands) |
| |||||
Right-of-use assets |
| $ | 10,077 |
|
| $ | 10,745 |
|
Lease liabilities |
| $ | 10,428 |
|
| $ | 11,087 |
|
The Company’s operating lease agreements have lease and non-lease components that require payments for which we recognize revenue at the amount to which we have the right to invoice for services performed.
|
| Three Months Ended March 31, 2019 |
| |
|
| (In thousands) |
| |
Operating lease expense |
| $ | 801 |
|
Variable and short-term lease expense |
|
| 72 |
|
Rent expense |
| $ | 873 |
|
|
|
|
|
|
16
The Company records right-of-use assets and lease liabilities based upon the present value of lease payments over the expected lease term. The Company’s rent agreements typically do not have implicit interest rates that are readily determinable. As a result, the Company utilizes an incremental borrowing rate that would be incurred to borrow on a collateralized basis over a similar term in a comparable economic environment. As of March 31, 2019 and January 1, 2019, the remaining lease term on the Company’s leases was 5.0 years and 5.3 years, respectively. As of March 31, 2019 and January 1, 2019, the discount rate was 5.00%.The future minimum lease payments to be paid under operating leases are as follows:
|
| Three Months Ended March 31, 2019 |
| |
|
| (In thousands) |
| |
2019 (remaining nine months) |
| $ | 2,328 |
|
2020 |
| $ | 2,703 |
|
2021 |
| $ | 2,113 |
|
2022 |
| $ | 1,247 |
|
2023 |
| $ | 1,184 |
|
Thereafter |
| $ | 2,189 |
|
Total future lease payments |
| $ | 11,764 |
|
(Present value adjustment) |
| $ | (1,336 | ) |
Present value of future lease payments |
| $ | 10,428 |
|
BUSINESS DESCRIPTION AND OVERVIEW
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 and communicating valuable and timely measurement data.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, to various industries for watervalves and other fluidsproducts 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 when both categories are grouped together.
Municipal water, the largest sales category, by sales volume, includesis comprised of either mechanical and ultrasonic (electronic)or static (ultrasonic) water meters along with the related radio and relatedsoftware technologies and services used by municipal water utilities as the basis for generating their water and wastewater revenues. The keylargest geographic market for the Company’s municipal water meter 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. In recent years, the Company has made inroadsnature; however, ultrasonic meters are gaining in sellingpenetration due to a variety of factors, including their ability to maintain near absolute measurement accuracy over their useful life. Providing ultrasonic water meters. The development of smaller diameter ultrasonic water metersmeter technology, combined with advanced radio technology, now provides the Company with the opportunity to sell into other geographical markets, for example Europe, the Middle East and South America. In the municipal water category, sales of water meters and related technologies and services are also commonly referred to as residential or commercial water meter sales, the latter referring to larger sizes of water meters.
Flow instrumentation includes meters and valves sold worldwide to measure and control materials flowingfluids 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, primarily intowith the following industries:Company’s primary market focus being water/wastewater; heating, ventilating and air conditioning (HVAC); oil and gas;gas, and chemical and petrochemical; test and measurement; automotive aftermarket; and the concrete construction process. Furthermore, the Company’s flowpetrochemical. Flow instrumentation technologiesproducts are generally sold to original equipment manufacturers as the primary flow measurement device within a product or system.
Municipal water meters (both residential and commercial water meterscommercial) are generally classified as either manually read meters or remotely read meters via radio technology. A manually read meter consists of a water meter and a register that provides a visual totalized meter reading. Meters equipped with radio technology (endpoints) receive flow measurement data from battery-powered encoder registers attached to the water meter, which is encrypted and transmitted via radio frequency to a receiver that collects and formats the data appropriately for water utility usage and billing systems. These remotely read or mobile, systems are classified as either automatic meter reading (AMR) systems, where a vehicle equipped for meter reading purposes, including a radio receiver, computer and reading software, collects the data from utilities’ meters; or fixed network advanced metering infrastructure (AMI) systems, where data is gathered utilizing a network (either fixed or cellular) of permanent data collectors or gateway receivers that are always active or listening for theable to receive radio data transmission from the utilities’ meters. AMI systems eliminate the need for utility personnel to drive through service territories to collect data from the meters. These systems provide the utilities with more frequent and diverse data from their meters at specified intervals.
The ORION®ORION branded family of radio endpoints provides water utilities with a range of industry-leading options for meter reading. These include ORION Migratable (ME) for mobileAMR meter reading, ORION (SE) for traditional fixed network applications, and ORION Cellular for an infrastructure-free fixed network meter reading.reading solution. ORION Migratable makes the migration to fixed network easier for utilities that prefer to start with mobile reading and later adopt fixed network communications, allowing utilities to choose a solution for their current needs and be positioned for their future operational changes. ORION Cellular eliminates the need for utility-owned fixed network infrastructure, allows for rapidgradual or full deployment, and decreases ongoing maintenance.
Critical to the water metering ecosystem is information and analytics. The Company’s BEACON AMA Managed Solution is the latest in metering technology. BEACON AMA combines the BEACON analyticalAdvanced Metering Analytics (AMA) software suite with proven ORION technologies using two-way fixed and cellular networks in a managed solution, improvingimproves the utilities’ visibility of their water consumption and eliminating the need for costly utility-managed infrastructure.
Water meter replacement and the adoption and deployment of new technology comprise the majority of water meter product sales, including radio products. To a much lesser extent, housing starts also contribute to the new product sales base. Over the last decade, there has been a growing trend in the conversion from manually read water meters to meters with radio technology. This conversion rate is accelerating, and contributes to an increased water meter and radio solutions base of business. Thewith the Company estimatesestimating that approximately 55% to 60% of water meters installed in the United States have been converted to a radio solutionssolution technology.
18
The Company’s strategy isnet sales and corresponding net earnings depend on unit volume and product mix, with the Company generally earning higher average selling prices and margins on meters equipped with radio technology, and higher margins on ultrasonic compared to fulfill customers’ metering expectationsmechanical meters. The Company’s proprietary radio products (i.e. ORION) generally result in higher margins than the remarketed, non-proprietary technology products. The Company also sells registers and requirements with its proprietary meter reading systems or other systems available through its alliance partnersendpoints separately to customers who wish to upgrade their existing meters in the marketplace.
Flow instrumentation products serveare used in flow measurement and control applications across a broad industrial spectrum, occasionally leveraging the same technologies used in the municipal water category. Specialized communication protocols that control the entire flow measurement process and mandatory certifications drive these markets. The Company’s specific flow measurementCompany provides both standard and control applications and technologies serve the flow measurement market through both customized and standard flow instrumentation solutions.
The industries served by the Company’s flow instrumentation products face accelerating demands to contain costs, reduce product variability, and meet ever-changing safety, regulatory and sustainability requirements. To address these challenges, customers must reap more value from every component in their systems. This system-wide scrutiny has heightened the focus on flow instrumentation in industrial process, manufacturing, commercial fluid, building automation and precision engineering applications where flow measurement and control are critical.
A leader in both mechanical and electricalstatic (ultrasonic) flow metering technologies for industrial markets, the Company offers one of the broadest flow measurement, control and communication portfolios in the market. TheThis portfolio carries respected brand names including Recordall®, E-Series, ORION, Hedland®, Dynasonics®, Blancett®, and Research Control®, and includes eight of the ten major flow meter technologies. Customers rely on the Company for application-specific solutions that deliver accurate, timely and dependable flow data and control essential for product quality, cost control, safer operations, regulatory compliance and more sustainable operations.
The Company's products are sold throughout the electric utility industry reliesworld through employees, resellers and representatives. Depending on AMI technology for two-way communication to monitor and control electrical devices at the customer's site. Although the Company does not sell products for electric market applications, the trend toward AMI affects the markets in which the Company does participate, particularly for those customers in the water utility market that are interested in more frequent and diverse data collection. Specifically, AMI and AMA technologies enable water utilities to capture readings from each meter at more frequent and variable intervals. Similar to the electric utility industry’s conversion to solid-state meters in recent years, the water utility industry is beginning the conversion from mechanical to ultrasonic meters. Ultrasonic water metering has lower barriers to entry, which could affect the competitive landscape for the water meter market in North America.
Business Trends
Across the United States and the Company estimates that approximately 55% to 60% of them have converted to a radio solutions technology. With the BEACON AMA managed solution and its wide breadth of water meters, the Company believes it is well positioned to meet customers' future needs.
Increasingly, customers in the water utility market are interested in more frequent and diverse data collection. Specifically, AMI technology enables water utilities to capture readings from each meter at more frequent and variable intervals. There are approximately 52,000 water utilities in the United States and the Company estimates that approximately 60% of them have converted to a radio solution. The Company believes it is well positioned to meet this continuing conversion trend with its comprehensive radio and software solutions.
In addition, the water utility industry is beginning the conversion from mechanical to static (ultrasonic) meters. Ultrasonic water metering maintains measurement accuracy over the life of the meter, reducing a utility’s non-revenue water. The Company has nearly a decade of proven reliability in the market with its ultrasonic meters and will be launching its next generation of ultrasonic metering with its D-Flow technology in 2019, which the Company believes will increase its competitive differentiation. While ultrasonic technology migration in North America could affect the competitive landscape, it also opens up further geographic penetration opportunities for the Company as previously described.
19
Finally, the concept of “Smart Cities” is beginning to take hold as one avenue to affect efficient city operations, conserve resources and improve service and delivery. Smart water solutions (“Smart Water”) are those that provide actionable information through data analytics from an interconnected and interoperable network of sensors and devices that help people and organizations efficiently use and conserve one of the world’s most precious resources. Badger Meter is well positioned to benefit from the advancement of Smart Water applications within the Smart Cities framework. Cities have a keen interest in Smart Water as it provides both a revenue base and conservation outcome. Badger Meter is one of approximately a dozen firms, and the only water metering company, that participates in the AT&T Smart City Alliance. By leveraging this alliance, the Company expects to be able to gain access and sell its broad smart water solutions to higher level decision makers within a city such as the mayor’s office. In addition, it allows Badger Meter to keep abreast of emerging cellular technology changes which the Company believes is the premier AMI solution.
Acquisition
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 settlement of $3.3 million of pre-existing Company receivables. The working capital adjustment was settled in the second quarter of 2018 and the balance sheet holdback has been included as a payableis recorded in payables on the Company's consolidated balance sheet.Consolidated Balance Sheet as it is anticipated to be paid in the next twelve months. The Company's preliminary allocation of the purchase price at June 30, 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. 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 June 30, 2018, the Company had not completed its analysis for estimating the fair value of the assets acquired. This acquisition is further described in Note 5 “Acquisitions” in the Notes to Consolidated Condensed Financial Statements.
In the first quarter of 2019, the Company made a contingent payment of $1.0 million related to the May 1, 2017 acquisition of 100% of the outstanding common stock of D-Flow. There is an additional $2.0 million of contingent payments related to the D-Flow acquisition that is anticipated to be made in 2019 which is recorded in payables on the Company’s Consolidated Balance Sheet at March 31, 2019.
Revenue and Product Mix
As the industry continues to evolve, the Company has been vigilantat the forefront of innovation across metering, radio and software technologies in anticipatingorder to meet its customers’ increasing expectations for accurate and exceeding customer expectations. In 2011,actionable data. As technologies such as ORION Cellular and BEACON AMA managed solutions have become more readily adopted, the Company introduced AMACompany’s revenue from Software as a hardwareService (SaaS) has increased significantly, albeit from a small base, and software solution for water and gas utilities, and then in early 2014 launched its new BEACON AMA system, as a managed solution, which it believes will help maintain the Company's position as a market leader. Since its inception, sales of BEACON AMA have continued to grow with large cities and private water utilities selecting BEACON AMA and the Company’s industry-leading water meters.
The Company continues to seekalso seeks opportunities for additional revenue enhancement. For instance, the Company has made inroads into the Middle East market with its ultrasonic meter technology and is pursuing other geographic expansion opportunities. The Company is periodically asked to oversee and perform field installation of its products for certain customers. The Company assumes the role of general contractor hiringand either performs the installation or hires installation subcontractors and supervisingsupervises their work. The Company also supports its product and technology sales with the sale of extended service programs that provide additional services beyond the standard warranty. In recent years, the Company has sold ORION radio technology to natural gas utilities for installation on their gas meters. Most recently, the introduction of the BEACON AMA system opens the door to “software as a service” revenues. Revenues from such products and services are not yet significant and the Company is uncertain of the potential growth achievable for such products and services in future periods.
Net Sales
The Company’s net sales for the three months ended June 30, 2018 increased $9.4March 31, 2019 were $104.9 million, or 9.0%, to $113.6level with the prior year comparable quarter of $105.0 million. Sales into the municipal water market were $81.2 million, compared to $104.2 million duringan increase of approximately 1% over the same period in 2017.
20
Total operating earnings for the three months ended June 30, 2018March 31, 2019 were $14.3 million, or 13.7% of sales, compared to 23.2% during the same period in 2017. These sales increased $1.5$10.0 million, or 6.2%, to $25.6 million from $24.1 million9.5% of sales, in the same period last year.comparable prior year quarter. Gross profit increased $3.7 million and improved as a percent of sales from 35.0% to 38.6%. The increaseimprovement was due tolargely the continued rebound in the oil and gas market and other targeted markets served.
The provision for income taxes as a percentage of earnings before income taxes for the secondfirst quarter of 20182019 was 22.2%23.5% compared to 35.5%22.2% in the secondfirst quarter of 2017.2018. Interim provisions are tied tobased on an estimate of the overall annual rate that can vary due to state taxes, the relationship of foreign and domestic earnings, and other credits available. The decrease between years was due primarily to the lower Federalavailable and tax rate, which declined from 35% in 2017 to 21% in 2018.
As a result of the above-mentioned items, net earnings for the three months ended June 30, 2018March 31, 2019 were $6.2$10.8 million, or $0.21$0.37 per diluted share, compared to $10.6$7.5 million, or $0.36$0.26 per diluted share, for the same period in 2017.
LIQUIDITY AND CAPITAL RESOURCES
The main sources of liquidity for the Company are cash from operations and borrowing capacity. Cash providedIn addition, depending on market conditions, the Company may access the capital markets to strengthen its capital position and to provide additional liquidity for general corporate purposes.
Primary Working Capital
The Company uses primary working capital (PWC) as a percentage of sales as a key metric for working capital efficiency. The Company defines this metric as the sum of Receivables and Inventories less Payables, divided by operations was $25.2trailing twelve month net sales. The following table shows the components of our PWC (in millions):
|
| March 31, 2019 |
|
| December 31, 2018 |
| ||||||||||
|
| $ |
|
| PWC% |
|
| $ |
|
| PWC% |
| ||||
Receivables |
| $ | 68,095 |
|
|
| 15.7 | % |
| $ | 66,300 |
|
|
| 15.3 | % |
Inventories |
|
| 80,554 |
|
|
| 18.6 | % |
|
| 80,804 |
|
|
| 18.6 | % |
Payables |
|
| (25,983 | ) |
|
| -6.0 | % |
|
| (22,469 | ) |
|
| -5.2 | % |
Primary Working Capital |
| $ | 122,666 |
|
|
| 28.3 | % |
| $ | 124,635 |
|
|
| 28.7 | % |
Overall, PWC declined $2.0 million for the first six months of 2018 compared to $37.3the prior quarter on flat sales activity. Receivables at March 31, 2019 were $68.1 million throughcompared to $66.3 million at the first six monthsend of 2017. Last year’s amount2018. The increase was favorably impacted bydue to a decreasemodest increase in inventory balances which did not recur this year. This, alongdays sales outstanding associated with international receivables due to their regionally higher receivable balances arepayment terms. Inventories at March 31, 2019 were $80.6 million, in line with the primary reasons for the decline.
Cash Provided by Operations
Cash provided by operations in the first three months of 2019 was $17.8 million compared to $6.8 million in the same period of 2018. The increase between years is due primarily to higher net earnings and other current liabilitiesPWC changes between years.
Capital expenditures for the first three months of $28.12019 were $2.2 million compared to $3.0 million in the first three months of 2018.
Short-term debt decreased $7.1 million to $11.0 million at June 30, 2018 decreasedMarch 31, 2019 from $28.6$18.1 million at December 31, 2017. These balances were impacted2018 due to the strong cash flow from operations, partially offset by the timingpayment of purchases and payments.
The Company’s financial condition remains strong. In June 2018, the Company amended its May 2012 credit agreement with its primary lender to extendand extended its term until September 2021 the2021. 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. 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 June 30, 2018.March 31, 2019. The Company believes that its operating cash flows, available borrowing capacity, and its ability to raise capital provide adequate resources to fund ongoing operating requirements, future capital expenditures and the development of new products. The Company continues to take advantage of its local commercial paper market and carefully monitors the current borrowing market. The Company had $90.7$121.8 million of unused credit lines available at June 30, 2018.
The Company is subject to contingencies related to environmental laws and regulations. A future change in circumstances with respect to these 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 20172018 and the first halfquarter of 20182019 were not material.
See the “Special Note Regarding Forward Looking Statements” at the front of this Quarterly Report on Form 10-Q and Part I, Item 1A “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 20172018 for a discussion of risks and uncertainties that could impact the Company’s financial performance and results of operations.
Off-Balance Sheet Arrangements and Contractual Obligations
The Company’s off-balance sheet arrangements and contractual obligations are discussed in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the headings “Off-Balance Sheet Arrangements” and “Contractual Obligations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 20172018 and have not materially changed since that report was filed unless otherwise indicated in this Form 10-Q.
Item 3 |
The Company’s quantitative and qualitative disclosures about market risk are included in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the heading “Market Risks” in the Company’s Annual Report on Form 10-K for the year ended December 31, 20172018 and have not materially changed since that report was filed.
Evaluation of Disclosure Controls and Procedures
In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), the Company’s management evaluated, with the participation of the Company’s ChairmanPresident and Chief Executive Officer and the Company’s Senior Vice President - Finance, Chief Financial Officer and Treasurer, the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the quarter ended June 30, 2018.March 31, 2019. Based upon their evaluation of these disclosure controls and procedures, the Company’s ChairmanPresident and Chief Executive Officer and the Company’s Senior Vice President - Finance, Chief Financial Officer and Treasurer concluded that, as of the date of such evaluation, the Company’s disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There was no change in the Company’s internal control over financial reporting that occurred during the quarter ended June 30, 2018March 31, 2019 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
EXHIBIT INDEX
Exhibit No. | Description | |
10 | ||
31.1 | ||
31.2 | ||
32 | ||
101 | The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
BADGER METER, INC. | ||||||
Dated: | By | /s/ | ||||
Kenneth C. Bockhorst | ||||||
President and Chief Executive Officer | ||||||
By | /s/ | |||||
Robert A. Wrocklage | ||||||
Vice President – Finance, Chief Financial Officer and Treasurer | ||||||
By | /s/ | |||||
Daniel R. Weltzien | ||||||
Vice President – Controller |
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