UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No.
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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Securities registered pursuant to Section 12(b) of the Act:
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Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐
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.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.
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Emerging growth company |
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Non‑accelerated filer |
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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
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity: As of June 30, 2019, the aggregate market value of the shares of Common Stock held by non-affiliates of the Registrant was approximately $
As of February 4, 2020, there were
DOCUMENTS INCORPORATED BY REFERENCE
Table of Contents
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Item 1. |
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Item 1A. |
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Item 1B. |
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Item 2. |
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Item 3. |
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Item 7. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 9. |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
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Item 10. |
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Item 12. |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
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Item 13. |
Certain Relationships and Related Transactions, and Director Independence |
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2
Special Note Regarding Forward Looking Statements
Certain statements contained in this Annual Report on Form 10-K, as well as other information provided from time to time by Badger Meter, Inc. (the “Company”) or its employees, may contain forward looking statements that involve risks and uncertainties that could cause actual results to differ materially from those in the forward looking statements. The words “anticipate,” “believe,” “estimate,” “expect,” “think,” “should,” “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 this Annual Report on Form 10-K for the year ended December 31, 2019.
PART I
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ITEM 1. |
BUSINESS |
Badger Meter, Inc. (the “Company”) is a leading innovator, manufacturer and marketer of products incorporating flow measurement, control and communication solutions serving markets worldwide. The Company was incorporated in 1905.
Throughout this 2019 Annual Report on Form 10-K, the words “we,” “us” and “our” refer to the Company.
Available Information
The Company's internet address is http://www.badgermeter.com. The Company makes available free of charge through its website its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports, on the same day they are electronically filed with, or furnished to, the Securities and Exchange Commission. The Company is not including the information contained on or available through its website as a part of, or incorporating such information by reference into, this Annual Report on Form 10-K.
Market Overview, Products, Systems and Solutions
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 nearly 90% of its products are used in water related 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 an increasing percentage of the water meters sold by the Company and in the industry, due to a variety of factors, including their ability to maintain 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.
The flow instrumentation product line 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.
Municipal water meters (both residential and commercial) 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 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 advanced metering infrastructure (AMI) systems, where data is gathered utilizing a network (either fixed or cellular) of data collectors or gateway receivers that are able 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 utilities with more frequent and diverse data from their meters at specified intervals.
3
The 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 AMR meter reading, ORION (SE) for traditional fixed network applications, and ORION Cellular for an infrastructure-free meter 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 gradual or full deployment, and decreases ongoing maintenance.
Critical to the water metering ecosystem is information and analytics. The Company’s BEACON® Advanced Metering Analytics (AMA) software suite improves the utilities’ visibility of their water and water usage. BEACON AMA is a secure, cloud-hosted software suite that includes a customizable dashboard, and has the ability to establish alerts for specific conditions. It also allows for consumer engagement tools that permit end water users (such as homeowners) to view and manage their water usage activity. Benefits to the utility include improved customer service, increased visibility through faster leak detection, the ability to promote and quantify the effects of its water conservation efforts, and easier compliance reporting.
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, with the Company estimating that approximately 60% of water meters installed in the United States have been converted to a radio solution technology.
The Company’s net 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 mechanical meters. The Company’s proprietary radio products (i.e. ORION) generally result in higher margins than remarketed, non-proprietary technology products. The Company also sells registers and endpoints separately to customers who wish to upgrade their existing meters in the field.
Flow instrumentation products are 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 provides both standard and customized 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 static (ultrasonic) flow metering technologies for industrial markets, the Company offers one of the broadest flow measurement, control and communication portfolios in the market. This portfolio carries respected brand names including Recordall®, 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 world through employees, resellers and representatives. Depending on the customer mix, there can be a moderate seasonal impact on sales, primarily relating to higher sales of certain municipal water products during the spring and summer months. No single customer accounts for more than 10% of the Company's sales.
Competition
The Company faces competition for both its municipal water and flow instrumentation product lines. The competition varies from moderate to strong depending upon the products involved and the markets served. Major competitors for municipal water meters include Xylem, Inc. (“Sensus”), Roper Technologies, Inc. (“Neptune”), Master Meter, Inc. and Mueller Water Products, Inc. Together with Badger Meter, it is estimated that these companies sell in excess of 90% of the water meters in the North American market, which has historically been somewhat insulated from penetration by other competitors due to the nature of the mechanical technology used. As static metering technology continues to gain traction in the North American market, additional competitors include firms such as Kamstrup A/S, Diehl Metering GmbH and Itron, Inc., although these competitors lack brand recognition and product breadth and do not have extensive water utility channel distribution to effectively reach the more than 50,000 water utilities in the United States, which impedes their ability to compete. In addition, as previously noted, the technology acceptance overall also provides competitive opportunities for Badger Meter outside North America.
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The Company's primary competitors for municipal water radio products in North America are Itron, Inc., Hubbel, Inc. (Aclara Technologies), Neptune and Sensus. The vast majority of the Company’s radio sales are of its own proprietary radio systems (ORION and GALAXY®); however, the Company may also resell other radio products as part of an overall smart meter solution (e.g. Aclara, Itron®).
A number of the Company's competitors in certain markets have greater financial resources than the Company. The Company, however, believes it currently provides the leading technologies in water meters and water-dedicated radio solutions and analytics. As a result of significant research and development activities, the Company enjoys favorable patent positions and trade secret protections for several of its technologies, products and processes.
There are many competitors in the flow instrumentation markets due to the various end markets and applications served. They include, among others, Emerson Electric Company, Krohne Messtechnik GmbH, Endress+Hauser AG, Yokogawa Electric Corporation and Cameron International. With a broad portfolio consisting of products utilizing eight of the ten major flow meter technologies, the Company is well positioned to compete in niche, specialized applications within these markets, primarily focused on the water/wastewater, HVAC, oil & gas and chemical/petrochemical end markets.
Backlog
The Company's total backlog of unshipped orders at December 31, 2019 and 2018 was $27.2 million and $29.9 million, respectively. The backlog is comprised of firm orders and signed contractual commitments, or portions of such commitments that call for shipment within 12 months. Backlog can be significantly affected by the timing of orders for large projects and the amounts can vary due to the timing of work performed.
Raw Materials and Components
Raw materials used in the manufacture of the Company's products include purchased castings made of metal or alloys (such as brass, which uses copper as its main component, aluminum, stainless steel and cast iron), plastic resins, glass, microprocessors and other electronic subassemblies, and components. There are multiple sources for these raw materials and components, but the Company relies on single suppliers for certain brass castings, resins and electronic subassemblies. The Company believes these items would be available from other sources, but that the loss of certain suppliers may 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 carries business interruption insurance on key suppliers. The Company's purchases of raw materials are based on production schedules, and as a result, inventory on hand is generally not exposed to price fluctuations. World commodity markets and currency exchange rates may also affect the prices of material purchased in the future. The Company does not hold significant amounts of precious metals.
Research and Development
Expenditures for research and development activities related to the development of new products, the improvement of existing products and manufacturing process improvements were $11.9 million in 2019, $11.1 million in 2018 and $10.6 million in 2017. Research and development activities are primarily sponsored by the Company. The Company also engages from time to time in joint research and development with other companies and organizations.
Intangible Assets
The Company owns or controls several trade secrets and many patents, trademarks and trade names in the United States and other countries that relate to its products and technologies. No single patent, trademark, trade name or trade secret is material to the Company's business as a whole.
Environmental Protection
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 control provisions and regulations during 2019, 2018 and 2017 were not material.
Employees
The Company and its subsidiaries employed 1,567 persons at December 31, 2019. Approximately 108 of these employees are covered by a collective bargaining agreement with District 10 of the International Association of Machinists. The Company is currently operating under a three-year contract with the union, which expires on October 31, 2022. The Company believes it has good relations with the union and all of its employees.
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Information about the Company’s Executive Officers
The following table sets forth certain information regarding the Executive Officers of the Registrant.
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Position |
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Age at 2/28/2020 |
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Kenneth C. Bockhorst |
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Chairman, President and Chief Executive Officer |
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47 |
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Robert A. Wrocklage |
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Senior Vice President — Chief Financial Officer |
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41 |
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Karen M. Bauer |
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Vice President — Investor Relations, Corporate Strategy and Treasurer |
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52 |
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Fred J. Begale |
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Vice President — Engineering |
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55 |
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William R. A. Bergum |
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Vice President — General Counsel and Secretary |
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55 |
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Gregory M. Gomez |
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Vice President — Global Flow Instrumentation and International Utility |
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55 |
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Trina L. Jashinsky |
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Vice President — Human Resources |
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57 |
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William J. Parisen |
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Vice President — Global Operations |
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53 |
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Kimberly K. Stoll |
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Vice President — Sales and Marketing |
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53 |
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Daniel R. Weltzien |
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Vice President — Controller |
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41 |
There are no family relationships between any of the executive officers. Officers are elected annually at the first meeting of the Board of Directors held after each annual meeting of the shareholders. Each officer holds office until his or her successor has been elected or until his or her death, resignation or removal. There is no arrangement or understanding between any executive officer and any other person pursuant to which he or she was elected as an officer.
Mr. Bockhorst was elected President in April 2018, Chief Executive Officer in January 2019 and Chairman in January 2020 after serving as Senior Vice President - Chief Operating Officer for the Company from October 2017 to April 2018. Prior to joining the Company, Mr. Bockhorst was Executive Vice President of the Energy segment, preceded by President of Hydratight and Global Vice President Operations of Enerpac, all within Actuant Corporation (now Enerpac Tool Group) from March 2011 to October 2017.
Mr. Wrocklage was elected Vice President – Chief Financial Officer and Treasurer in 2019 and Senior Vice President – Chief Financial Officer in January 2020 after serving as Vice President - Finance for the Company from August 2018 to December 2018. Prior to joining the Company, Mr. Wrocklage spent ten years with Actuant Corporation (now Enerpac Tool Group), holding various corporate and business unit financial leadership roles, most recently as Vice President - Corporate Controller and Chief Accounting Officer.
Ms. Bauer was elected Vice President - Investor Relations, Corporate Strategy and Treasurer effective June 2019. She joined Badger Meter in July 2018 as Director, Investor Relations and Corporate Strategy. In her role she also oversees the Company’s ESG (Environmental, Social & Governance) initiatives. Prior to joining Badger Meter, she served at Actuant Corporation (now Enerpac Tool Group), most recently as Director, Investor Relations & Communications.
Mr. Begale has served as Vice President - Engineering for more than five years.
Mr. Bergum has served as Vice President - General Counsel and Secretary for more than five years.
Mr. Gomez was elected Vice President – Flow Instrumentation and International Utility in March 2019. Mr. Gomez served as Vice President - Business Development and Flow Instrumentation from April 2017 to March 2019, Vice President - Flow Instrumentation from September 2014 to April 2017, and Vice President - Business Development from December 2010 to September 2014.
Ms. Jashinsky was elected Vice President - Human Resources in October 2016. Prior to joining the Company, Ms. Jashinsky was Vice President of Human Resources at Gannett Company, Inc. from February 2015 to July 2016, Senior Vice President Human Resources at Fiserv, Inc. from March 2014 to February 2015, and Vice President - Global Corporate Human Resources at Johnson Controls, Inc. from May 2010 to February 2014.
Mr. Parisen was elected Vice President - Global Operations in June 2019. He joined Badger Meter in August 2018 as Senior Director, Global Supply Chain. Prior to joining Badger Meter, he was employed at Actuant Corporation (now Enerpac Tool Group) where he most recently held the position of Vice President - Global Operations for the Industrial and Energy segments.
Ms. Stoll has served as Vice President - Sales and Marketing for more than five years.
Mr. Weltzien was elected Vice President – Controller in March 2019. Prior to joining the Company, Mr. Weltzien spent eight years with Actuant Corporation (now Enerpac Tool Group), holding various corporate and business unit financial leadership roles, most recently as Senior Director of Finance for its Hydratight business unit.
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Foreign Operations and Export Sales
The Company sells its products through employees, resellers and representatives throughout the world. Additionally, the Company has a sales, distribution and manufacturing facility in Neuffen, Germany; sales and customer service offices in Mexico, Singapore, China, United Arab Emirates and Slovakia; manufacturing facilities in Nogales, Mexico, Brno, Czech Republic and Bern, Switzerland; and a development facility in Luleå, Sweden. The Company exports products from the United States that are manufactured in Milwaukee, Wisconsin; Racine, Wisconsin and Tulsa, Oklahoma.
Information about the Company's foreign operations and export sales is included in Note 9 “Industry Segment and Geographic Areas” in the Notes to Consolidated Financial Statements in Part II, Item 8 of this 2019 Annual Report on Form 10-K.
Financial Information about Industry Segments
The Company operates in one industry segment as an innovator, manufacturer and marketer of products incorporating flow measurement, control and communication solutions. Information about the Company's sales, operating earnings and assets is included in the Consolidated Financial Statements and in Note 9 “Industry Segment and Geographic Areas” in the Notes to Consolidated Financial Statements in Part II, Item 8 of this 2019 Annual Report on Form 10-K.
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ITEM 1A. |
RISK FACTORS |
Shareholders, potential investors and other readers are urged to consider the significant business risks described below in addition to the other information set forth or incorporated by reference in this 2019 Annual Report on Form 10-K, including the “Special Note Regarding Forward Looking Statements” at the front of this 2019 Annual Report on Form 10-K. If any of the events contemplated by the following risks actually occur, our financial condition or results of operations could be materially adversely affected. The following list of risk factors may not be exhaustive. We operate in a continually changing business, economic and geopolitical environment, and new risk factors may emerge from time to time. We can neither predict these new risk factors with certainty nor assess the precise impact, if any, on our business, or the extent to which any factor, or combination of factors, may adversely impact our results of operations. While there is much uncertainty, we do analyze the risks we face, perform a probability assessment of their impacts and attempt to soften their potential impact when and if possible.
Competitive pressures in the marketplace could decrease our revenues and profits.
Competitive pressures in the marketplace for our products could adversely affect our competitive position, leading to a possible loss of market share or a decrease in prices, either of which could result in decreased revenues and profits. We operate in an environment where competition varies from moderate to strong and a number of our competitors have greater financial resources. Our competitors also include alliance partners that sell products that do or may compete with our products. The principal elements of competition for our most significant product applications, residential and commercial water meters for the municipal water utility market (with various radio technology systems), are price, product technology, quality and service. The competitive environment is also affected by the movement toward radio technologies and away from manually read meters, the demand for replacement units and, to some extent, such things as global economic conditions, the timing and size of governmental programs such as stimulus fund programs, the ability of municipal water utility customers to authorize and finance purchases of our products, our ability to obtain financing, housing starts in the United States, and overall economic activity. For our flow instrumentation products, the competitive environment is affected by the general economic health of various industrial sectors particularly in the United States and Europe.
The inability to develop technologically advanced products could harm our future success.
We believe that our future success depends, in part, on our ability to develop technologically advanced products that meet or exceed appropriate industry standards. Although we believe that we currently have a competitive advantage in this area, maintaining such advantage will require continued investment in research and development, sales, marketing and manufacturing capabilities. There can be no assurance that we will have sufficient resources to make such investments or that we will be able to make the technological advances necessary to maintain such competitive advantage. If we are unable to maintain our competitive advantage, our future financial performance may be adversely affected. We are not currently aware of any emerging standards, technologies or new products that could render our existing products obsolete in the near term. The municipal water industry is continuing to see the adoption of static water meters. Static water metering has lower barriers to entry that could affect the competitive landscape in North America. We believe we have a competitive product, if the adoption rate for static meters were to accelerate, we believe competitors lack brand recognition and product breadth and do not have extensive water utility channel distribution to effectively reach the more than 50,000 water utilities in the United States.
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The inability to obtain adequate supplies of raw materials and component parts at favorable prices could decrease our profit margins and negatively impact timely delivery to customers.
We are affected by the availability and prices for raw materials and component parts, including purchased castings made of metal or alloys (such as brass, which uses copper as its main component, aluminum, stainless steel and cast iron), plastic resins, glass, microprocessors and other electronic subassemblies, and components that are used in the manufacturing process. The inability to obtain adequate supplies of raw materials and component parts for our products at favorable prices could have a material adverse effect on our business, financial condition or results of operations by decreasing profit margins and by negatively impacting timely deliveries to customers. In the past, we have been able to offset price increases in raw materials and component parts by increased sales prices, active materials management, product engineering programs and the diversity of materials used in the production processes. However, we cannot be certain that we will be able to accomplish this in the future. Since we do not control the actual production of these raw materials and component parts, there may be delays caused by an interruption in the production or transportation of these materials for reasons that are beyond our control. World commodity markets and inflation may also affect raw material and component part prices.
Economic conditions could cause a material adverse impact on our sales and operating results.
As a supplier of products and software, the majority of which are to water utilities, we may be adversely affected by global economic conditions, delays in governmental programs created to stimulate the economy, and the impact of government budget cuts or partial shutdowns of governmental operations that affect our customers, including independent distributors, large city utilities, public and private water companies and numerous smaller municipal water utilities. These customers may delay capital projects, including non-critical maintenance and upgrades, or may not have the ability to authorize and finance purchases during economic downturns or instability in world markets. We also sell products for other applications to reduce our dependency on the municipal water market. A significant downturn in this market could cause a material adverse impact on sales and operating results. Therefore, a downturn in general economic conditions, as well as in the municipal water market, and delays in the timing or amounts of possible economic stimulus fund programs, government budget cuts or partial shutdowns of governmental operations, or the availability of funds to municipalities could result in a reduction in demand for our products and services and could harm the business.
Economic impacts due to leadership or policy changes in the countries where we do business could negatively affect our profitability.
We may be affected by adjustments to economic and trade policies, such as taxation, changes to or withdrawal from international trade agreements, or the like, when countries where we produce or sell our products change leadership or economic policies. These types of changes, as well as any related regulatory changes, could significantly increase our costs and adversely affect our profitability and financial condition.
Global and regional economic and political conditions could adversely affect our business.
In June 2016, voters in the United Kingdom approved the United Kingdom’s exit from the European Union (“Brexit”), and on January 31, 2020, the United Kingdom withdrew from the European Union. There is now a transition period during which businesses and others prepare for the new post-Brexit rules to take effect on January 1, 2021. The ongoing negotiations of the future trading relationship between the United Kingdom and the European Union during the transition period have yet to provide clarity on what the outcome will be for the United Kingdom or Europe. As a result, Brexit continues to be the source of significant economic uncertainty in the United Kingdom and in Europe, the Middle East, and Asia, which may negatively impact our business results in those regions. In addition, changes related to Brexit could result in disruptions to trade and free movement of goods, services and people to and from the United Kingdom, increased foreign exchange volatility with respect to the British pound and additional legal, political and economic uncertainty, all of which could potentially disrupt the markets we serve, the tax jurisdictions in which we operate, adversely change tax benefits or liabilities in these or other jurisdictions and may cause us to lose customers, suppliers and employees. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the United Kingdom determines which European Union laws to replace or replicate. Any of these effects could adversely affect our business and results of operations.
Climate change, unusual weather and other natural phenomena could adversely affect our business.
Climate changes and weather conditions may affect, or cause volatility in, our financial results. Drought conditions could drive higher demand for smart water solutions that advance conservation efforts in residential and commercial applications. Our sales also may be adversely affected by unusual weather, weather patterns or other natural phenomena that could have an impact on the timing of orders in given periods, depending on the particular mix of customers being served by us at the time. The unpredictable nature of weather conditions and climate change therefore may result in volatility for certain portions of our business, as well as the operations of certain of our customers and suppliers.
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Geopolitical crisis, including terrorism or pandemics, could adversely affect our business.
Our operations are susceptible to global events, including acts or threats of war or terrorism, international conflicts, political instability, and widespread outbreak of an illness or other health issue. The occurrence of any of these events could have an adverse effect on our business results and financial condition.
Failure to manufacture quality products could have a material adverse effect on our business.
If we fail to maintain and enforce quality control and testing procedures, our products will not meet required performance standards. Product quality and performance are a priority for us since our products are used in various applications where precise control of fluids is essential. Although we believe our products are perceived as high quality, any future production and/or sale of substandard products could seriously harm our reputation, resulting in both a loss of current customers to competitors and damage to our ability to attract new customers. In addition, if any of our products prove to be defective, we may be required to participate in a recall involving such products or incur warranty related expenses. A successful claim brought against us with respect to a defective product in excess of available insurance coverage, if any, or a requirement to participate in a major product recall, could have a material adverse effect on our business, results of operations or financial condition.
Litigation against us could be costly, time consuming to defend and could adversely affect our profitability.
From time to time, we are subject to legal proceedings and claims that arise in the ordinary course of business. For example, we may be subject to workers' compensation claims, employment/labor disputes, customer and supplier disputes, product liability claims, intellectual property disputes and contractual disputes related to warranties arising out of the conduct of our business. Litigation may result in substantial costs and may divert management's attention and resources, which could adversely affect our profitability or financial condition.
If our technology products do not operate as intended, our business could be materially and adversely affected.
We sell and install software products, including some that are provided in “the cloud,” that may contain unexpected design defects or may encounter unexpected complications during installation or when used with other technologies utilized by the customer. A failure of our technology products to operate as intended and in a seamless fashion with other products or a failure or breach of a cloud network could materially and adversely affect our results of operations, financial position and cash flows.
Our expanded role as a prime contractor brings certain risks that could have a material adverse effect to our business.
The Company periodically assumes the role of prime contractor for providing complete technology systems, installation and project management to governmental entities, which brings with it added risks, including but not limited to, our responsibility for managing subcontractor performance and project timelines and the potential for expanded warranty and performance obligations. While we have managed a number of these types of arrangements, it is possible to encounter a situation where we may not be able to perform to the expectations of the governmental entity, and thus incur additional costs that could affect our profitability or harm our reputation.
Disruptions and other damages to our information technology and other networks and operations, and breaches in data security or cybersecurity attacks could have a negative financial impact and damage our reputation.
Our ability to serve customers, as well as increase revenues and control costs, depends in part on the reliability of our sophisticated technologies, system networks and cloud-based software. We use information technology and other systems to manage our business in order to maximize our revenue, effectiveness and efficiency. Unauthorized parties gaining access to digital systems and networks for purposes of misappropriating assets or sensitive financial, personal or business information, corrupting data, causing operational disruptions and other cyber-related risks could adversely impact our customer relationships, business plans and our reputation. In some cases, we are dependent on third-party technologies and service providers for which there is no certainty of uninterrupted availability or through which hackers could gain access to sensitive and/or personal information. These potential disruptions and cyber-attacks could negatively affect revenues, costs, customer demand, system availability and our reputation.
Further, as the Company pursues its strategy to grow through acquisitions and to pursue newer technologies that improve our operations and cost structure, the Company is also expanding and improving its information technologies, resulting in a larger technological presence and corresponding exposure to cybersecurity risk. Certain new technologies present new and significant cybersecurity safety risks that must be analyzed and addressed before implementation. If we fail to assess and identify cybersecurity risks associated with acquisitions and new initiatives, we may become increasingly vulnerable to such risks.
9
If we are not able to protect our proprietary rights to our software and related products, our ability to market our software products could be hindered and our results of operations, financial position and cash flows could be materially and adversely affected.
We rely on our agreements with customers, confidentiality agreements with employees, and our trademarks, trade secrets, copyrights and patents to protect our proprietary rights. These legal protections and precautions may not prevent misappropriation of our proprietary information. In addition, substantial litigation regarding intellectual property rights exists in the software industry, and software products may increasingly be subject to third-party infringement claims. Such litigation and misappropriation of our proprietary information could hinder our ability to market and sell products and services and our results of operations, financial position and cash flows could be materially and adversely affected.
Changes in environmental or regulatory requirements could entail additional expenses that could decrease our profitability.
We are subject to a variety of laws in various countries and markets, such as those regulating lead or other material content in certain of our products, the handling and disposal of certain electronic materials, the use and/or licensing of radio frequencies necessary for radio products, data privacy and protection, as well as customs and trade practices. We cannot predict the nature, scope or effect of future environmental or regulatory requirements to which our operations might be subject or the manner in which existing or future laws will be administered or interpreted. Currently, the cost of complying with existing laws is included as part of our on-going expenses and does not have a material effect on our business or financial position, but a change in the future could adversely affect our profitability.
Risks related to foreign markets could decrease our profitability.
Since we sell products worldwide as well as manufacture products in several countries, we are subject to risks associated with doing business internationally. These risks include such things as changes in foreign currency exchange rates, changes in political or economic conditions of specific countries or regions, potentially negative consequences from changes in tax laws or regulatory requirements, differing labor regulations, and the difficulty of managing widespread operations.
An inability to attract and retain skilled employees could negatively impact our growth and decrease our profitability.
Our success depends on our continued ability to identify, attract, develop and retain skilled personnel throughout our organization. Current and future compensation arrangements, including benefits, may not be sufficient to attract new employees or retain existing employees, which may hinder our growth.
Violations or alleged violations of laws that impose requirements for the conduct of the Company’s overseas operations, including the Foreign Corrupt Practices Act (FCPA) or other anti-corruption laws, trade sanctions and sanctioned parties restrictions could adversely affect our business.
In foreign countries where we operate, a risk exists that our employees, third party partners or agents could engage in business practices prohibited by applicable laws and regulations, such as the FCPA. Such anti-corruption laws generally prohibit companies from making improper payments to foreign officials, require companies to keep accurate books and records, and maintain appropriate internal controls. Our policies mandate strict compliance with such laws and we devote resources to ensure compliance. However, we operate in some parts of the world that have experienced governmental corruption, and, in certain circumstances, local customs and practice might not be consistent with the requirements of anti-corruption laws. We remain subject to the risk that our employees, third party partners or agents will engage in business practices that are prohibited by our policies and violate such laws and regulations. Violations by us or a third party acting on our behalf could result in significant internal investigation costs and legal fees, civil and criminal penalties, including prohibitions on the conduct of our business and reputational harm.
We may also be subject to legal liability and reputational damage if we violate U.S. trade sanctions administered by the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC), the European Union, the United Nations and trade sanction laws, such as the Iran Threat Reduction and Syria Human Rights Act of 2012. Our policies mandate strict compliance with such laws and we devote resources to ensure compliance.
Failure to successfully identify, complete and integrate acquired businesses or products could adversely affect our operations.
As part of our business strategy, we continue to evaluate and may pursue selected business or product acquisition opportunities that we believe may provide us with certain operating and financial benefits. There can be no assurance that we will identify or complete transactions with suitable acquisition candidates in the future. If we complete any such acquisitions, they may require integration into our existing business with respect to administrative, financial, sales, marketing, manufacturing and other functions to realize these anticipated benefits. If we are unable to successfully integrate a business or product acquisition, we may not realize the benefits identified in our due diligence process, and our financial results may be negatively impacted. Additionally, significant unexpected liabilities may arise during or after completion of an acquisition.
10
|
ITEM 1B. |
UNRESOLVED STAFF COMMENTS |
None.
|
ITEM 2. |
PROPERTIES |
The principal facilities utilized by the Company at December 31, 2019 are listed below. The Company owns all such facilities except as noted. The Company believes that its facilities are generally well maintained and have sufficient capacity for its current needs.
|
|
|
|
|
Approximate area |
|
|
|
|
Location |
|
Principal use |
|
(square feet) |
|
|
|
|
Los Gatos, California, USA |
|
Software development |
|
|
3,600 |
|
(1) |
|
Centennial, Colorado, USA |
|
Distribution |
|
|
12,000 |
|
|
|
Nashville, Tennessee, USA |
|
Distribution |
|
|
8,400 |
|
(2) |
|
West Sacramento, California, USA |
|
Distribution |
|
|
11,400 |
|
(3) |
|
San Marcos, Texas, USA |
|
Distribution |
|
|
14,800 |
|
(4) |
|
Tulsa, Oklahoma, USA |
|
Manufacturing |
|
|
59,500 |
|
|
|
Milwaukee, Wisconsin, USA |
|
Manufacturing and offices |
|
|
324,200 |
|
|
|
Racine, Wisconsin, USA |
|
Manufacturing and offices |
|
|
134,300 |
|
(5) |
|
Brno, Czech Republic |
|
Manufacturing |
|
|
27,800 |
|
|
|
Neuffen, Germany |
|
Manufacturing and offices |
|
|
24,700 |
|
|
|
Nogales, Mexico |
|
Manufacturing |
|
|
181,300 |
|
|
|
Luleå, Sweden |
|
Electronic development |
|
|
7,000 |
|
(6) |
|
Bern, Switzerland |
|
Manufacturing |
|
|
16,800 |
|
(7) |
|
(1) |
Leased facility. Lease term expires November 30, 2021. |
|
(2) |
Leased facility. Lease term expires June 30, 2022. |
|
(3) |
Leased facility. Lease term expires October 31, 2024. |
|
(4) |
Leased facility. Lease term expires November 30, 2021. |
|
(5) |
Leased facility. Lease term expires December 31, 2025. |
|
(6) |
Leased facility. Lease term expires June 30, 2025. |
|
(7) |
Building is owned, but land is leased from the government, as required. Lease term expires October 18, 2021. |
|
ITEM 3. |
LEGAL PROCEEDINGS |
In the normal course of business, the Company is named in legal proceedings from time to time. There are currently no material legal proceedings pending with respect to the Company.
The Company is subject to contingencies related to environmental laws and regulations. Information about the Company's compliance with environmental regulations is included in Part I, Item 1 of this 2019 Annual Report on Form 10-K under the heading “Environmental Protection.”
|
ITEM 4. |
MINE SAFETY DISCLOSURES |
Not applicable.
11
PART II
|
ITEM 5. |
MARKET FOR THE REGISTRANT'S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
The Company’s Common Stock is traded on the New York Stock Exchange (NYSE Trading Symbol: BMI). At February 3, 2020, there were approximately 788 holders of the Company’s Common Stock. Other information required by this Item is set forth in Note 2 “Common Stock” and Note 10 “Unaudited: Quarterly Results of Operations, Common Stock Price and Dividends” in the Notes to Consolidated Financial Statements in Part II, Item 8 of this 2019 Annual Report on Form 10-K.
The following information in Item 5 of this Annual Report on Form 10-K is not deemed to be “soliciting material” or to be “filed” with the Securities and Exchange Commission or subject to Regulation 14A or 14C under the Securities Exchange Act of 1934, as amended, or to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended, and will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent the Company specifically incorporates it by reference into such a filing.
The following graph compares on a cumulative basis the yearly percentage change since January 1, 2015 in (a) the total shareholder return on the Company’s Common Stock with (b) the total return on the Russell 2000® Index, and (c) the total return of the peer group made up of 14 companies, including the Company, in similar industries and with similar market capitalization. The Russell 2000® Index is a trademark of the Frank Russell Company, and is used herein for comparative purposes in accordance with Securities and Exchange Commission regulations.
The graph assumes $100 invested on December 31, 2014. It further assumes the reinvestment of dividends. The returns of each component company in the peer groups have been weighted based on such company's relative market capitalization.
|
December 31 |
|
|
|
2014 |
|
|
2015 |
|
|
2016 |
|
|
2017 |
|
|
2018 |
|
|
2019 |
|
||||||
|
Badger Meter, Inc. |
|
Return % |
|
|
|
|
|
|
0.03 |
% |
|
|
27.71 |
% |
|
|
30.94 |
% |
|
|
4.10 |
% |
|
|
33.45 |
% |
|
|
|
Cumulative $ |
|
$ |
100.00 |
|
|
$ |
100.03 |
|
|
$ |
127.75 |
|
|
$ |
167.28 |
|
|
$ |
174.14 |
|
|
$ |
232.39 |
|
|
Russell 2000 Index |
|
Return % |
|
|
|
|
|
|
-4.41 |
% |
|
|
21.31 |
% |
|
|
14.65 |
% |
|
|
-11.01 |
% |
|
|
25.52 |
% |
|
|
|
Cumulative $ |
|
$ |
100.00 |
|
|
$ |
95.59 |
|
|
$ |
115.95 |
|
|
$ |
132.94 |
|
|
$ |
118.30 |
|
|
$ |
148.49 |
|
|
Peer Group |
|
Return % |
|
|
|
|
|
|
-7.30 |
% |
|
|
33.10 |
% |
|
|
20.10 |
% |
|
|
-20.18 |
% |
|
|
34.49 |
% |
|
|
|
Cumulative $ |
|
$ |
100.00 |
|
|
$ |
92.70 |
|
|
$ |
123.38 |
|
|
$ |
148.19 |
|
|
$ |
118.28 |
|
|
$ |
159.07 |
|
12
The Peer Group consists of A. O. Smith Corp. (AOS), Badger Meter, Inc. (BMI), CIRCOR International, Inc. (CIR), ESCO Technologies Inc. (ESE), Franklin Electric Co, Inc. (FELE), Gorman-Rupp Company (GRC), Itron, Inc. (ITRI), Lindsay Corporation (LNN), Perma-Pipe International Holdings, Inc. (PPIH), Mueller Water Products (MWA), Northwest Pipe Company (NWPX), Rexnord Corporation (RXN), Helios Technologies (SNHY) and Watts Water Technologies, Inc. (WTS).
In February 2017, the Board of Directors authorized the repurchase of up to 400,000 shares of the Company’s Common Stock through February 2020. The following table provides information about the Company's purchases during the quarter ended December 31, 2019 of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act.
|
|
|
Total number of shares purchased |
|
|
Average price paid per share |
|
|
Total number of shares purchased as part of a publicly announced program |
|
|
Maximum number of shares that may yet be purchased under the program |
|
||||
|
October 1, 2019 - October 31, 2019 |
|
|
— |
|
|
$ |
— |
|
|
|
267,221 |
|
|
|
132,779 |
|
|
November 1, 2019 - November 30, 2019 |
|
|
— |
|
|
|
— |
|
|
|
267,221 |
|
|
|
132,779 |
|
|
December 1, 2019 - December 31, 2019 |
|
|
29,297 |
|
|
|
63.09 |
|
|
|
296,518 |
|
|
|
103,482 |
|
|
Total as of December 31, 2019 |
|
|
29,297 |
|
|
|
|
|
|
|
296,518 |
|
|
|
103,482 |
|
On February 14, 2020, the Board of Directors approved a new share repurchase authorization of up to 400,000 shares of the Company’s Common Stock through February 2023.
13
|
ITEM 6. |
SELECTED FINANCIAL DATA |
BADGER METER, INC.
|
|
|
Years ended December 31, |
|
|||||||||||||||||||||||||||||||||||||
|
(In thousands except per share data) |
|
2019 |
|
|
2018 |
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|
2011 |
|
|
2010 |
|
||||||||||
|
Operating results |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
424,625 |
|
|
|
433,732 |
|
|
|
402,440 |
|
|
|
393,761 |
|
|
|
377,698 |
|
|
|
364,768 |
|
|
|
334,122 |
|
|
|
319,660 |
|
|
|
262,915 |
|
|
|
276,634 |
|
|
Research and development |
|
$ |
11,930 |
|
|
|
11,095 |
|
|
|
10,596 |
|
|
|
10,597 |
|
|
|
10,645 |
|
|
|
9,496 |
|
|
|
10,504 |
|
|
|
9,567 |
|
|
|
8,086 |
|
|
|
7,164 |
|
|
Earnings before income taxes |
|
$ |
61,607 |
|
|
|
35,852 |
|
|
|
54,833 |
|
|
|
49,844 |
|
|
|
41,152 |
|
|
|
44,912 |
|
|
|
38,009 |
|
|
|
43,471 |
|
|
|
27,349 |
|
|
|
44,438 |
|
|
Net earnings |
|
$ |
47,177 |
|
|
|
27,790 |
|
|
|
34,571 |
|
|
|
32,295 |
|
|
|
25,938 |
|
|
|
29,678 |
|
|
|
24,617 |
|
|
|
28,032 |
|
|
|
19,161 |
|
|
|
28,662 |
|
|
Net earnings to sales |
|
|
11.1 |
% |
|
|
6.4 |
% |
|
|
8.6 |
% |
|
|
8.2 |
% |
|
|
6.9 |
% |
|
|
8.1 |
% |
|
|
7.4 |
% |
|
|
8.8 |
% |
|
|
7.3 |
% |
|
|
10.4 |
% |
|
Per Common share (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
1.63 |
|
|
|
0.96 |
|
|
|
1.20 |
|
|
|
1.12 |
|
|
|
0.90 |
|
|
|
1.04 |
|
|
|
0.86 |
|
|
|
0.98 |
|
|
|
0.64 |
|
|
|
0.96 |
|
|
Diluted earnings per share |
|
$ |
1.61 |
|
|
|
0.95 |
|
|
|
1.19 |
|
|
|
1.11 |
|
|
|
0.90 |
|
|
|
1.03 |
|
|
|
0.85 |
|
|
|
0.98 |
|
|
|
0.64 |
|
|
|
0.96 |
|
|
Cash dividends declared: Common Stock |
|
$ |
0.64 |
|
|
|
0.56 |
|
|
|
0.49 |
|
|
|
0.43 |
|
|
|
0.39 |
|
|
|
0.37 |
|
|
|
0.35 |
|
|
|
0.33 |
|
|
|
0.30 |
|
|
|
0.26 |
|
|
Price range - high |
|
$ |
66.64 |
|
|
|
57.12 |
|
|
|
52.10 |
|
|
|
39.36 |
|
|
|
32.94 |
|
|
|
30.46 |
|
|
|
28.18 |
|
|
|
24.30 |
|
|
|
22.74 |
|
|
|
22.75 |
|
|
Price range - low |
|
$ |
47.59 |
|
|
|
41.00 |
|
|
|
34.40 |
|
|
|
26.40 |
|
|
|
25.82 |
|
|
|
23.24 |
|
|
|
20.94 |
|
|
|
14.65 |
|
|
|
13.43 |
|
|
|
16.29 |
|
|
Closing price |
|
$ |
64.93 |
|
|
|
49.21 |
|
|
|
47.80 |
|
|
|
36.95 |
|
|
|
29.30 |
|
|
|
29.68 |
|
|
|
27.25 |
|
|
|
23.71 |
|
|
|
14.72 |
|
|
|
22.11 |
|
|
Book value * |
|
$ |
11.37 |
|
|
|
10.42 |
|
|
|
9.53 |
|
|
|
8.80 |
|
|
|
8.00 |
|
|
|
7.41 |
|
|
|
6.82 |
|
|
|
5.98 |
|
|
|
5.93 |
|
|
|
5.60 |
|
|
Shares outstanding at year- end (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
29,119 |
|
|
|
29,119 |
|
|
|
29,119 |
|
|
|
29,119 |
|
|
|
29,050 |
|
|
|
28,922 |
|
|
|
28,824 |
|
|
|
28,628 |
|
|
|
30,246 |
|
|
|
30,096 |
|
|
Financial position |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary working capital * |
|
$ |
111,790 |
|
|
|
124,635 |
|
|
|
114,781 |
|
|
|
119,169 |
|
|
|
116,084 |
|
|
|
109,682 |
|
|
|
92,518 |
|
|
|
91,030 |
|
|
|
79,239 |
|
|
|
77,586 |
|
|
Primary working capital as a percent of net sales * |
|
|
26.4 |
% |
|
|
28.7 |
% |
|
|
28.5 |
% |
|
|
30.3 |
% |
|
|
30.7 |
% |
|
|
30.1 |
% |
|
|
27.7 |
% |
|
|
28.5 |
% |
|
|
30.1 |
% |
|
|
28.0 |
% |
|
Net cash provided by operations |
|
$ |
80,714 |
|
|
|
60,350 |
|
|
|
49,751 |
|
|
|
56,185 |
|
|
|
35,831 |
|
|
|
35,735 |
|
|
|
34,818 |
|
|
|
34,802 |
|
|
|
31,317 |
|
|
|
18,396 |
|
|
Capital expenditures |
|
$ |
7,496 |
|
|
|
8,643 |
|
|
|
15,069 |
|
|
|
10,596 |
|
|
|
19,766 |
|
|
|
12,332 |
|
|
|
14,311 |
|
|
|
8,202 |
|
|
|
5,336 |
|
|
|
9,238 |
|
|
Total assets |
|
$ |
421,893 |
|
|
|
392,691 |
|
|
|
391,727 |
|
|
|
349,699 |
|
|
|
355,480 |
|
|
|
341,158 |
|
|
|
316,058 |
|
|
|
290,453 |
|
|
|
218,910 |
|
|
|
215,864 |
|
|
Short-term and current portion of long-term debt |
|
$ |
4,480 |
|
|
|
18,060 |
|
|
|
44,550 |
|
|
|
37,950 |
|
|
|
71,360 |
|
|
|
75,927 |
|
|
|
70,045 |
|
|
|
66,730 |
|
|
|
1,790 |
|
|
|
12,878 |
|
|
Long-term debt |
|
$ |
n/a |
|
|
n/a |
|
|
n/a |
|
|
n/a |
|
|
n/a |
|
|
n/a |
|
|
n/a |
|
|
n/a |
|
|
n/a |
|
|
n/a |
|
|||||||||
|
Shareholders' equity |
|
$ |
331,068 |
|
|
|
303,503 |
|
|
|
277,452 |
|
|
|
256,209 |
|
|
|
232,275 |
|
|
|
214,331 |
|
|
|
196,563 |
|
|
|
171,247 |
|
|
|
179,281 |
|
|
|
168,383 |
|
|
Debt as a percent of total debt and equity * |
|
|
1.3 |
% |
|
|
5.6 |
% |
|
|
13.8 |
% |
|
|
12.9 |
% |
|
|
23.5 |
% |
|
|
26.2 |
% |
|
|
26.3 |
% |
|
|
28.0 |
% |
|
|
1.0 |
% |
|
|
7.1 |
% |
|
Return on shareholders' equity * |
|
|
14.2 |
% |
|
|
9.2 |
% |
|
|
12.5 |
% |
|
|
12.6 |
% |
|
|
11.2 |
% |
|
|
13.8 |
% |
|
|
12.5 |
% |
|
|
16.4 |
% |
|
|
10.7 |
% |
|
|
17.0 |
% |
|
Price/earnings ratio * |
|
|
40.3 |
|
|
|
51.8 |
|
|
|
40.2 |
|
|
|
33.3 |
|
|
|
32.6 |
|
|
|
28.8 |
|
|
|
32.1 |
|
|
|
24.3 |
|
|
|
23.2 |
|
|
|
23.2 |
|
|
(1) |
All per share amounts and number of shares outstanding have been restated to reflect the 2016 2-for-1 stock split for the periods presented. |
|
* |
Description of calculations as of the applicable year end: |
Book value per share equals total shareholders' equity at year-end divided by the number of common shares outstanding.
Primary working capital equals receivables plus inventories minus payables.
Primary working capital as a percent of net sales equals receivables plus inventories minus payables, divided by net sales.
Debt as a percent of total debt and equity equals total debt (the sum of short-term debt, current portion of long-term debt and long-term debt) divided by the sum of total debt and total shareholders' equity at year-end.
Return on shareholders' equity equals net earnings divided by total shareholders' equity at year-end.
Price/earnings ratio equals the year-end closing stock price for common stock divided by diluted earnings per share.
14
|
ITEM 7. |
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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 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 nearly 90% of its products are used in water related 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 an increasing portion of the water meters sold by the Company and in the industry due to a variety of factors, including their ability to maintain a high level of 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.
The flow instrumentation product line 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.
Municipal water meters (both residential and commercial) 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 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 advanced metering infrastructure (AMI) systems, where data is gathered utilizing a network (either fixed or cellular) of data collectors or gateway receivers that are able 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 branded family of radio endpoints provides water utilities with a range of industry-leading options for meter reading. These include ORION Migratable (ME) for AMR meter reading, ORION (SE) for traditional fixed network applications, and ORION Cellular for an infrastructure-free meter 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 gradual or full deployment, and decreases ongoing maintenance.
Critical to the water metering ecosystem is information and analytics. The Company’s BEACON Advanced Metering Analytics (AMA) software suite improves the utilities’ visibility of their water and water usage. BEACON AMA is a secure, cloud-hosted software suite that includes a customizable dashboard, and has the ability to establish alerts for specific conditions. It also allows for consumer engagement tools that permit end water users (such as homeowners) to view and manage their water usage activity. Benefits to the utility include improved customer service, increased visibility through faster leak detection, the ability to promote and quantify the effects of its water conservation efforts, and easier compliance reporting.
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, with the Company estimating that approximately just over 60% of water meters installed in the United States have been converted to a radio solution technology.
15
The Company’s net 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 mechanical meters. The Company’s proprietary radio products (i.e. ORION), which comprise the majority of its radio sales, generally result in higher margins than remarketed, non-proprietary technology products. The Company also sells registers and endpoints separately to customers who wish to upgrade their existing meters in the field.
Flow instrumentation products are 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 provides both standard and customized 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 static (ultrasonic) flow metering technologies for industrial markets, the Company offers one of the broadest flow measurement, control and communication portfolios in the market. This portfolio carries respected brand names including Recordall®, 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 world through employees, resellers and representatives. Depending on the customer mix, there can be a moderate seasonal impact on sales, primarily relating to higher sales of certain municipal water products during the spring and summer months. No single customer accounts for more than 10% of the Company's sales.
Business Trends
Across the globe, increasing regulations and a focus on sustainability are driving companies and utilities to better manage critical resources like water, monitor their use of hazardous materials and reduce exhaust gases. Some customers measure fluids to identify leaks and/or misappropriation for cost control or add measurement points to help automate manufacturing. Other customers employ measurement to comply with government mandates and laws. The Company provides flow measurement technology to measure water, oil, chemicals and other fluids, gases and steams. This technology is critical to provide baseline usage data and to quantify reductions as customers attempt to reduce consumption. For example, once water usage metrics are better understood, a strategy for water-use reduction can be developed with specific water-reduction initiatives targeted to those areas where it is most viable. With the Company’s technology, customers have found costly leaks, pinpointed equipment in need of repair, and identified areas for process improvements.
Increasingly, customers in the municipal water market are interested in more frequent and diverse data collection and the use of water metering analytics to evaluate water use. Specifically, AMI technology enables water utilities to capture readings from each meter at more frequent and variable intervals. There are more than 50,000 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, certain water utilities are converting from mechanical to static meters. Ultrasonic water metering maintains a high level of measurement accuracy over the life of the meter, reducing a utility’s non-revenue water. The Company has a decade of proven reliability in the market with its ultrasonic meters and is on a path to launching its next generation of ultrasonic metering with its D-Flow technology, which the Company believes increases its competitive differentiation. While the introduction of ultrasonic technology into North America may increase competition, it also opens up further geographic penetration opportunities for the Company as previously described.
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 has been 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 infrastructure-free AMI solution.
16
Acquisitions
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 was paid in the second quarter of 2019. As of March 31, 2019, the Company had completed its analysis for estimating the fair value of the assets acquired with no additional adjustments. This acquisition is further described in Note 3 “Acquisitions” in the Notes to Consolidated Financial Statements.
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. As of December 31, 2018, the Company completed its analysis for estimating the fair value of the assets acquired with no additional adjustments. This acquisition is further described in Note 3 “Acquisitions” in the Notes to Consolidated Financial Statements.
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, $2.0 million in payments that were made in 2019 and $1.0 million in payments that are anticipated to be made in 2020 and are recorded in payables on the Consolidated Balance Sheets at December 31, 2019. 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. This acquisition is further described in Note 3 “Acquisitions” in the Notes to Consolidated Financial Statements.
Revenue and Product Mix
As the industry continues to evolve, the Company has been at the forefront of innovation across metering, radio and software technologies in order to meet its customers’ increasing expectations for accurate and actionable data. As technologies such as ORION Cellular and BEACON AMA managed solutions have become more readily adopted, the Company’s revenue from Software as a Service (SaaS) has increased significantly, albeit from a small base, and is margin accretive.
The Company also 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. Additionally, the Company is periodically asked to oversee and perform field installation of its products for certain customers. In these cases, the Company assumes the role of general contractor and either performs the installation or hires installation subcontractors and supervises their work.
RESULTS OF OPERATIONS
Net Sales
Net sales in 2019 decreased $9.1 million, or -2%, to $424.6 million from $433.7 million in 2018. Sales into the municipal water market were $330.7 million, a decrease of 1% compared to the prior year’s $334.7 million, while sales into the flow instrumentation end markets were $93.9 million, a 5% decrease from 2018 sales of $99.0 million. Municipal water sales benefitted from higher sales of smart water solutions in North America where sales increased 1% year-over-year, however, sales into international markets, primarily the Middle East, declined significantly as a $5.5 million sale from 2018 did not repeat. While the Company continued to benefit from favorable market demand, it experienced a mid-year pause in certain order activity as a result of new product launches, most notably commercial ultrasonic meters and next generation cellular radio offerings. Sales of products into the global flow instrumentation end markets declined due to sluggish global industrial activity across multiple end markets served.
17
Net sales in 2018 increased $31.3 million, or 8%, to $433.7 million from $402.4 million in 2017. Sales into the municipal water market were $334.7 million, an increase of 9% over the prior year’s $306.9 million, while sales into the flow instrumentation end markets were $99.0 million, a 4% increase from 2017 sales of $95.9 million. Municipal water sales benefitted from higher volumes in both the residential and commercial markets in the U.S. as well as further penetration into international markets, primarily in the Middle East. In addition to the higher volumes, the Company benefitted from favorable sales mix reflecting a higher percentage of meters with radios, ultrasonic metering technology and SaaS revenue associated with the data collection and software analytics deployed by certain water utility customers. Sales of products into the global flow instrumentation end markets increased 4% benefitting from the overall solid global industrial landscape. Sales were particularly strong into the water/wastewater and oil and gas markets, which have been a focus area for the Company. This growth was partially offset by lower sales into de-emphasized end markets such as automotive.
Operating Earnings
Operating earnings in 2019 were $62.1 million or 14.6% of sales, compared to $56.9 million, or 13.1% of sales, in 2018. Gross profit increased $1.2 million, despite lower sales volumes, and increased as a percent of sales from 37.4% in 2018 to 38.5% in 2019. This was largely the result of improved utility sales mix attributed to selling more meters with radios, SaaS revenues, and favorable regional sales mix. In addition, gross margins benefitted from positive price/cost dynamics due primarily to lower commodity costs in 2019, particularly brass. Selling, engineering and administration (“SEA”) expenses declined $4.1 million year-over-year, which included $2.6 million of executive retirement charges incurred in the prior year which did not repeat. The remaining decrease in SEA was associated with tighter discretionary spending controls that more than offset normal inflation for employee salaries and benefits as well as higher engineering expenses to support product innovation and development.
Operating earnings in 2018 were $56.9 million, or 13.1% of sales, compared to $56.6 million, or 14.1% of sales, in 2017. Gross profit increased $6.6 million on higher sales volumes, but declined as a percent of sales from 38.7% in 2017 to 37.4% in 2018. This was largely the result of the higher sales and improved utility sales mix, partially offset by higher commodity cost increases in the first half of the year that were not fully offset by pricing until the latter half. Selling, engineering and administration (“SEA”) expenses increased $6.3 million year-over-year, which included the $2.6 million of executive retirement charges incurred for the vesting of certain equity and cash awards for the retiring chief executive officer, chief financial officer and chief accounting officer. The remaining increase in SEA was associated with normal inflation for employee salaries and benefits, duplicative executive expenses associated with the CEO and CFO transitions, as well as higher engineering expenses to support product innovation and development.
Other Pension and Postretirement Costs
Other pension and postretirement costs were $0.3 million in 2019 compared to $19.9 million in 2018 and $1.0 million in 2017. The significant costs in 2018 were associated with the Company’s termination of its defined benefit pension plan. Following the pension termination charges taken in 2018, the pension termination was complete.
Interest Expense, Net
Net interest expense was $0.3 million in 2019 compared to $1.2 million in 2018 and $0.8 million in 2017. The decrease from 2018 to 2019 was due to the repayment of US commercial paper borrowings using cash from operations. The increase in 2018 from 2017 was due to higher interest rates.
Income Taxes
Income taxes as a percentage of earnings before income taxes were 23.4%, 22.5% and 37.0% for 2019, 2018 and 2017, respectively. The decrease beginning in 2018 was due primarily to the lower U.S. Federal tax rate, which declined from 35% in 2017 to 21% in 2018 and 2019.
Earnings and Diluted Earnings per Share
For 2019, the increase in operating earnings and lower interest expense, along with the non-recurring pension termination charges in 2018, resulted in net earnings of $47.2 million in 2019 compared to $27.8 million in 2018. On a diluted basis, earnings per share were $1.61 in 2019 compared to $0.95 in 2018.
For 2018, the increase in operating earnings and benefit of the lower effective tax rate was more than offset by the pension settlement charges resulting in net earnings of $27.8 million in 2018 compared to $34.6 million in 2017. On a diluted basis, earnings per share were $0.95 in 2018 compared to $1.19 in 2017.
18
LIQUIDITY AND CAPITAL RESOURCES
The main sources of liquidity for the Company are cash from operations and borrowing capacity. In 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
We use primary working capital (PWC) as a percentage of sales as a key metric for working capital efficiency. We define this metric as the sum of receivables and inventories less payables, divided by annual net sales. The following table shows the components of our PWC (in millions):
|
|
|
12/31/2019 |
|
|
12/31/2018 |
|
||||||||||
|
|
|
$ |
|
|
PWC% |
|
|
$ |
|
|
PWC% |
|
||||
|
Receivables |
|
$ |
61,365 |
|
|
|
14.5 |
% |
|
$ |
66,300 |
|
|
|
15.3 |
% |
|
Inventories |
|
|
81,948 |
|
|
|
19.3 |
% |
|
|
80,804 |
|
|
|
18.6 |
% |
|
Payables |
|
|
(31,523 |
) |
|
|
-7.4 |
% |
|
|
(22,469 |
) |
|
|
-5.2 |
% |
|
Primary Working Capital |
|
$ |
111,790 |
|
|
|
26.4 |
% |
|
|||||||