2018
BADGER METER
ANNUAL REPORT
OUR COMPANY
Badger Meter (NYSE:BMI) is an innovator in flow measurement, control and communications solutions, serving water utilities, municipalities, and commercial and industrial customers worldwide. Our products measure water, wastewater, oil, chemicals, and other fluids, and are known for accuracy, long-lasting durability and for providing valuable and timely measurement data. Our smart solutions allow users to optimize, use and minimize waste of one of the world’s most precious resources. PERFORMANCE DATA
December 31,
Operations (dollars in thousands)
Net Sales
Adjusted Operating Earnings (1)
Adjusted Net Earnings (1)
Diluted per Common Share Amounts
Adjusted Diluted Earnings (1)
Cash Dividends
Year-End Financial Position (dollars in thousands)
Total Assets
Net Debt (2)
Shareholders’ Equity
Net Debt to Capitalization
Other
Number of Employees
Shares Outstanding at December 31
2017
$ 402,440
$ 56,595
$ 34,571
$ 1.19
$ 0.49
$ 391,727
$ 33,386
$ 277,452
10.7%
1,632
29,118,532
(1) See last page for reconciliation of GAAP to non-GAAP measures, including adjusted operating earnings, net earnings, and diluted earnings per share.
(2) Net debt equals short term debt plus any long term debt less cash and cash equivalents.
$500
$400
$300
$200
$100
$0
$433.7
14
15
16
17
18
Net Sales
(in millions)
50
$45
$40
$35
$30
$25
$20
$15
$10
$5
$0
$44.9
14
15
16
17
18
Adjusted Net Earnings (1)
(in millions)
$2.00
$1.75
$1.50
$1.25
$1.00
$0.75
$0.50
$0.25
$0
$1.54
14
15
16
17
18
$0.60
$0.50
$0.40
$0.30
$0.20
$0.10
$0
$ 433,732
$ 59,444
$ 44,933
$ 1.54
$ 0.56
$ 392,691
$ 4,974
$ 303,503
1.6%
1,531
29,118,571
2018
% Change
7.8
5.0
30.0
29.4
14.3
$0.56
14
15
16
17
18
Adjusted Diluted EPS (1)
Dividends per Share
2018 BADGER METER ANNUAL REPORT | 1
OUR PRODUCTS
MUNICIPAL WATER
Badger Meter provides smart metering solutions to optimize the delivery and use of water. Offering the widest range
of residential and commercial solutions, we help municipalities increase operational efficiency, effectiveness and
responsiveness. Our end-to-end solutions provide actionable information through data analytics from an interconnected
and interoperable network of sensors and devices that empower people and organizations to efficiently use and
conserve water.
BEACON® Advanced Metering Analytics (AMA)
Cloud-based analytical software suite providing
greater visibility and control
E-Series® Ultrasonic Meters
Innovative ultrasonic metering technology for both
commercial and residential applications
Residential
Commercial
ORION® Cellular Endpoints
Infrastructure free 2-way communication device including
LTE-M cellular network technology
Recordall® Disc Series Meters
Industry leading nutating disc technology
2 | 2018 BADGER METER ANNUAL REPORT
We offer fully integrated smart water solutions that
improve efficiency and reduce water loss by providing
real-time access to detailed water usage data, enhancing
customer service and empowering end water consumers
to better manage their water usage.
Utilities are leveraging highly reliable and secure
infrastructure-free cellular networks to make their meter
reading more efficient, scalable and interoperable for the
long term.
FLOW INSTRUMENTATION
EyeOnWater® - Consumer Engagement App
Badger Meter Flow Instrumentation products and solutions provide technology to measure and control whatever moves
through a pipe or pipeline—including water, wastewater, air, steam, oil, other liquids and gases. And we apply our
expertise to further enhance our products’ ease-of-use, accuracy and effectiveness. An industry leader in both
mechanical and electrical flow metering technologies, Badger Meter offers one of the broadest flow control and
measurement portfolios in the industry.
Customers can rely on Badger Meter Flow Instrumentation for application-specific solutions that deliver accurate, timely
and dependable flow data and control essential for product quality, cost management, safer and more sustainable
operations, and regulatory compliance.
2018 BADGER METER ANNUAL REPORT | 3
A MESSAGE TO OUR SHAREHOLDERS
TO MY FELLOW SHAREHOLDERS
I am honored to lead the tremendous team at Badger Meter. As only the sixth CEO in the company’s 113-year history, I
recognize the awesome responsibility of preserving the legacy of trusted solutions, broad offerings and innovation earned
since Badger Meter’s founding in 1905. That solid foundation, coupled with a sharpened strategic focus and a strong financial
position, provide us the opportunity to continue to grow both organically, and when strategically appropriate, through acquisition.
Executing our strategies will allow us to develop opportunities for our employees and deliver strong returns for our shareholders.
I am highly optimistic about the future of Badger Meter.
2018 was a year of significant change for Badger Meter in several respects, enabling us to prepare for the next generation of
sustainable growth. This included changes in:
LEADERSHIP – executed the well thought out and planned
CEO and CFO transitions, along with other organizational
and leadership changes.
INNOVATION – continued to invest in new technologies
including next generation ultrasonic metering and LTE-M
cellular radio offerings to deliver superior customer
satisfaction and efficiency.
OPERATIONAL EXCELLENCE – set goals and tracking
metrics with a focus on SQDC – or Safety, Quality, Delivery
and Cost. Our operations are solid, but there is more we can
do to become world-class.
SUSTAINABILITY – published our first ever Sustainability
Report, highlighting the key metrics, actions and goals related
to our commitment to preserving the world’s most precious
natural resources.
Kenneth C. Bockhost
President and Chief Executive officer
4 | 2018 BADGER METER ANNUAL REPORT
Our greatest asset is the world-class team of dedicated employees at Badger Meter. During the year, we strengthened our
leadership team and built our overall talent base by adding and promoting individuals whose capabilities align with our long-
range growth plans. This includes competencies tied to software & analytics, customer care, international markets, acquisitions
and operations & supply chain. By continuing to train, reward and supplement our diverse talent, we are building the most
important enabler to achieving our goals. Just as Every Drop Counts to our customers, Every Employee Counts to
Badger Meter.
FINANCIAL RESULTS
From a financial perspective, while 2018 began a bit slow, we built solid momentum throughout the remainder of the year. Our
sales grew 8% year-over-year with water utility revenues increasing 9% while sales of flow instrumentation products increased
4%. We continued to see the migration to “smart” meters that include radio technology, and experienced above average growth
in our newer technologies in the meter (ultrasonic) and radio (cellular) categories.
Excluding the impact of non-recurring pension termination and executive retirement charges, our earnings per share improved
29% year-over-year to $1.54 from $1.19 in the prior year. This was largely due to improved margins associated with the higher
volumes, favorable product and service mix, positive price/cost dynamics and the benefit of the lower U.S. corporate
income tax rate.
Our balance sheet remains strong, with ample financial flexibility to invest in both organic and acquisition growth opportunities.
We generated strong free cash flow of $52 million representing a free cash flow to adjusted net earnings conversion
ratio of 115%.
We anticipate the solid momentum to continue into 2019. Our order rates and backlog remain strong, and we see continued
acceptance of our newer technologies in meters, radios and software.
Sales
Growth
8%
EPS
Growth
29%
Free
Cash Flow
Conversion
115%
2018 BADGER METER ANNUAL REPORT | 5
STRATEGIC FRAMEWORK FOR THE FUTURE
Our strategic framework is focused around several key pillars. First and foremost is the one I already mentioned - preserving the
legacy of trusted solutions, broad offerings and innovation that has become synonymous with the Badger Meter brand. Making
sure we protect and defend our leadership position in the North American utility metering market is our top priority. In addition,
we intend to accelerate customer-focused growth, drive strong execution and invest with discipline.
Our market growth is supported by the continuing conversion to smart meters. Accelerating this underlying growth rate, in a
profitable way, will take various forms. First, we will continue to invest in research & development (R&D) and capital to leverage
innovation across our served markets. An example of this is incorporating our proprietary D-Flow technology into ultrasonic
metering used for both municipal and industrial applications. We will invest selectively in international markets, such as the
Middle East, where the opportunity for higher technology solutions is substantial and we are well-positioned with customers to
win business. We will also further leverage our cellular and analytics solutions to drive sustainable
Software as a Service (SaaS) revenues.
Improved execution, whether in our operating environments,
our R&D projects, or our working capital management, will be
a differentiator and value driver for Badger Meter. Establishing
metrics and targets, driving accountability and providing the
training and resources to move the needle are part of this
cultural change that is already underway.
Finally, we will be disciplined in our investments, deploying
capital where there is a compelling competitive advantage.
Smart, strategic acquisitions will be an important part of our
business model and critical to meeting our growth aspirations.
Investing in focus areas such as software and analytics which
leverages the Internet of Things (IoT), as well as water quality
assurance, we believe will extend our competitive advantage
and allow us to better serve customers and consumers.
Smart cities is a concept that is beginning to take hold as
one avenue to affect efficient city operations, conserve
resources and improve service and delivery. Badger Meter
is well positioned to benefit from the advancement of smart
water applications within the “smart cities” framework. Smart
water solutions are those that provide actionable information
6 | 2018 BADGER METER ANNUAL REPORT
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. Cities have a keen interest in smart water
as it provides both a sustainable 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, we expect to
be able to demonstrate the benefits of our broad, smart water solutions to high level decision makers within a city, such as the
Mayor’s office. In addition, the alliance allows Badger Meter to keep abreast of emerging cellular technology changes which we
believe is the premier advanced metering infrastructure (AMI) solution.
While I am respectful of all that was built in the past, I am confident the best is yet to come for Badger Meter. To us, success is
defined by more than just financial outperformance. It is delivering outstanding results for our customers, shareholders and our
team in a purpose-driven and socially responsible way.
FINAL THOUGHTS
In closing, I would like to thank my predecessor, Rich Meeusen, for his immense contributions and many years of distinguished
service at Badger Meter. Under Rich’s direction and vision, Badger Meter strengthened its notable century-old legacy and
capitalized on significant growth opportunities. Rich’s leadership and mentorship has had a positive impact on me personally,
and all of his colleagues. I look forward to continuing to work with Rich as Chairman of the Board of Badger Meter. I also want to
recognize Rick Johnson and Beverly Smiley, both retiring in early 2019. Their collective commitment to strong ethics and fiscal
discipline has been engrained in the culture and I am confident this will continue under new CFO Bob Wrocklage’s leadership.
Our employees around the world are the foundation of our successes and I am impressed with their passion, commitment
to operating with unquestionable integrity and desire to continually improve how we serve our customers. We are committed
to making a safe working environment a top priority for all of them – ensuring each person goes home as safe as when they
arrived at work.
Finally, I wish to thank our customers, suppliers and shareholders for their support of Badger Meter.
Sincerely –
Ken Bockhorst
President and Chief Executive Officer
2018 BADGER METER ANNUAL REPORT | 7
CORPORATE INFORMATION
BOARD OF DIRECTORS
Todd A. Adams 1
President and Chief Executive Officer,
Gale E. Klappa 2, 3
Executive Chairman, WEC Energy Group
Rexnord Corporation
Kenneth C. Bockhorst
President and Chief Executive Officer,
Gail A. Lione 2, 3
Senior Counsel, Dentons; Adjunct Professor,
Georgetown University School of Law;
Richard A. Meeusen
Chairman and Retired Chief Executive Officer,
Todd J. Teske (Lead Director) 2, 3
Chairman, President and Chief Executive
Badger Meter, Inc.
Officer, Briggs & Stratton Corporation
James F. Stern 1, 2
Executive Vice President, General Counsel
Badger Meter, Inc.
Retired President, The Harley-Davidson
and Secretary, A.O. Smith Corporation
Thomas J. Fischer 1, 3
President, Fischer Financial Consulting LLC
and Retired Managing Partner,
Arthur Andersen LLP
Foundation; and former Executive Vice
President, General Counsel and Secretary,
Harley-Davidson, Inc.
Glen E. Tellock 1
President and Chief Executive Officer,
Lakeside Foods
Committees of the Board:
1. Audit and Compliance
2. Compensation
3. Corporate Governance
EXECUTIVE OFFICERS
Kenneth C. Bockhorst
President and Chief Executive Officer
Gregory M. Gomez
Vice President – Business Development and
Richard E. Johnson
Senior Vice President – Administration
Kimberly K. Stoll
Vice President – Sales and Marketing
Fred J. Begale
Vice President – Engineering
William R.A. Bergum
Vice President – General Counsel
and Secretary
Flow Instrumentation
Horst E. Gras
Vice President – International Operations
Trina L. Jashinsky
Vice President – Human Resources
Raymond G. Serdynski
Vice President – Manufacturing
Beverly L.P. Smiley
Vice President – Controller
Daniel R. Weltzien
Vice President – Accounting and
External Reporting
Robert A. Wrocklage
Vice President – Finance, Chief Financial
Officer and Treasurer
OTHER
Badger Meter, Inc. Headquarters
4545 West Brown Deer Road
P.O. Box 245036
Milwaukee, Wisconsin 53224-9536
(414) 355-0400
www.badgermeter.com
Independent Registered Public Accounting Firm
Ernst & Young, LLP, Milwaukee, Wisconsin
Transfer Agent
American Stock Transfer & Trust Company, LLC
New York, New York
(877) 248-6415
www.amstock.com
Listing of Common Stock
New York Stock Exchange; Symbol – BMI
BMI
LISTED
NYSE
Form 10-K Report/Shareholder Information
The 2018 Form 10-K annual report (without exhibits) as filed with the Securities and
Exchange Commission, is included in this report. Shareholder information, including
news releases and Form 10-K, are available on the company’s website:
www.badgermeter.com.
Forward Looking Statements
Any forward looking statements contained in this document are subject to various risks
and uncertainties, the most important of which are outlined in the Form 10-K.
Automatic Dividend Reinvestment and Stock Purchase Plan
Badger Meter’s Dividend Reinvestment and Stock Purchase Plan is a convenient way
to acquire shares of company stock. To receive a prospectus describing the plan and
an enrollment card, please contact our plan administrator, American Stock Transfer, at
(877) 248-6415, or visit their website at www.amstock.com.
Trademarks
Trademarks appearing in this document are the property of their respective entities.
Investor Relations
Financial analysts and investors should direct inquires to:
Karen Bauer
Director, Investor Relations and Corporate Strategy
kbauer@badgermeter.com
(414) 371-7276
8 | 2018 BADGER METER ANNUAL REPORT
© 2019 Badger Meter, Inc. All rights reserved.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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 No. 001-06706
BADGER METER, INC.
(Exact name of registrant as specified in its charter)
Wisconsin
(State or other jurisdiction
of incorporation or organization)
4545 W. Brown Deer Road
Milwaukee, Wisconsin
(Address of principal executive offices)
39-0143280
(I.R.S. Employer
Identification No.)
53233
(Zip code)
Securities registered pursuant to Section 12(b) of the Act:
(414) 355-0400
(Registrant’s telephone number, including area code)
Common Stock
(Title of each class)
New York Stock Exchange
(Name of each exchange on which registered)
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. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment
to this Form 10-K. Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging
growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of
the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
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
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 29, 2018, the aggregate market value of the shares of Common Stock held by non-
affiliates of the Registrant was approximately $1.28 billion. For purposes of this calculation only, (i) shares of Common Stock are deemed to have a market value of
$44.70 per share, the closing price of the Common Stock as reported on the New York Stock Exchange on June 29, 2018, and (ii) each of the Company's executive
officers and directors is deemed to be an affiliate of the Company.
As of February 11, 2019, there were 29,112,354 shares of Common Stock outstanding with a par value of $1 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for the 2019 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission under
Regulation 14A within 120 days after the end of the registrant's fiscal year, are incorporated by reference from the definitive Proxy Statement into Part III of this Annual
Report on Form 10-K.
1
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,
2018 and include, among other things:
•
•
•
•
•
•
•
•
•
•
•
•
•
the continued shift in the Company’s business from lower cost, manually read meters toward more expensive, value-added
automatic meter reading (AMR) systems, advanced metering infrastructure (AMI) systems and advanced metering analytics
(AMA) systems that offer more comprehensive solutions to customers’ metering needs;
the success or failure of newer Company products;
changes in competitive pricing and bids in both the domestic and foreign marketplaces, and particularly in continued intense
price competition on government bid contracts for lower cost, manually read meters;
the actions (or lack thereof) of the Company’s competitors;
changes in the general conditions of the United States and foreign economies, including to some extent such things as the
length and severity of global economic downturns, international or civil conflicts that affect international trade, the ability of
municipal water utility customers to authorize and finance purchases of the Company’s products, the Company’s ability to
obtain financing, housing starts in the United States, and overall industrial activity;
unusual weather, weather patterns or other natural phenomena, including related economic and other ancillary effects of any
such events;
economic policy changes, including but not limited to, trade policy and corporate taxation;
the timing and impact of government funding programs that stimulate national and global economies, as well as the impact of
government budget cuts or partial shutdowns of governmental operations;
changes in the cost and/or availability of needed raw materials and parts, such as volatility in the cost of brass castings as a
result of fluctuations in commodity prices, particularly for copper and scrap metal at the supplier level, foreign-sourced
electronic components as a result of currency exchange fluctuations and/or lead times, and plastic resin as a result of changes
in petroleum and natural gas prices;
the Company’s ability to successfully integrate acquired businesses or products;
changes in foreign economic conditions, particularly currency fluctuations in the United States dollar, the Euro and the
Mexican peso;
the inability to develop technologically advanced products;
the failure of the Company’s products to operate as intended;
22
•
•
•
•
•
•
•
the inability to protect the Company’s proprietary rights to its products;
the Company’s expanded role as a prime contractor for providing complete technology systems to governmental entities,
which brings with it added risks, including but not limited to, the Company’s responsibility for subcontractor performance,
additional costs and expenses if the Company and its subcontractors fail to meet the timetable agreed to with the
governmental entity, and the Company’s expanded warranty and performance obligations;
disruptions and other damages to information technology, other networks, operations and property (Company or third party
owned) due to breaches in data security or any other cybersecurity attack;
transportation delays or interruptions;
violations or alleged violations of the U.S. Foreign Corrupt Practices Act (FCPA) or other anti-corruption 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 Annual Report on Form 10-
K 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.
33
ITEM 1.
BUSINESS
PART I
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 2018 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
Internet 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 over 85% 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 gaining in penetration 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.
Flow instrumentation includes meters and valves sold worldwide to measure and control fluids going through a pipe or
pipeline including water, air, steam, oil, and other liquids and gases. These products are used in a variety of industries and
applications, with the Company’s primary market focus being water/wastewater; heating, ventilating and air conditioning (HVAC); oil
and gas, and chemical and petrochemical. Flow instrumentation products are generally sold to original equipment manufacturers as
the primary flow measurement device within a product or system, as well as through manufacturers’ representatives.
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.
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.
44
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 the 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 utility 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 organic growth by other competitors due to the nature of the mechanical technology
used and the standards promulgated by the American Water Works Association. As static metering technology continues to gain
traction, additional competitors include firms such as Kamstrup A/S, Diehl Metering GmbH and Itron, Inc., although these competitors
lack brand recognition and do not have extensive water utility channel distribution, which impedes their ability to compete. In
addition, as previously noted, the technology acceptance also provides competitive opportunities for Badger Meter outside North
America.
The Company's primary competitors for water utility radio products in North America are Itron, Inc., Neptune and Sensus.
While the vast majority of the Company’s radio sales are of its own proprietary radio systems (ORION and GALAXY®), it is also a
reseller of Itron® products. 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. 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.
55
There are many competitors in the flow instrumentation markets due to the various end markets and applications being
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, 2018 and 2017 was $29.9 million and $28.9 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 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 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 $11.1 million in 2018 and $10.6 million in both 2017 and 2016.
Research and development activities are primarily sponsored by the Company. The Company also engages in some 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 2018, 2017 and
2016 were not material.
Employees
The Company and its subsidiaries employed 1,531 persons at December 31, 2018. Approximately 110 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, 2019. The Company believes it has good
relations with the union and all of its employees.
66
The following table sets forth certain information regarding the Executive Officers of the Registrant.
Name
Kenneth C. Bockhorst
Richard E. Johnson
Fred J. Begale
William R. A. Bergum
Gregory M. Gomez
Horst E. Gras
Trina L. Jashinsky
Raymond G. Serdynski
Beverly L. P. Smiley
Kimberly K. Stoll
Daniel R. Weltzien
Robert A. Wrocklage
Position
President and Chief Executive Officer
Senior Vice President — Administration
Vice President — Engineering
Vice President — General Counsel and Secretary
Vice President — Business Development and Flow Instrumentation
Vice President — International Operations
Vice President — Human Resources
Vice President — Manufacturing
Vice President — Controller
Vice President — Sales and Marketing
Vice President — Accounting and External Reporting
Vice President — Finance, Chief Financial Officer and Treasurer
Age at
2/28/2019
46
64
54
54
54
63
56
62
69
52
40
40
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 and Chief Executive Officer in January 2019 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 from March 2011 to October 2017.
Mr. Johnson was elected as Senior Vice President – Administration in January 2019 after serving as Senior Vice President –
Finance, Chief Financial Officer and Treasurer from May 2003 to December 2018. Mr. Johnson will retire from the Company
effective April 2019.
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 - Business Development and Flow Instrumentation in April 2017. Mr. Gomez served
as Vice President - Flow Instrumentation from September 2014 to April 2017, and Vice President - Business Development from
December 2010 to September 2014.
Mr. Gras has served as Vice President - International Operations for more than five years.
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. Serdynski has served as Vice President - Manufacturing for more than five years.
Ms. Smiley has served as Vice President - Controller for more than five years. Ms. Smiley will retire from the Company
effective March 2019.
Ms. Stoll has served as Vice President - Sales and Marketing for more than five years.
Mr. Weltzien was elected Vice President – Accounting and External Reporting in January 2019. Prior to joining the
Company, Mr. Weltzien spent eight years with Actuant Corporation, holding various corporate and business unit financial leadership
roles, most recently as Senior Director of Finance for its Hydratight business unit.
Mr. Wrocklage was elected Vice President – Finance, Chief Financial Officer and Treasurer in January 2019 after serving as
Vice President - Finance for the Company from August 2018 to December 2018. Prior to joining the Company, Mr. Wrocklage spent
77
ten years with Actuant Corporation, holding various corporate and business unit financial leadership roles, most recently as Vice
President - Corporate Controller and Chief Accounting Officer.
Foreign Operations and Export Sales
The Company distributes 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 2018 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 2018 Annual Report on Form 10-K.
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 2018 Annual Report on Form 10-K, including the
“Special Note Regarding Forward Looking Statements” at the front of this 2018 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, particularly those that provide
radio solutions (including cellular). 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 water utility industry is beginning to see the
adoption of static (ultrasonic) 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.
88
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, 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, 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
the British government has indicated that it intends to negotiate the withdrawal of the United Kingdom from the European Union
based on the results of this vote. The Brexit vote has created 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, the terms of Brexit, once
negotiated, 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.
Unusual weather and other natural phenomena could adversely affect our business.
Our sales 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.
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 we have a very good reputation for product quality, any future production and/or
sale of substandard products would 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
99
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 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 as a prime contractor for providing complete technology systems to
governmental entities, which brings with it added risks, including but not limited to, our responsibility for managing subcontractor
performance and the potential for expanded warranty and performance obligations. While we have managed a limited number of
these types of arrangements, it is possible to encounter a situation where we may not be able to perform up 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.
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.
1010
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 our overseas operations, including the
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 Foreign Corrupt Practices Act (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.
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.
1111
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
The principal facilities utilized by the Company at December 31, 2018 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.
Location
Los Gatos, California, USA
Centennial, Colorado, USA
Tulsa, Oklahoma, USA
Milwaukee, Wisconsin, USA
Racine, Wisconsin, USA
Brno, Czech Republic
Neuffen, Germany
Nogales, Mexico
Luleå, Sweden
Bern, Switzerland
Principal use
Software development
Distribution
Manufacturing
Manufacturing and offices
Manufacturing and offices
Manufacturing
Manufacturing and offices
Manufacturing
Electronic development
Manufacturing
Approximate
area
(square feet)
3,600 (1)
12,000
59,500
324,200
134,300 (2)
27,800
24,700
181,300
7,000 (3)
16,800 (4)
(1) Leased facility. Lease term expires November 30, 2021.
(2) Leased facility. Lease term expires December 31, 2025.
(3) Leased facility. Lease term expires June 30, 2025.
(4) 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 2018 Annual Report on Form 10-K under the heading
“Environmental Protection.”
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
1212
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 13,
2019, there were approximately 897 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 2018 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, 2014 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, 2013. 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.
1313
Badger Meter, Inc.
Russell 2000 Index
Peer Group
December 31
2013
2015
2016
2017
2018
2014
11.00 %
Return %
Cumulative $ $ 100.00 $ 111.00 $ 111.04
Return %
Cumulative $ $ 100.00 $ 104.89 $ 100.26
Return %
Cumulative $ $ 100.00 $ 100.24 $ 92.92
0.24 %
4.89 %
0.03 % 27.71 % 30.94 %
4.10 %
$ 141.80 $ 185.68 $ 193.29
(4.41 )% 21.31 % 14.65 % (11.01 )%
$ 121.63 $ 139.45 $ 124.09
(7.30 )% 33.10 % 20.10 % (20.18 )%
$ 123.68 $ 148.54 $ 118.56
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, 2018 of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act.
October 1, 2018 - October 31, 2018
November 1, 2018 - November 30, 2018
December 1, 2018 - December 31, 2018
Total as of December 31, 2018
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
— $
—
6,300 $
6,300
—
—
54.65
201,491
201,491
207,791
207,791
198,509
198,509
192,209
192,209
1414
ITEM 6.
SELECTED FINANCIAL DATA
BADGER METER, INC.
Ten Year Summary of Selected Consolidated Financial Data
2017
2016
2015
2014
2013
2012
2011
2010
2009
Years ended December 31,
$ 433,732 402,440 393,761 377,698 364,768 334,122 319,660 262,915 276,634 250,337
6,910
$ 11,095 10,596 10,597 10,645
9,496 10,504
7,164
8,086
9,567
$ 35,852 55,622 49,844 41,152 44,912 38,009 43,471 27,349 44,438 42,333
$ 27,790 34,571 32,295 25,938 29,678 24,617 28,032 19,161 28,662 26,780
n/a
$
7,390
$ 27,790 34,571 32,295 25,938 29,678 24,617 28,032 19,161 28,662 34,170
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
8.6 %
8.2 %
6.9 %
8.1 %
7.4 %
8.8 %
7.3 %
10.4 %
10.7 %
1.20
1.12
0.90
1.04
0.86
0.98
0.64
0.96
0.91
n/a
1.20
n/a
1.12
n/a
0.90
n/a
1.04
n/a
0.86
n/a
0.98
n/a
0.64
n/a
0.96
0.25
1.16
1.19
1.11
0.90
1.03
0.85
0.98
0.64
0.96
0.90
n/a
1.19
n/a
1.11
n/a
0.90
n/a
1.03
n/a
0.85
n/a
0.98
n/a
0.64
n/a
0.96
0.25
1.14
0.49
52.10
34.40
47.80
9.53
0.43
39.36
26.40
36.95
8.80
0.39
32.94
25.82
29.30
8.00
0.37
30.46
23.24
29.68
7.41
0.35
28.18
20.94
27.25
6.82
0.33
24.30
14.65
23.71
5.98
0.30
22.74
13.43
14.72
5.93
0.26
22.75
16.29
22.11
5.60
0.23
22.45
11.25
19.91
4.82
29,119 29,119 29,119 29,050 28,922 28,824 28,628 30,246 30,096 29,946
$ 124,635 114,781 119,169 116,084 109,682 92,518 91,030 79,239 77,586 57,520
28.7 %
28.5 %
30.3 %
30.7 %
30.1 %
27.7 %
28.5 %
30.1 %
28.0 %
23.0 %
$ 60,350 49,751 56,185 35,831 35,735 34,818 34,802 31,317 18,396 36,588
7,750
$ 8,643 15,069 10,596 19,766 12,332 14,311
$ 392,691 391,727 349,699 355,480 341,158 316,058 290,453 218,910 215,864 191,016
9,238
5,336
8,202
8,003
$ 18,060 44,550 37,950 71,360 75,927 70,045 66,730
$
n/a
n/a
$ 303,503 277,452 256,209 232,275 214,331 196,563 171,247 179,281 168,383 144,461
1,790 12,878
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
5.6 %
9.2 %
51.8
13.8 %
12.5 %
40.2
12.9 %
12.6 %
33.3
23.5 %
11.2 %
32.6
26.2 %
13.8 %
28.8
26.3 %
12.5 %
32.1
28.0 %
16.4 %
24.3
1.0 %
10.7 %
23.2
7.1 %
17.0 %
23.2
5.2 %
18.5 %
22.2
6.4 %
0.96
n/a
0.96
0.95
n/a
0.95
$
0.56
$ 57.12
$ 41.00
$ 49.21
$ 10.42
$
$
$
$
(In thousands except per share data) 2018
Operating results
Net sales
Research and development
Earnings from continuing
operations before
income taxes
Earnings from continuing
operations
Earnings from discontinued
operations (1)
Net earnings
Earnings from continuing
operations to sales
Per Common share (2)
Basic earnings from continuing
operations
Basic earnings from
discontinued operations (1)
Total basic earnings
Diluted earnings from
continuing operations
Diluted earnings from
discontinued operations (1)
Total diluted earnings
Cash dividends declared:
Common Stock
Price range - high
Price range - low
Closing price
Book value *
Shares outstanding at year-end (2)
Common Stock
Financial position
Primary working capital *
Primary working capital as a
percent of net sales *
Net cash provided by
operations
Capital expenditures
Total assets
Short-term and current portion
of long-term debt
Long-term debt
Shareholders' equity
Debt as a percent of total debt
and equity *
Return on shareholders' equity *
Price/earnings ratio *
$
$
(1) In 2009, discontinued operations represented the recognition of previously unrecognized tax benefits for certain deductions that
were taken on prior tax returns related to the shutdown of the Company's French operations.
(2) 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.
1515
* 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 and other current liabilities.
Primary working capital as a percent of net sales equals receivables plus inventories minus payables and other current
liabilities, 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 earnings from continuing operations 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 from
continuing operations.
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 over 85% 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 gaining in penetration due to a variety of factors, including their ability to maintain near absolute
measurement accuracy over their useful life. Providing ultrasonic water meter technology, combined with advanced radio technology,
provides the Company with the opportunity to sell into other geographical markets, for example the Middle East and Europe.
Flow instrumentation includes meters and valves sold worldwide to measure and control fluids going through a pipe or
pipeline including water, air, steam, oil, and other liquids and gases. These products are used in a variety of industries and
applications, with the Company’s primary market focus being water/wastewater; heating, ventilating and air conditioning (HVAC); oil
and gas, and chemical and petrochemical. Flow instrumentation products are generally sold to original equipment manufacturers as
the primary flow measurement device within a product or system, as well as through manufacturers’ representatives.
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
1616
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.
17
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 over 85% 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 gaining in penetration due to a variety of factors, including their ability to maintain near absolute
measurement accuracy over their useful life. Providing ultrasonic water meter technology, combined with advanced radio technology,
provides the Company with the opportunity to sell into other geographical markets, for example the Middle East and Europe.
Flow instrumentation includes meters and valves sold worldwide to measure and control fluids going through a pipe or
pipeline including water, air, steam, oil, and other liquids and gases. These products are used in a variety of industries and
applications, with the Company’s primary market focus being water/wastewater; heating, ventilating and air conditioning (HVAC); oil
and gas, and chemical and petrochemical. Flow instrumentation products are generally sold to original equipment manufacturers as
the primary flow measurement device within a product or system, as well as through manufacturers’ representatives.
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 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
17
ultrasonic compared to mechanical 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 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, hydrocarbon-based fluids, chemicals, 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 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
17
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.
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
18
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 the 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, hydrocarbon-based fluids, chemicals, 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 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.
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
18
allows Badger Meter to keep abreast of emerging cellular technology changes which the Company believes is the premier AMI
solution.
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 is recorded in
payables and other current liabilities on the Company's Consolidated Balance Sheet as it is anticipated to be paid in the next twelve
months. As of December 31, 2018, the Company had not completed its analysis for estimating the fair value of the assets acquired.
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. The Company's preliminary allocation of the purchase price included
$0.6 million of receivables, $0.2 million of inventory, $3.3 million of intangibles and $2.2 million of goodwill. 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 and $3.0 million in payments that are anticipated to be made in 2019 which
are recorded in payables and other accrued liabilities on the Consolidated Balance Sheets at December 31, 2018. 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.
On October 20, 2016, the Company acquired certain assets of Precision Flow Measurement, Inc., doing business as Nice
Instrumentation, of Manalapan Township, New Jersey. The acquisition added a new technology for the measurement of steam to the
Company's HVAC line of products. The total purchase consideration for the Nice Instrumentation assets was $2.0 million. This
18
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. It is
periodically asked to oversee and perform field installation of its products for certain customers. The Company assumes the role of
general contractor and either performs the installation or hires installation subcontractors and supervises their work.
19
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.
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 is recorded in
payables and other current liabilities on the Company's Consolidated Balance Sheet as it is anticipated to be paid in the next twelve
months. As of December 31, 2018, the Company had not completed its analysis for estimating the fair value of the assets acquired.
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. The Company's preliminary allocation of the purchase price included
$0.6 million of receivables, $0.2 million of inventory, $3.3 million of intangibles and $2.2 million of goodwill. 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 and $3.0 million in payments that are anticipated to be made in 2019 which
are recorded in payables and other accrued liabilities on the Consolidated Balance Sheets at December 31, 2018. 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.
On October 20, 2016, the Company acquired certain assets of Precision Flow Measurement, Inc., doing business as Nice
Instrumentation, of Manalapan Township, New Jersey. The acquisition added a new technology for the measurement of steam to the
Company's HVAC line of products. The total purchase consideration for the Nice Instrumentation assets was $2.0 million. 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. It is
periodically asked to oversee and perform field installation of its products for certain customers. 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 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 $95.5 million. Municipal water sales benefitted from higher
19
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. Overall residential sales increased 8% while commercial sales increased 4%. 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.
Net sales in 2017 increased 2% to $402.4 million from $393.8 million in 2016. Municipal water sales increased $2.4 million,
or 1%, to $306.9 million in 2017 compared to $304.5 million in 2016. The increase was primarily the result of higher commercial
water meter sales. Sales of residential meters and related technologies were favorably impacted by the inclusion of sales from D-Flow
and incremental sales from Carolina Meter, both of which were acquired in 2017. Sales of other residential related products decreased
slightly between years due to delays of anticipated municipal projects. Overall, residential sales were essentially flat while
commercial sales increased 3%, the latter due to slightly higher unit volumes. Flow instrumentation sales increased $6.2 million, or
7%, to $95.5 million from $89.3 million in 2016. The increase was primarily due to a rebound in the oil and gas market as well as
strengthening of industrial markets in general as the Company continued to broaden its distribution channels.
Operating Earnings
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.
Operating earnings in 2017 were $56.6 million, or 14.1% of sales, compared to $52.7 million, or 13.4%, in 2016. The
increase was the result of higher sales and gross margin, offset slightly by higher SEA expenses. Gross profit increased $5.2 million
and margins improved 50 basis points year-over-year due primarily to higher sales, the benefit of distributor acquisitions and
improved utility sales mix, partially offset by higher commodity cost increases. SEA expenses increased a modest $1.3 million, or
approximately 1%. The slight increase was the net impact of costs associated with added employees from acquisitions, the related
amortization of the intangibles from those transactions and normal inflationary increases, offset somewhat by lower healthcare costs.
Other Pension and Postretirement Costs
19
Other pension and postretirement costs were $19.9 million in 2018 compared to $1.0 million in 2017, with the increase
primarily due to the Company’s planned termination of its defined benefit pension plan. Following the pension termination charges
taken in 2018, the pension termination is complete.
Other pension and postretirement costs were $1.0 million in 2017 compared to $1.9 million in 2016. Included in 2017
expenses was a pretax charge of $0.6 million for non-cash pension settlements compared to $1.5 million in 2016.
Interest Expense, Net
Net interest expense was $1.2 million in 2018 compared to $0.8 million in 2017 and $0.9 million in 2016. The increase from
2017 to 2018 was due to higher interest rates. The slight decrease from 2016 to 2017 was impacted by the timing of cash flows.
20
RESULTS OF OPERATIONS
Net Sales
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 $95.5 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. Overall residential sales increased 8% while commercial sales increased 4%. 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.
Net sales in 2017 increased 2% to $402.4 million from $393.8 million in 2016. Municipal water sales increased $2.4 million,
or 1%, to $306.9 million in 2017 compared to $304.5 million in 2016. The increase was primarily the result of higher commercial
water meter sales. Sales of residential meters and related technologies were favorably impacted by the inclusion of sales from D-Flow
and incremental sales from Carolina Meter, both of which were acquired in 2017. Sales of other residential related products decreased
slightly between years due to delays of anticipated municipal projects. Overall, residential sales were essentially flat while
commercial sales increased 3%, the latter due to slightly higher unit volumes. Flow instrumentation sales increased $6.2 million, or
7%, to $95.5 million from $89.3 million in 2016. The increase was primarily due to a rebound in the oil and gas market as well as
strengthening of industrial markets in general as the Company continued to broaden its distribution channels.
Operating Earnings
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.
Operating earnings in 2017 were $56.6 million, or 14.1% of sales, compared to $52.7 million, or 13.4%, in 2016. The
increase was the result of higher sales and gross margin, offset slightly by higher SEA expenses. Gross profit increased $5.2 million
and margins improved 50 basis points year-over-year due primarily to higher sales, the benefit of distributor acquisitions and
improved utility sales mix, partially offset by higher commodity cost increases. SEA expenses increased a modest $1.3 million, or
approximately 1%. The slight increase was the net impact of costs associated with added employees from acquisitions, the related
amortization of the intangibles from those transactions and normal inflationary increases, offset somewhat by lower healthcare costs.
Other Pension and Postretirement Costs
Other pension and postretirement costs were $19.9 million in 2018 compared to $1.0 million in 2017, with the increase
primarily due to the Company’s planned termination of its defined benefit pension plan. Following the pension termination charges
taken in 2018, the pension termination is complete.
Other pension and postretirement costs were $1.0 million in 2017 compared to $1.9 million in 2016. Included in 2017
expenses was a pretax charge of $0.6 million for non-cash pension settlements compared to $1.5 million in 2016.
Interest Expense, Net
Net interest expense was $1.2 million in 2018 compared to $0.8 million in 2017 and $0.9 million in 2016. The increase from
2017 to 2018 was due to higher interest rates. The slight decrease from 2016 to 2017 was impacted by the timing of cash flows.
Income Taxes
Income taxes as a percentage of earnings before income taxes were 22.5%, 37.0% and 35.2% for 2018, 2017 and 2016,
respectively. The decrease in 2018 was due primarily to the lower U.S. Federal tax rate, which declined from 35% in 2017 and 2016
20
to 21% in 2018.
Earnings and Diluted Earnings per Share
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.
For 2017, the increase in operating earnings was offset somewhat by the higher effective tax rate resulting in net earnings of
$34.6 million in 2017 compared to $32.3 million in 2016. On a diluted basis, earnings per share were $1.19 in 2017 compared to
$1.11 in 2016.
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 and Other Current Liabilities, divided by annual net sales. The
following table shows the components of our PWC (in millions):
Receivables
Inventories
Payables and Other Current Liabilities
Primary Working Capital
12/31/2018
12/31/2017
$
66,300
80,804
(22,469 )
124,635
$
$
PWC%
15.3 % $
18.6 %
-5.2 %
28.7 % $
$
58,210
85,172
(28,601 )
114,781
PWC%
14.5 %
21.2 %
-7.1 %
28.5 %
Overall PWC increased $9.9 million due primarily to the higher sales volumes and increased mix of international sales
activity. Receivables at December 31, 2018 were $66.3 million compared to $58.2 million at the end of 2017. The increase was due
to the higher sales activity and increased days sales outstanding associated with international receivables due to their regionally higher
payment terms. The Company believes its Receivables balance is fully collectible. Inventories at December 31, 2018 were $80.8
million, a decline from $85.2 million at December 31, 2017, primarily due to the higher sales volumes, improved inventory
management and lower brass costs. Payables and Other Current Liabilities at December 31, 2018 were $22.5 million, down from
$28.6 million at the end of 2017.
Cash Provided by Operations
Cash provided by operations in 2018 was $60.4 million compared to $49.8 million in 2017. The increase from 2017 was
driven primarily by higher operating earnings (excluding the non-cash pension termination settlement charges), partially offset by
higher primary working capital. The cash flow was more than adequate to fund capital expenditures of $8.6 million along with
dividends of $16.3 million and $10.0 million of acquisitions. The remaining cash flow was used to reduce short term borrowings.
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Cash provided by operations in 2017 was $49.8 million compared to $56.2 in 2016. Higher working capital usage offset an
increase in net earnings. The cash flow was more than adequate to fund $15.1 million of capital expenditures, $14.2 million in
dividends and $20.4 million in acquisitions with only a modest increase in short term borrowings.
Capital expenditures were $8.6 million, $15.1 million and $10.6 million in fiscal 2018, 2017 and 2016, respectively. Capital
expenditures for fiscal 2019 are expected to be in the $10-15 million range, but could vary depending on timing of R&D projects,
growth opportunities and the amount of assets purchased.
21
Income taxes as a percentage of earnings before income taxes were 22.5%, 37.0% and 35.2% for 2018, 2017 and 2016,
respectively. The decrease in 2018 was due primarily to the lower U.S. Federal tax rate, which declined from 35% in 2017 and 2016
Income Taxes
to 21% in 2018.
Earnings and Diluted Earnings per Share
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.
For 2017, the increase in operating earnings was offset somewhat by the higher effective tax rate resulting in net earnings of
$34.6 million in 2017 compared to $32.3 million in 2016. On a diluted basis, earnings per share were $1.19 in 2017 compared to
$1.11 in 2016.
LIQUIDITY AND CAPITAL RESOURCES
general corporate purposes.
Primary Working Capital
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
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 and Other Current Liabilities, divided by annual net sales. The
following table shows the components of our PWC (in millions):
Receivables
Inventories
Payables and Other Current Liabilities
Primary Working Capital
12/31/2018
12/31/2017
$
PWC%
$
PWC%
$
66,300
80,804
(22,469 )
15.3 % $
18.6 %
-5.2 %
58,210
85,172
(28,601 )
$
124,635
28.7 % $
114,781
14.5 %
21.2 %
-7.1 %
28.5 %
Overall PWC increased $9.9 million due primarily to the higher sales volumes and increased mix of international sales
activity. Receivables at December 31, 2018 were $66.3 million compared to $58.2 million at the end of 2017. The increase was due
to the higher sales activity and increased days sales outstanding associated with international receivables due to their regionally higher
payment terms. The Company believes its Receivables balance is fully collectible. Inventories at December 31, 2018 were $80.8
million, a decline from $85.2 million at December 31, 2017, primarily due to the higher sales volumes, improved inventory
management and lower brass costs. Payables and Other Current Liabilities at December 31, 2018 were $22.5 million, down from
$28.6 million at the end of 2017.
Cash Provided by Operations
Cash provided by operations in 2018 was $60.4 million compared to $49.8 million in 2017. The increase from 2017 was
driven primarily by higher operating earnings (excluding the non-cash pension termination settlement charges), partially offset by
higher primary working capital. The cash flow was more than adequate to fund capital expenditures of $8.6 million along with
dividends of $16.3 million and $10.0 million of acquisitions. The remaining cash flow was used to reduce short term borrowings.
Cash provided by operations in 2017 was $49.8 million compared to $56.2 in 2016. Higher working capital usage offset an
increase in net earnings. The cash flow was more than adequate to fund $15.1 million of capital expenditures, $14.2 million in
dividends and $20.4 million in acquisitions with only a modest increase in short term borrowings.
Capital expenditures were $8.6 million, $15.1 million and $10.6 million in fiscal 2018, 2017 and 2016, respectively. Capital
expenditures for fiscal 2019 are expected to be in the $10-15 million range, but could vary depending on timing of R&D projects,
growth opportunities and the amount of assets purchased.
Short-term debt decreased to $18.1 million at December 31, 2018 from $44.6 million at December 31, 2017 due to the strong
cash flow from operations, partially offset by the payment of dividends and the 2018 acquisition of IMS. At the end of 2018, net debt
(short-term debt less cash) represented 1.6% of the Company’s total capitalization compared to 10.7% at the end of 2017. None of the
21
debt is secured by the Company’s assets.
The Company’s financial condition remains strong. In June 2018, the Company amended its May 2012 credit agreement
with its primary lender and extended its term until September 2021. The credit agreement includes a $125.0 million line of credit that
supports commercial paper (up to $70.0 million) and includes $5.0 million of a Euro line of credit. While the facility is unsecured,
there are a number of financial covenants with which the Company must comply, and the Company was in compliance as of
December 31, 2018. 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 $111.5 million of unused credit lines available at December 31, 2018.
OFF-BALANCE SHEET ARRANGEMENTS
The Company had no off-balance sheet arrangements at December 31, 2018.
CONTRACTUAL OBLIGATIONS
The following table includes the Company's significant contractual obligations as of December 31, 2018. There are no
material undisclosed guarantees.
Short-term debt
Operating leases
Total contractual obligations
Total
Less than
1 year
Payments due by period
1-3 years
(In thousands)
3-5 years
More than
5 years
$
$
18,060 $
12,977
31,037 $
18,060 $
3,371
21,431 $
— $
5,004
5,004 $
— $
2,412
2,412 $
—
2,190
2,190
Other than items included in the preceding table, as of December 31, 2018, the Company had no additional material purchase
obligations other than those created in the ordinary course of business related to inventory and property, plant and equipment, which
generally have terms of less than 90 days. The Company also has long-term obligations related to its postretirement plans which are
discussed in detail in Note 7 “Employee Benefit Plans” in the Notes to Consolidated Financial Statements in Part II, Item 8 of this
2018 Annual Report on Form 10-K. Postretirement medical claims are paid by the Company as they are submitted, and they are
anticipated to be $0.4 million in 2019 based on actuarial estimates; however, these amounts can vary significantly from year to year
because the Company is self-insured.
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
The Company's accounting policies are more fully described in Note 1 “Summary of Significant Accounting Policies” in the
Notes to Consolidated Financial Statements in Part II, Item 8 of this 2018 Annual Report on Form 10-K. As discussed in Note 1, the
preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The Company's more
significant estimates relate primarily to the following judgmental reserves: allowance for doubtful accounts, reserve for obsolete
21
inventories, and warranty and after-sale costs reserve. Each of these reserves is evaluated quarterly and is reviewed with the
Company's internal Disclosure Committee and the Audit and Compliance Committee of the Board of Directors. The basis for the
reserve amounts is determined by analyzing the anticipated exposure for each account, and then selecting the most likely amount
based upon historical experience and various other considerations that are believed to be reasonable under the circumstances. These
methods have been used for all years in the presented financials and have been used consistently throughout each year. Actual results
may differ from these estimates if actual experiences vary from the Company's assumptions.
22
Short-term debt decreased to $18.1 million at December 31, 2018 from $44.6 million at December 31, 2017 due to the strong
cash flow from operations, partially offset by the payment of dividends and the 2018 acquisition of IMS. At the end of 2018, net debt
(short-term debt less cash) represented 1.6% of the Company’s total capitalization compared to 10.7% at the end of 2017. None of the
debt is secured by the Company’s assets.
The Company’s financial condition remains strong. In June 2018, the Company amended its May 2012 credit agreement
with its primary lender and extended its term until September 2021. The credit agreement includes a $125.0 million line of credit that
supports commercial paper (up to $70.0 million) and includes $5.0 million of a Euro line of credit. While the facility is unsecured,
there are a number of financial covenants with which the Company must comply, and the Company was in compliance as of
December 31, 2018. 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 $111.5 million of unused credit lines available at December 31, 2018.
OFF-BALANCE SHEET ARRANGEMENTS
The Company had no off-balance sheet arrangements at December 31, 2018.
The following table includes the Company's significant contractual obligations as of December 31, 2018. There are no
CONTRACTUAL OBLIGATIONS
material undisclosed guarantees.
Short-term debt
Operating leases
Total contractual obligations
Total
Less than
1 year
Payments due by period
1-3 years
3-5 years
(In thousands)
More than
5 years
$
18,060 $
18,060 $
12,977
3,371
$
31,037 $
21,431 $
— $
5,004
5,004 $
— $
2,412
2,412 $
—
2,190
2,190
Other than items included in the preceding table, as of December 31, 2018, the Company had no additional material purchase
obligations other than those created in the ordinary course of business related to inventory and property, plant and equipment, which
generally have terms of less than 90 days. The Company also has long-term obligations related to its postretirement plans which are
discussed in detail in Note 7 “Employee Benefit Plans” in the Notes to Consolidated Financial Statements in Part II, Item 8 of this
2018 Annual Report on Form 10-K. Postretirement medical claims are paid by the Company as they are submitted, and they are
anticipated to be $0.4 million in 2019 based on actuarial estimates; however, these amounts can vary significantly from year to year
because the Company is self-insured.
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
The Company's accounting policies are more fully described in Note 1 “Summary of Significant Accounting Policies” in the
Notes to Consolidated Financial Statements in Part II, Item 8 of this 2018 Annual Report on Form 10-K. As discussed in Note 1, the
preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The Company's more
significant estimates relate primarily to the following judgmental reserves: allowance for doubtful accounts, reserve for obsolete
inventories, and warranty and after-sale costs reserve. Each of these reserves is evaluated quarterly and is reviewed with the
Company's internal Disclosure Committee and the Audit and Compliance Committee of the Board of Directors. The basis for the
reserve amounts is determined by analyzing the anticipated exposure for each account, and then selecting the most likely amount
based upon historical experience and various other considerations that are believed to be reasonable under the circumstances. These
methods have been used for all years in the presented financials and have been used consistently throughout each year. Actual results
may differ from these estimates if actual experiences vary from the Company's assumptions.
The criteria used for calculating each of the reserve amounts vary by type of reserve. For the allowance for doubtful accounts
reserve, significant past due balances are individually reviewed for collectability, while the balance of accounts is reviewed in
conjunction with applying historical write-off ratios. The calculation for the obsolete and excess inventories reserve is determined by
analyzing the relationship between the age and quantity of items on hand versus estimated usage to determine if excess quantities
exist. The calculation for warranty and after-sale costs reserve uses criteria that include known potential problems on past sales as
well as historical claim experience and current warranty trends. The changes in the balances of these reserves at December 31, 2018
compared to the prior year were due to normal business conditions and are not deemed to be significant. While the Company
continually tries to improve its estimates, no significant changes in the underlying processes are expected for 2019.
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The Company also uses estimates in three other significant areas: (i) stock-based compensation, (ii) income taxes, and (iii)
evaluating goodwill at least annually for impairment. The actuarial valuations of benefit obligations and net periodic benefit costs rely
on key assumptions including discount rates and long-term expected returns on plan assets for 2017.
The total cost of the Company's stock-based awards is equal to the grant date fair value per award multiplied by the number
of awards granted, adjusted for forfeitures. Forfeitures are initially estimated based on historical Company information and
subsequently updated over the life of the awards to ultimately reflect actual forfeitures, which could have an impact on the amount of
stock compensation cost recognized from period to period. The grant date fair value of stock options relies on assumptions including
the risk-free interest rate, dividend yield, market volatility and expected option life.
In calculating the provision for income taxes on an interim basis, the Company uses an estimate of the annual effective tax
rate based upon the facts and circumstances known at each interim period. On a quarterly basis, the actual effective tax rate is
adjusted as appropriate based upon the actual results compared to those forecasted at the beginning of the fiscal year. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The reserve for uncertainty in income taxes is a matter of judgment based on an
evaluation of the individual facts and circumstances of each tax position in light of all available evidence, including historic data and
current trends. A tax benefit is recognized when it is “more likely than not” to be sustained based solely on the technical merits of
each tax position. The Company evaluates and updates all of these assumptions quarterly.
Goodwill impairment, if any, is determined by comparing the fair value of the reporting unit with its carrying value and is
reviewed at least annually. Actual results may differ from these estimates.
OTHER MATTERS
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 2018, 2017 and 2016 were not material.
See the “Special Note Regarding Forward Looking Statements” at the front of this Annual Report on Form 10-K and Part I,
Item 1A “Risk Factors” in this Annual Report on Form 10-K for the year ended December 31, 2018 for a discussion of risks and
uncertainties that could impact the Company's financial performance and results of operations.
MARKET RISKS
In the ordinary course of business, the Company is exposed to various market risks. The Company operates in an
environment where competition varies from moderate to strong. The Company believes it currently provides the leading technology
in water meters and radio systems for water utilities. A number of the Company's competitors in certain markets have greater financial
resources. Competitors also include alliance partners that sell products that do or may compete with our products, particularly those
that provide radio solutions. As the global water metering market begins to shift to adopt ultrasonic technology, the number of
competitors may increase. In addition, the market's level of acceptance of the Company's newer product offerings, including the
BEACON AMA system, may have a significant effect on the Company's results of operations. As a result of significant research and
22
development activities, the Company enjoys favorable patent positions for several of its products.
The Company's ability to generate operating income and to increase profitability depends somewhat on the general conditions
of the United States and foreign economies, including to some extent such things as the length and severity of global economic
downturns; the timing and size of governmental programs such as stimulus fund programs, as well as the impact of government
budget cuts or partial shutdowns of governmental operations; 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
23
The criteria used for calculating each of the reserve amounts vary by type of reserve. For the allowance for doubtful accounts
reserve, significant past due balances are individually reviewed for collectability, while the balance of accounts is reviewed in
conjunction with applying historical write-off ratios. The calculation for the obsolete and excess inventories reserve is determined by
analyzing the relationship between the age and quantity of items on hand versus estimated usage to determine if excess quantities
exist. The calculation for warranty and after-sale costs reserve uses criteria that include known potential problems on past sales as
well as historical claim experience and current warranty trends. The changes in the balances of these reserves at December 31, 2018
compared to the prior year were due to normal business conditions and are not deemed to be significant. While the Company
continually tries to improve its estimates, no significant changes in the underlying processes are expected for 2019.
The Company also uses estimates in three other significant areas: (i) stock-based compensation, (ii) income taxes, and (iii)
evaluating goodwill at least annually for impairment. The actuarial valuations of benefit obligations and net periodic benefit costs rely
on key assumptions including discount rates and long-term expected returns on plan assets for 2017.
The total cost of the Company's stock-based awards is equal to the grant date fair value per award multiplied by the number
of awards granted, adjusted for forfeitures. Forfeitures are initially estimated based on historical Company information and
subsequently updated over the life of the awards to ultimately reflect actual forfeitures, which could have an impact on the amount of
stock compensation cost recognized from period to period. The grant date fair value of stock options relies on assumptions including
the risk-free interest rate, dividend yield, market volatility and expected option life.
In calculating the provision for income taxes on an interim basis, the Company uses an estimate of the annual effective tax
rate based upon the facts and circumstances known at each interim period. On a quarterly basis, the actual effective tax rate is
adjusted as appropriate based upon the actual results compared to those forecasted at the beginning of the fiscal year. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The reserve for uncertainty in income taxes is a matter of judgment based on an
evaluation of the individual facts and circumstances of each tax position in light of all available evidence, including historic data and
current trends. A tax benefit is recognized when it is “more likely than not” to be sustained based solely on the technical merits of
each tax position. The Company evaluates and updates all of these assumptions quarterly.
Goodwill impairment, if any, is determined by comparing the fair value of the reporting unit with its carrying value and is
reviewed at least annually. Actual results may differ from these estimates.
OTHER MATTERS
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 2018, 2017 and 2016 were not material.
See the “Special Note Regarding Forward Looking Statements” at the front of this Annual Report on Form 10-K and Part I,
Item 1A “Risk Factors” in this Annual Report on Form 10-K for the year ended December 31, 2018 for a discussion of risks and
uncertainties that could impact the Company's financial performance and results of operations.
MARKET RISKS
In the ordinary course of business, the Company is exposed to various market risks. The Company operates in an
environment where competition varies from moderate to strong. The Company believes it currently provides the leading technology
in water meters and radio systems for water utilities. A number of the Company's competitors in certain markets have greater financial
resources. Competitors also include alliance partners that sell products that do or may compete with our products, particularly those
that provide radio solutions. As the global water metering market begins to shift to adopt ultrasonic technology, the number of
competitors may increase. In addition, the market's level of acceptance of the Company's newer product offerings, including the
BEACON AMA system, may have a significant effect on the Company's results of operations. As a result of significant research and
development activities, the Company enjoys favorable patent positions for several of its products.
The Company's ability to generate operating income and to increase profitability depends somewhat on the general conditions
of the United States and foreign economies, including to some extent such things as the length and severity of global economic
downturns; the timing and size of governmental programs such as stimulus fund programs, as well as the impact of government
budget cuts or partial shutdowns of governmental operations; 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. In addition, changes in governmental laws and
23
regulations, particularly laws dealing with the content or handling of materials, customs or trade practices, may impact the results of
operations. These factors are largely beyond the Company's control and depend on the economic condition and regulatory
environment of the geographic region of the Company's operations.
The Company relies on single suppliers for certain castings and components in several of its product lines. Although
alternate sources of supply exist for these items, the loss of certain suppliers could temporarily disrupt operations in the short term.
The Company attempts to mitigate these risks by working closely with key suppliers, purchasing minimal amounts from alternative
suppliers and by purchasing business interruption insurance where appropriate.
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. The Company does not hold significant amounts of precious metals. The price and
availability of raw materials is influenced by economic and industry conditions, including supply and demand factors that are difficult
to anticipate and cannot be controlled by the Company. Commodity risk is managed by keeping abreast of economic conditions and
locking in purchase prices for quantities that correspond to the Company's forecasted usage.
The Company's foreign currency risk relates to the sales of products to foreign customers and purchases of material from
foreign vendors. The Company uses lines of credit with U.S. and European banks to offset currency exposure related to European
receivables and other monetary assets. As of December 31, 2018 and 2017, the Company's foreign currency net monetary assets were
partially offset by comparable debt resulting in no material exposure to the results of operations. The Company believes the effect of a
change in foreign currency rates will not have a material adverse effect on the Company's financial position or results of operations,
either from a cash flow perspective or on the financial statements as a whole.
The Company typically does not hold or issue derivative instruments and has a policy specifically prohibiting the use of such
instruments for trading purposes.
The Company's short-term debt on December 31, 2018 was floating rate debt with market values approximating carrying
value. Future annual interest costs for short-term debt fluctuate based upon short-term interest rates. For the short-term debt balance
as of December 31, 2018, the effect of a 1% change in interest rates is approximately $0.2 million.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required by this Item is set forth in Part II, Item 7 “Management's Discussion and Analysis of Financial
Condition and Results of Operations” under the heading “Market Risks” in this 2018 Annual Report on Form 10-K.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
BADGER METER, INC.
Management's Annual Report on Internal Control over Financial Reporting
The Company's management is responsible for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. The Company's internal control over
financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company's management assessed the effectiveness of the Company's internal control over financial reporting as of
23
December 31, 2018 using the criteria set forth in Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 Framework). Based on this assessment, the Company's management believes that,
as of December 31, 2018, the Company's internal control over financial reporting was effective based on those criteria.
Ernst & Young LLP, an independent registered public accounting firm, has audited the Consolidated Financial Statements
included in this Annual Report on Form 10-K and, as part of its audit, has issued an attestation report, included herein, on the
effectiveness of the Company's internal control over financial reporting.
24
financing; housing starts in the United States; and overall industrial activity. In addition, changes in governmental laws and
regulations, particularly laws dealing with the content or handling of materials, customs or trade practices, may impact the results of
operations. These factors are largely beyond the Company's control and depend on the economic condition and regulatory
environment of the geographic region of the Company's operations.
The Company relies on single suppliers for certain castings and components in several of its product lines. Although
alternate sources of supply exist for these items, the loss of certain suppliers could temporarily disrupt operations in the short term.
The Company attempts to mitigate these risks by working closely with key suppliers, purchasing minimal amounts from alternative
suppliers and by purchasing business interruption insurance where appropriate.
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. The Company does not hold significant amounts of precious metals. The price and
availability of raw materials is influenced by economic and industry conditions, including supply and demand factors that are difficult
to anticipate and cannot be controlled by the Company. Commodity risk is managed by keeping abreast of economic conditions and
locking in purchase prices for quantities that correspond to the Company's forecasted usage.
The Company's foreign currency risk relates to the sales of products to foreign customers and purchases of material from
foreign vendors. The Company uses lines of credit with U.S. and European banks to offset currency exposure related to European
receivables and other monetary assets. As of December 31, 2018 and 2017, the Company's foreign currency net monetary assets were
partially offset by comparable debt resulting in no material exposure to the results of operations. The Company believes the effect of a
change in foreign currency rates will not have a material adverse effect on the Company's financial position or results of operations,
either from a cash flow perspective or on the financial statements as a whole.
The Company typically does not hold or issue derivative instruments and has a policy specifically prohibiting the use of such
instruments for trading purposes.
The Company's short-term debt on December 31, 2018 was floating rate debt with market values approximating carrying
value. Future annual interest costs for short-term debt fluctuate based upon short-term interest rates. For the short-term debt balance
as of December 31, 2018, the effect of a 1% change in interest rates is approximately $0.2 million.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required by this Item is set forth in Part II, Item 7 “Management's Discussion and Analysis of Financial
Condition and Results of Operations” under the heading “Market Risks” in this 2018 Annual Report on Form 10-K.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
BADGER METER, INC.
Management's Annual Report on Internal Control over Financial Reporting
The Company's management is responsible for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. The Company's internal control over
financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company's management assessed the effectiveness of the Company's internal control over financial reporting as of
December 31, 2018 using the criteria set forth in Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 Framework). Based on this assessment, the Company's management believes that,
as of December 31, 2018, the Company's internal control over financial reporting was effective based on those criteria.
Ernst & Young LLP, an independent registered public accounting firm, has audited the Consolidated Financial Statements
included in this Annual Report on Form 10-K and, as part of its audit, has issued an attestation report, included herein, on the
effectiveness of the Company's internal control over financial reporting.
24
24
BADGER METER, INC.
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Badger Meter, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Badger Meter, Inc.’s internal control over financial reporting as of December 31, 2018, based on criteria
established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (2013 framework) (the COSO criteria). In our opinion, Badger Meter, Inc. (“the Company”) maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, and the related consolidated
statements of operations, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended
December 31, 2018, and the related notes and our report dated February 26, 2019, expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual
Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control
over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations
of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Milwaukee, Wisconsin
February 26, 2019
2525
BADGER METER, INC.
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Badger Meter, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Badger Meter, Inc. (“the Company”) as of December 31,
2018 and 2017, the related consolidated statements of operations, comprehensive income, shareholders’ equity and cash flows for each
of the three years in the period ended December 31, 2018, and the related notes (collectively referred to as the “consolidated financial
statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the
Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period
ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
framework) and our report dated February 26, 2019 expressed an unqualified opinion thereon.
Adoption of New Accounting Standard
As discussed in Note 1 “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements, the
Company changed its method of accounting for defined benefit and post-retirement plan expenses in 2018 through retrospective
application.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion
on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as Badger Meter, Inc.’s auditor since 1927.
Milwaukee, Wisconsin
February 26, 2019
2626
BADGER METER, INC.
Consolidated Balance Sheets
Assets
December 31,
2018
2017
(Dollars in thousands)
Current assets:
Cash
Receivables
Inventories:
Finished goods
Work in process
Raw materials
Total inventories
Prepaid expenses and other current assets
Total current assets
Property, plant and equipment, at cost:
Land and improvements
Buildings and improvements
Machinery and equipment
Less accumulated depreciation
Net property, plant and equipment
Intangible assets, at cost less accumulated amortization
Other assets
Deferred income taxes
Goodwill
Total assets
Liabilities and Shareholders’ Equity
Current liabilities:
Short-term debt
Payables and other current liabilities
Accrued compensation and employee benefits
Warranty and after-sale costs
Income and other taxes
Total current liabilities
Other long-term liabilities
Deferred income taxes
Accrued non-pension postretirement benefits
Other accrued employee benefits
Commitments and contingencies (Note 6)
Shareholders’ equity:
BADGER METER, INC.
$
13,086 $
66,300
23,476
17,097
40,231
80,804
4,469
164,659
9,066
67,932
136,724
213,722
(123,401 )
90,321
55,418
8,872
2,163
71,258
392,691 $
18,060 $
22,469
13,768
4,206
1,512
60,015
13,972
3,332
5,184
6,685
$
$
Consolidated Statements of Comprehensive Income
Common Stock, $1 par; authorized 40,000,000 shares; issued
37,198,298 shares in 2018 and 37,164,698 shares in 2017
Capital in excess of par value
Reinvested earnings
Accumulated other comprehensive income (loss)
Less: Employee benefit stock
Net earnings
Other comprehensive income :
Treasury stock, at cost; 8,079,727 shares in 2018 and
Foreign currency translation adjustment
8,046,166 shares in 2017
Pension and postretirement benefits, net of tax
Total shareholders’ equity
Comprehensive income
Total liabilities and shareholders’ equity
2018
37,198
Years ended December 31,
38,082
2017
257,313
(Dollars in thousands)
580
34,571 $
(306 )
27,790 $
(484 )
13,657
40,963 $
$
1,844
(1,102 )
35,313 $
(29,364 )
303,503
392,691 $
$
$
11,164
58,210
23,125
22,035
40,012
85,172
4,077
158,623
9,119
67,604
135,762
212,485
(118,884 )
93,601
59,326
9,897
2,856
67,424
391,727
44,550
28,601
15,509
3,367
1,082
93,109
4,073
3,434
5,703
7,956
2016
37,165
32,182
244,224
(10,893 )
32,295
(460 )
(328 )
(24,766 )
1,473
277,452
33,440
391,727
See accompanying notes.
2727
29
BADGER METER, INC.
Consolidated Statements of Operations
2018
Years ended December 31,
2017
(In thousands except per share amounts)
2016
Net sales
Cost of sales
Gross margin
Selling, engineering and administration
Operating earnings
Interest expense, net
Other pension and postretirement costs
Earnings before income taxes
Provision for income taxes
Net earnings
Earnings per share:
Basic
Diluted
Shares used in computation of earnings per share:
Basic
Impact of dilutive securities
Diluted
$
$
$
$
433,732 $
271,383
162,349
105,480
56,869
1,157
19,860
35,852
8,062
27,790 $
402,440 $
246,694
155,746
99,151
56,595
789
973
54,833
20,262
34,571 $
0.96 $
0.95 $
1.20 $
1.19 $
28,993
196
29,189
28,927
184
29,111
393,761
243,185
150,576
97,904
52,672
921
1,907
49,844
17,549
32,295
1.12
1.11
28,887
163
29,050
See accompanying notes.
2828
BADGER METER, INC.
Consolidated Statements of Comprehensive Income
Net earnings
Other comprehensive income :
Foreign currency translation adjustment
Pension and postretirement benefits, net of tax
Comprehensive income
2018
Years ended December 31,
2017
(Dollars in thousands)
2016
$
27,790 $
34,571 $
32,295
(484 )
13,657
40,963 $
1,844
(1,102 )
35,313 $
(328 )
1,473
33,440
$
See accompanying notes.
2929
BADGER METER, INC.
Consolidated Statements of Cash Flows
Operating activities:
Net earnings
Adjustments to reconcile net earnings to net cash
provided by operations:
Depreciation
Amortization
Deferred income taxes
Pension termination settlement charges
Contributions to pension plan
Noncurrent employee benefits
Stock-based compensation expense
Changes in:
Receivables
Inventories
Prepaid expenses and other current assets
Liabilities other than debt
Total adjustments
Net cash provided by operations
Investing activities:
Property, plant and equipment additions
Acquisitions, net of cash acquired
Net cash used for investing activities
Financing activities:
Net (decrease) increase in short-term debt
Payment of contingent acquisition consideration
Dividends paid
Proceeds from exercise of stock options
Purchase of common stock for treasury stock
Issuance of treasury stock
Net cash used for financing activities
Effect of foreign exchange rates on cash
Increase (decrease) in cash
Cash — beginning of year
Cash — end of year
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Income taxes
Interest
Non cash transactions:
Settlement of Innovative Metering Systems payables prior
to the acquisition
Settlement of Carolina Meter & Supply payables prior
to the acquisition
2018
Years ended December 31,
2017
(Dollars in thousands)
2016
$
27,790 $
34,571 $
32,295
11,354
12,961
(5,269 )
19,900
(2,860 )
464
4,174
(7,999 )
4,859
(5,062 )
38
32,560
60,350
(8,643 )
(8,048 )
(16,691 )
(21,012 )
(2,034 )
(16,265 )
1,443
(4,795 )
523
(42,140 )
403
1,922
11,164
13,086 $
12,056
12,342
(4,100 )
—
(825 )
714
1,725
(967 )
(6,167 )
(6,237 )
6,639
15,180
49,751
(15,069 )
(20,376 )
(35,445 )
6,376
—
(14,215 )
1,215
(4,402 )
600
(10,426 )
(54 )
3,826
7,338
11,164 $
10,715
11,727
710
—
(1,000 )
660
1,537
(3,561 )
955
(961 )
3,108
23,890
56,185
(10,596 )
(1,800 )
(12,396 )
(33,096 )
—
(12,461 )
568
—
518
(44,471 )
(143 )
(825 )
8,163
7,338
12,503 $
1,175 $
17,912 $
867 $
19,723
952
3,246 $
— $
— $
4,176 $
—
—
$
$
$
$
$
See accompanying notes.
3030
BADGER METER, INC.
Consolidated Statements of Shareholders’ Equity
Common
Stock at $1
par value*
Capital in
excess of
par value
Years ended December 31,
Accumulated
other
comprehensive
income
Reinvested
earnings
(loss)
(In thousands except per share amounts)
Employee
benefit
stock
Treasury
stock
Total
$ 41,103 $ 31,626 $ 204,044 $
— 32,295
—
(12,780 ) $
—
(768 ) $ (30,950 ) $ 232,275
— 32,295
—
—
—
—
19
—
—
—
(4,000 )
—
—
—
—
—
— (12,463 )
—
—
—
—
—
—
37,122 28,022 223,876
— 34,571
528
(110 )
289
1,537
(6,260 )
412
—
—
—
—
43
—
—
—
—
—
—
—
—
— (14,223 )
—
—
—
—
—
37,165 32,182 244,224
— 27,790
1,798
205
1,725
—
432
—
—
—
—
—
—
33
—
—
—
—
—
—
—
—
— (16,273 )
—
(128 )
1,700
—
—
1,410
—
(78 )
—
4,174
—
—
—
394
$ 37,198 $ 38,082 $ 257,313 $
1,473
(328 )
—
—
—
—
—
—
—
(11,635 )
—
(1,102 )
1,844
—
—
—
—
—
—
(10,893 )
—
13,657
(484 )
—
—
(1,700 )
—
—
—
—
—
580 $
—
1,473
—
—
(328 )
—
—
— (12,463 )
—
569
22
—
(110 )
—
443
154
—
1,537
—
—
—
— 10,260
518
106
—
(614 ) (20,562 ) 256,209
— 34,571
—
—
—
—
—
154
—
—
—
(1,102 )
—
—
1,844
— (14,223 )
1,871
30
359
—
—
1,725
(4,402 )
(4,402 )
600
168
(460 ) (24,766 ) 277,452
— 27,790
—
—
—
—
—
—
—
154
—
—
—
— 13,657
(484 )
—
— (16,273 )
(128 )
—
—
—
1,511
68
76
—
—
4,174
(4,795 )
(4,795 )
523
129
(306 ) $ (29,364 ) $ 303,503
Balance, December 31, 2015
Net earnings
Pension and postretirement benefits
(net of $1,019 tax effect)
Foreign currency translation
Cash dividends of $0.43 per share
Stock options exercised
Tax benefit on stock options and dividends
ESSOP transactions
Stock-based compensation
Retirement of treasury stock
Issuance of treasury stock (41 shares)
Balance, December 31, 2016
Net earnings
Pension and postretirement benefits
(net of $292 tax effect)
Foreign currency translation
Cash dividends of $0.49 per share
Stock options exercised
ESSOP transactions
Stock-based compensation
Purchase of common stock for treasury stock
Issuance of treasury stock (61 shares)
Balance, December 31, 2017
Net earnings
Pension and postretirement benefits
(net of $5,127 tax effect)
Foreign currency translation
Cash dividends of $0.56 per share
ASU 2014-09 adoption impact
ASU 2018-02 adoption impact
Stock options exercised
ESSOP transactions
Stock-based compensation
Purchase of common stock for treasury stock
Issuance of treasury stock (40 shares)
Balance, December 31, 2018
* 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.
3131
BADGER METER, INC.
Notes to Consolidated Financial Statements
December 31, 2018, 2017 and 2016
Note 1 Summary of Significant Accounting Policies
Profile
Badger Meter is an innovator in flow measurement, control and related communication solutions, serving water utilities,
municipalities and commercial and industrial customers worldwide. The Company’s products measure water, oil, chemicals and other
fluids, and are known for accuracy, long-lasting durability and for providing valuable and timely measurement data through various
methods. The Company’s product lines fall into two categories: sales of water meters, radios and related technologies to municipal
water utilities (municipal water) and sales of meters, valves and other products for industrial applications in water, wastewater and
other industries (flow instrumentation). The Company estimates that over 85% of its products are used in water applications.
Municipal water, the largest sales category, is comprised of either mechanical or static (ultrasonic) water meters along with
the related radio and software technologies and services used by municipal water utilities as the basis for generating their water and
wastewater revenues. The largest geographic market for the Company’s municipal water products is North America, primarily the
United States, because most of the Company's meters are designed and manufactured to conform to standards promulgated by the
American Water Works Association. The majority of water meters sold by the Company continue to be mechanical in nature;
however, ultrasonic meters are gaining in penetration due to a variety of factors, including their ability to maintain near absolute
measurement accuracy over their useful life. Providing ultrasonic water meter technology, combined with advanced radio technology,
provides the Company with the opportunity to sell into other geographical markets, for example the Middle East and Europe.
Flow instrumentation includes meters and valves sold worldwide to measure and control fluids going through a pipe or
pipeline including water, air, steam, oil, and other liquids and gases. These products are used in a variety of industries and
applications, with the Company’s primary market focus being water/wastewater; heating, ventilating and air conditioning (HVAC); oil
and gas, and chemical and petrochemical. Flow instrumentation products are generally sold to original equipment manufacturers as
the primary flow measurement device within a product or system, as well as through manufacturers’ representatives.
Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All
intercompany transactions have been eliminated in consolidation.
Receivables
Receivables consist primarily of trade receivables. The Company does not require collateral or other security and evaluates
the collectability of its receivables based on a number of factors. An allowance for doubtful accounts is recorded for significant past
due receivable balances based on a review of the past due items and the customer's ability and likelihood to pay, as well as applying a
historical write-off ratio to the remaining balances. Changes in the Company's allowance for doubtful accounts are as follows:
2018
2017
2016
Balance at
beginning
of year
Provision
and reserve
adjustments
Write-offs
less
recoveries
Balance
at end
of year
$
$
$
387 $
425 $
477 $
(In thousands)
— $
285 $
2 $
(27 ) $
(323 ) $
(54 ) $
360
387
425
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Inventories
Inventories are valued at the lower of cost or market. Cost is determined using the first-in, first-out method. The Company
estimates and records provisions for obsolete and excess inventories. Changes to the Company's obsolete and excess inventories
reserve are as follows:
2018
2017
2016
Property, Plant and Equipment
Balance at
beginning
of year
Net additions
charged to
earnings
Disposals
Balance
at end
of year
$
$
$
3,881 $
3,639 $
3,836 $
(In thousands)
2,195 $
1,295 $
1,017 $
(1,945 ) $
(1,053 ) $
(1,214 ) $
4,131
3,881
3,639
Property, plant and equipment are stated at cost. Depreciation is provided over the estimated useful lives of the respective
assets by the straight-line method. The estimated useful lives of assets are: for land improvements, 15 years; for buildings and
improvements, 10 to 39 years; and for machinery and equipment, 3 to 20 years.
Capitalized Software and Hardware
Capitalized internal use software and hardware included in other assets in the Consolidated Balance Sheets were $5.2 million
and $6.0 million at December 31, 2018 and 2017, respectively. These amounts are amortized on a straight-line basis over the
estimated useful lives of the software and/or hardware, ranging from 1 to 5 years. Amortization expense recognized for the years
ending December 31, 2018, 2017 and 2016 was $3.2 million, $2.8 million and $3.1 million, respectively.
Long-Lived Assets
Property, plant and equipment and identifiable intangible assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected undiscounted cash flows is less
than the carrying value of the related asset or group of assets, a loss is recognized for the difference between the fair value and
carrying value of the asset or group of assets.
Intangible Assets
Intangible assets are amortized on a straight-line basis over their estimated useful lives, ranging from 5 to 20 years. The
Company does not have any intangible assets deemed to have indefinite lives. Amortization expense recognized for 2018 was $7.5
million compared to $6.8 million in 2017 and $6.1 million in 2016. Amortization expense expected to be recognized is $7.2 million in
2019, $7.0 million in both 2020 and 2021, $5.9 million in 2022, $5.5 million in 2023 and $22.8 million thereafter. The carrying value
and accumulated amortization by major class of intangible assets are as follows:
Technologies
Intellectual property
Non-compete agreements
Licenses
Customer lists
Customer relationships
Trade names
Total intangibles
December 31, 2018
December 31, 2017
Gross carrying
amount
Accumulated
amortization
Gross carrying
amount
Accumulated
amortization
$
$
47,647 $
10,000
2,322
650
8,023
25,220
9,595
103,457 $
(In thousands)
24,785 $
833
2,076
492
2,623
12,282
4,948
48,039 $
47,647 $
10,000
2,322
650
8,023
21,620
9,595
99,857 $
21,882
333
1,923
475
2,011
9,649
4,258
40,531
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Goodwill
Goodwill is tested for impairment annually during the fourth fiscal quarter or more frequently if an event indicates that the
goodwill might be impaired. Potential impairment is identified by comparing the fair value of a reporting unit with its carrying value.
No adjustments were recorded to goodwill as a result of these reviews during 2018, 2017 and 2016.
Goodwill was $71.3 million and $67.4 million at December 31, 2018 and 2017, respectively. The increase resulted from the
acquisition of Innovative Metering Solutions of Odessa, Florida in 2018. This acquisition is further described in Note 3
“Acquisitions.”
Warranty and After-Sale Costs
The Company estimates and records provisions for warranties and other after-sale costs in the period in which the sale is
recorded, based on a lag factor and historical warranty claim experience. After-sale costs represent a variety of activities outside of the
written warranty policy, such as investigation of unanticipated problems after the customer has installed the product or analysis of
water quality issues. Changes in the Company's warranty and after-sale costs reserve are as follows:
2018
2017
2016
Research and Development
Balance at
beginning
of year
Net additions
charged to
earnings
Adjustments
to pre-
existing
warranties
(In thousands)
Costs
incurred
Balance
at end
of year
$
$
$
3,367 $
2,779 $
3,133 $
3,269 $
4,520 $
3,559 $
5 $
(439 ) $
(554 ) $
(2,435 ) $
(3,493 ) $
(3,359 ) $
4,206
3,367
2,779
Research and development costs are charged to expense as incurred and amounted to $11.1 million in 2018 and $10.6 million
in both 2017 and 2016.
Stock-Based Compensation Plans
As of December 31, 2018, the Company has an Omnibus Incentive Plan under which 1,400,000 shares are reserved for
restricted stock and stock option grants for employees as well as stock grants for directors as described in Note 5 “Stock
Compensation.” The plan was originally approved in 2011 and replaced all prior stock-based plans except for shares and options
previously issued under those plans.
The Company recognizes the cost of stock-based awards in net earnings for all of its stock-based compensation plans on a
straight-line basis over the service period of the awards. The Company estimates the fair value of its option awards using the Black-
Scholes option-pricing formula, and records compensation expense for stock options ratably over the stock option grant's vesting
period. The Company values restricted stock and stock grants for directors on the closing price of the Company's stock on the day the
grant was awarded. Total stock compensation expense recognized by the Company was $4.2 million for 2018, $1.8 million for 2017
and $1.6 million for 2016.
Healthcare
The Company estimates and records provisions for healthcare claims incurred but not reported, based on medical cost trend
analysis, reviews of subsequent payments made and estimates of unbilled amounts.
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Accumulated Other Comprehensive Income (Loss)
Components of accumulated other comprehensive income (loss) at December 31, 2018 are as follows:
Pension and
postretirement
benefits
Foreign currency
(In thousands)
Total
Balance at beginning of period
Other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated other comprehensive income
(loss), net of tax of $(5.1 million)
Net current period other comprehensive income (loss), net
Cumulative impact of adopting ASU 2018-02
Accumulated other comprehensive income
$
(11,597 ) $
—
13,657
13,657
(1,700 )
360 $
$
704 $
(484 )
—
(484 )
—
220 $
(10,893 )
(484 )
13,657
13,173
(1,700 )
580
Details of reclassifications out of accumulated other comprehensive income during 2018 are as follows:
Amortization of employee benefit plan items:
Prior service cost (1)
Settlement expense (1)
Actuarial loss (1)
Total before tax
Income tax impact
Amount reclassified out of accumulated other comprehensive income
Amount
reclassified from
accumulated other
comprehensive
loss
(In thousands)
$
$
(13 )
19,900
(1,103 )
18,784
(5,127 )
13,657
(1) These accumulated other comprehensive loss components are included in the computation of benefit plan costs in Note 7
“Employee Benefit Plans.”
Components of accumulated other comprehensive (loss) income at December 31, 2017 are as follows:
Pension and
postretirement
benefits
Foreign currency
(In thousands)
Total
Balance at beginning of period
Other comprehensive income before reclassifications
Amounts reclassified from accumulated other comprehensive loss, net of
tax of $0.3 million
Net current period other comprehensive (loss) income, net
Accumulated other comprehensive (loss) income
$
(10,495 ) $
—
(1,140 ) $
1,844
(1,102 )
(1,102 )
(11,597 ) $
—
1,844
704 $
$
(11,635 )
1,844
(1,102 )
742
(10,893 )
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Details of reclassifications out of accumulated other comprehensive loss during 2017 are as follows:
Amortization of employee benefit plan items:
Prior service cost (1)
Settlement expense (1)
Actuarial loss (1)
Total before tax
Income tax impact
Amount reclassified out of accumulated other comprehensive loss
Amount
reclassified from
accumulated other
comprehensive
loss
(In thousands)
$
$
(25 )
641
(2,010 )
(1,394 )
292
(1,102 )
(1) These accumulated other comprehensive loss components are included in the computation of benefit plan costs in Note 7
“Employee Benefit Plans.”
Use of Estimates
The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”)
requires management to make estimates and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Fair Value Measurements of Financial Instruments
The carrying amounts of cash, receivables and payables in the financial statements approximate their fair values due to the
short-term nature of these financial instruments. Short-term debt is comprised of notes payable drawn against the Company's lines of
credit and commercial paper. Because of its short-term nature, the carrying amount of the short-term debt also approximates fair
value. Included in other assets are insurance policies on various individuals who were associated with the Company. The carrying
amounts of these insurance policies approximate their fair value.
Subsequent Events
The Company evaluates subsequent events at the date of the balance sheet as well as conditions that arise after the balance
sheet date but before the financial statements are issued. The effects of conditions that existed at the balance sheet date are recognized
in the financial statements. Events and conditions arising after the balance sheet date but before the financial statements are issued are
evaluated to determine if disclosure is required to keep the financial statements from being misleading. To the extent such events and
conditions exist, if any, disclosures are made regarding the nature of events and the estimated financial effects for those events and
conditions. For purposes of preparing the accompanying consolidated financial statements and the notes to these financial statements,
the Company evaluated subsequent events through the date the accompanying financial statements were issued.
New Pronouncements
In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.
2018-14 “Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20),” which modifies the annual
disclosure requirements for defined benefit pension and other postretirement benefit plans. This ASU as modified added and deleted
specific disclosures in an effort to improve the usefulness for financial statement users while also reducing unnecessary costs for
companies. The ASU is effective for annual periods beginning after December 15, 2020 with early adoption being permitted in any
interim reporting period within the annual reporting period. The Company is currently assessing the impact of adopting ASU 2018-
14.
In August 2018, the FASB issued ASU No. 2018-13 “Fair Value Measurement (Topic 820),” which is designed to improve
the effectiveness of disclosures related to fair value measurements. This ASU is effective for annual periods beginning after
December 15, 2019 and early adoption is allowed in any interim reporting period within the annual reporting period. The Company is
currently assessing the impact of adopting ASU 2018-13.
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In February 2018, the FASB issued ASU 2018-02 “Income Statement - Reporting Comprehensive Income (Loss) (Topic
220).” Under existing U.S. GAAP, the effects of changes in tax rates and laws on deferred tax balances are recorded as a component
of income tax expense in the period in which the law was enacted. When deferred tax balances related to items originally recorded in
accumulated other comprehensive (loss) income are adjusted, certain tax effects become stranded in accumulated other comprehensive
(loss) income. The Company’s provisional adjustments recorded in 2017 to account for the impact of the Tax Cuts and Jobs Act
resulted in such stranded tax effects. The amendments in ASU 2018-02 allow a reclassification from accumulated other
comprehensive (loss) income to reinvested earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017. The
guidance is effective for annual years beginning after December 15, 2018 with early adoption permitted in any interim reporting
period. The Company elected to early-adopt this standard in the quarter ended September 30, 2018. This election resulted in a
reclassification of $1.7 million from accumulated other comprehensive income (loss) to reinvested earnings.
In May 2017, the FASB issued ASU 2017-09 “Compensation - Stock Compensation (Topic 718),” which clarifies when a
change to terms or conditions of a share-based payment award must be accounted for as a modification. The new guidance requires
modification accounting if the vesting condition, fair value or the award classification is not the same both before and after a change to
the terms and conditions of the award. The new guidance was adopted on a prospective basis on January 1, 2018. The adoption of
this standard did not have a significant impact on the Company's consolidated financial statements.
In March 2017, the FASB issued ASU 2017-07 “Compensation - Retirement Benefits (Topic 715),” which changes the
presentation of defined benefit and post-retirement benefit plan expense on the income statement by requiring separation between
operating and non-operating expense. Under the ASU, the service cost of net periodic benefit expense is an operating expense that
will be reported with similar compensation costs. The non-operating components, which include all other components of net periodic
benefit expense, are reported outside of operating income. The ASU also stipulates that only the service cost component of pension
and postretirement (benefits) costs is eligible for capitalization. The ASU was adopted by the Company on January 1, 2018.
Application was done retrospectively for the presentation of the components of these (benefits) costs. In the Consolidated Statements
of Operations, the Company previously recorded service and other (benefits) costs in operating cost and expense accounts along with
compensation costs. The adoption of the standard resulted in reclassification of those (benefits) costs to the other pension and
postretirement (benefits) costs line in the Consolidated Statements of Operations. Adoption of the standard increased operating
earnings for the year ended December 31, 2018 by $19.9 million and by $1.0 million for the year-ended December 31, 2017. A
corresponding amount was reclassified to other pension and postretirement (benefits) costs for each of these years. The specific net
periodic benefit components are disclosed in Note 7 “Employee Benefit Plans.”
In January 2017, the FASB issued ASU 2017-04 “Intangibles - Goodwill and Other (Topic 350).” The update requires a
single-step quantitative test to measure potential impairment based on the excess of a reporting unit's carrying amount over its fair
value. A qualitative assessment can still be completed first for an entity to determine if a quantitative impairment test is necessary.
The ASU is effective on a prospective basis for annual periods beginning after December 15, 2019 and interim periods thereafter.
Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The
Company does not anticipate that the adoption of ASU 2017-04 will have a significant impact on the Company’s financial statements.
In August 2016, the FASB issued ASU No. 2016-15 “Statement of Cash Flows (Topic 230),” which clarifies guidance on the
classification of certain cash receipts and payments in the statement of cash flows. This ASU was effective for annual periods
beginning after December 15, 2017, including interim periods within those annual reporting periods. The adoption of this ASU did
not have a significant impact on the categorization of operating, investing and financing activities on the Consolidated Statements of
Cash Flows.
In February 2016, the FASB issued ASU 2016-02 “Leases (Topic 842),” which requires lessees to record most leases on their
balance sheets. Lessees initially recognize a lease liability (measured at the present value of the 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 ASU also provides several optional practical expedients for the ongoing accounting for leases. The
standard includes the use of a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest
comparative period in the financial statements. Full retrospective application is prohibited.
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In July 2018, the FASB issued ASU No. 2018-11 “Targeted Improvements (Topic 842).” This ASU provides for an optional
method of transition which allows companies to adopt the new leasing standard with a cumulative effect adjustment to reinvested
earnings. Under this transition method, comparative periods would continue to be reported in accordance with the existing lease
guidance under ASC 840 Leases. The Company plans to adopt the ASU with this optional transition methodology beginning on the
effective date of January 1, 2019. The Company also intends to elect the practical expedient which will exclude short-term leases
from ROU asset or lease liability recognition on the consolidated balance sheet. In addition, the Company has elected the practical
expedient to not separate lease and non-lease components. The Company also plans to elect the package of practical expedients that is
permitted under the transition guidance, which, among other things, allows the Company to carry forward historical lease
classifications. The Company expects that upon adoption, the consolidated balance sheet will increase by $11 million for the
recognition of ROU assets and lease liabilities which will also create corresponding deferred tax assets and liabilities.
Note 2 Common Stock
Common Stock
The Company has Common Stock. The Company had a Common Share Purchase Rights plan that was in effect since
February 15, 2008, but it expired on May 26, 2018 and the Board of Directors elected not to renew it.
On August 12, 2016, the Company announced a 2-for-1 stock split in the form of a 100% stock dividend payable on
September 15, 2016 to shareholders of record at the close of business on August 31, 2016. In this report, all per share amounts and
number of shares have been restated to reflect the stock split for all periods presented.
Stock Options
Stock options to purchase 21,887 shares of the Company's Stock in 2018, 55,223 shares in 2017 and 91,330 shares in 2016
were not included in the computation of dilutive securities because their inclusion would have been anti-dilutive.
Note 3 Acquisitions
Acquisitions are accounted for under the purchase method, and accordingly, the results of operations were included in the
Company's financial statements from the date of acquisition. The acquisitions did not have a material impact on the Company's
consolidated financial statements or the notes thereto.
On April 2, 2018, the Company acquired 100% of the outstanding stock of Innovative Metering Solutions, Inc. (“IMS”) of
Odessa, Florida, which was one of the Company's distributors serving Florida.
The total purchase consideration was approximately $12.0 million, which included $7.7 million in cash, a $0.3 million
working capital adjustment, a balance sheet holdback of $0.7 million and a $3.3 million settlement of pre-existing Company
receivables. The working capital adjustment was settled in the second quarter of 2018 and the balance sheet holdback is recorded in
payables and other current liabilities on the Company's Consolidated Balance Sheets as it is anticipated to be paid in the next twelve
months. The Company's preliminary allocation of the purchase price at December 31, 2018 included $3.8 million of receivables, $0.8
million of inventories, $0.1 million of machinery and equipment, $3.6 million of intangibles and $3.7 million of goodwill. The
intangible assets acquired are customer relationships with an estimated average useful life of 10 years.
The preliminary allocation of the purchase price to the assets acquired was based upon the estimated fair values at the date of
acquisition. As of December 31, 2018, the Company had not completed its analysis for estimating the fair value of the assets acquired.
On November 1, 2017, the Company acquired certain assets of Utility Metering Services, Inc.'s business Carolina Meter &
Supply (“Carolina Meter”) of Wilmington, North Carolina, which was one of the Company's distributors serving North Carolina,
South Carolina and Virginia.
The total purchase consideration for the Carolina Meter assets was $6.3 million, which included $2.1 million in cash and
settlement of $4.2 million of pre-existing Company receivables. The Company's preliminary allocation of the purchase price included
$0.6 million of receivables, $0.2 million of inventory, $3.3 million of intangibles and $2.2 million of goodwill. The intangible assets
acquired are primarily customer relationships with an estimated average useful life of 12 years. The preliminary allocation of the
purchase price to the assets acquired was based upon the estimated fair values at the date of acquisition. As of December 31, 2018, the
Company completed its analysis for estimating the fair value of the assets acquired with no additional adjustments.
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On May 1, 2017, the Company acquired 100% of the outstanding common stock of D-Flow Technology AB (“D-Flow”) of
Luleå, Sweden. The D-Flow acquisition facilitates the continued advancement of the existing E-Series® ultrasonic product line while
also adding a technology center for the Company.
The purchase price was approximately $23.2 million in cash, plus a small working capital adjustment. The purchase price
included $2.0 million in payments that were made in 2018 and $3.0 million in payments that are anticipated to be made in 2019, which
are recorded in payables and other accrued liabilities on the Consolidated Balance Sheets at December 31, 2018. The Company's
preliminary allocation of the purchase price included approximately $0.3 million of receivables, $0.6 million of inventory, $0.2
million of property, plant and equipment, $10.9 million of intangibles and $16.1 million of goodwill. The majority of the intangible
assets acquired related to ultrasonic technology. The Company also assumed $4.9 million of liabilities as part of the acquisition. As of
March 31, 2018, the Company completed its analysis for estimating the fair value of the assets acquired and liabilities assumed with
no additional adjustments.
On October 20, 2016, the Company acquired certain assets of Precision Flow Measurement, Inc., doing business as Nice
Instrumentation, of Manalapan Township, New Jersey. The acquisition added new technology for the measurement of steam to the
Company's HVAC line of products. The total purchase consideration for the Nice Instrumentation assets was $2.0 million.
Note 4 Short-term Debt and Credit Lines
Short-term debt at December 31, 2018 and 2017 consisted of:
Notes payable to banks
Commercial paper
Total short-term debt
2018
2017
(In thousands)
4,560 $
13,500
18,060 $
8,300
36,250
44,550
$
$
Included in notes payable to banks at December 31, 2018 was $4.6 million outstanding under a 4.0 million Euro-based
revolving loan facility that does not expire, and which bore interest at 1.14%. Included in notes payable to banks at December 31,
2017 was $4.8 million outstanding under a 4.0 million Euro-based revolving loan facility that does not expire, and which bore interest
at 1.13%.
In June 2018, the Company amended its May 2012 credit agreement with its primary lender and extended its term until
September 2021. The credit agreement includes a $125.0 million line of credit that supports commercial paper (up to $70.0 million)
and includes $5.0 million of a Euro line of credit. Borrowings of commercial paper bore interest at 3.11% in 2018 and 2.10% in 2017.
Under the principal line of credit, the Company had $111.5 million of unused credit lines available out of the total of $114.9 million
available short-term credit lines at December 31, 2018. While the facility is unsecured, there are a number of financial covenants with
which the Company must comply, and the Company was in compliance as of December 31, 2018.
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Note 5 Stock Compensation
As of December 31, 2018, the Company has an Omnibus Incentive Plan under which 1,400,000 shares are reserved for
restricted stock and stock options grants for employees, as well as stock grants for directors. The plan was originally approved in 2011
and replaced all prior stock-based plans except for shares and options previously issued under those plans. As of December 31, 2018
and 2017, there were 548,653 shares and 629,615 shares, respectively, of the Company’s Common Stock available for grant under the
2011 Omnibus Incentive Plan. The Company recognizes the cost of stock-based awards in net earnings for all of its stock-based
compensation plans on a straight-line basis over the service period of the awards. Included in 2018 compensation expense is
executive retirement charges incurred for the vesting of certain equity awards for the retiring chief executive officer, chief financial
officer and chief accounting officer. The following sections describe the three types of grants in more detail.
Stock Options
The Company estimates the fair value of its option awards using the Black-Scholes option-pricing formula, and records
compensation expense for stock options ratably over the stock option grant’s vesting period. Stock option compensation expense
recognized by the Company for the year ended December 31, 2018 related to stock options was $2.1 million compared to $0.7 million
in 2017 and $0.5 million in 2016.
The following table summarizes the transactions of the Company’s stock option plans for the three-year period ended
December 31, 2018:
Number of shares
Weighted-
average
exercise price
369,612 $
42,302 $
(27,656 ) $
—
384,258 $
55,223 $
(53,198 ) $
—
386,283 $
43,778 $
80,642 $
(53,161 ) $
(80,642 ) $
—
376,900 $
118,900 $
119,139 $
138,861 $
376,900
242,522 $
239,043 $
321,122 $
22.35
33.98
20.59
n/a
23.75
36.75
22.83
n/a
25.74
48.20
52.44
21.47
37.04
n/a
28.95
18.35
27.17
39.55
21.01
21.59
27.16
Options outstanding - December 31, 2015
Options granted
Options exercised
Options forfeited
Options outstanding - December 31, 2016
Options granted
Options exercised
Options forfeited
Options outstanding - December 31, 2017
Options granted
Options modified
Options exercised
Options canceled
Options forfeited
Options outstanding - December 31, 2018
Price range $ 18.08 — $ 19.21
(weighted-average contractual life of 2.7 years)
Price range $ 19.30 — $ 28.33
(weighted-average contractual life of 5.3 years)
Price range $ 28.34 — $ 48.20
(weighted-average contractual life of 8.2 years)
Options outstanding - December 31, 2018
Exercisable options —
December 31, 2016
December 31, 2017
December 31, 2018
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The following assumptions were used for valuing options granted in the years ended December 31:
Per share fair value of options granted during the period
Risk-free interest rate
Dividend yield
Volatility factor
Weighted-average expected life in years
$
2018
2017
18.50 $
2.59 %
1.05 %
43.2 %
5.3
14.38
2.06 %
1.22 %
46.6 %
5.3
The expected life is based on historical exercise behavior and the projected exercise of unexercised stock options. The risk-
free interest rate is based on the U.S. Treasury yield curve in effect on the date of grant for the respective expected life of the option.
The expected dividend yield is based on the expected annual dividends divided by the grant date market value of the Company’s
Common Stock. The expected volatility is based on the historical volatility of the Company’s Common Stock.
The following table summarizes the aggregate intrinsic value related to options exercised, outstanding and exercisable as of
and for the years ended December 31:
Exercised
Outstanding
Exercisable
2018
2017
(In thousands)
1,590 $
8,390 $
7,722 $
814
7,966
5,921
$
$
$
As of December 31, 2018, the unrecognized compensation cost related to stock options was approximately $0.7 million,
which will be recognized over a weighted average period of 2.6 years.
Director Stock Grant
Non-employee directors receive an annual award of $57,000 worth of restricted shares of the Company’s Common Stock
under the shareholder-approved 2011 Omnibus Incentive Plan. The Company values stock grants for directors on the closing price of
the Company’s stock on the day the grant was awarded. The Company records compensation expense for this plan ratably over the
annual service period beginning May 1. Director stock compensation expense recognized by the Company for the years ended
December 31, 2018 and 2017 was $0.5 million compared to $0.4 million in 2016. As of December 31, 2018, the unrecognized
compensation cost related to the director stock award that is expected to be recognized over the remaining three months is estimated to
be approximately $0.1 million.
Restricted Stock
The Company periodically issues nonvested shares of the Company's Common Stock to certain eligible employees. The
Company values restricted stock on the closing price of the Company's stock on the day the grant was awarded. The Company
records compensation expense for this plan ratably over the vesting periods. Restricted stock compensation expense recognized by the
Company for the year ended December 31, 2018 was $2.1 million compared to $1.1 million in 2017 and $1.0 million in 2016.
41
41
The fair value of nonvested shares is determined based on the market price of the shares on the grant date.
Nonvested at December 31, 2015
Granted
Vested
Forfeited
Nonvested at December 31, 2016
Granted
Vested
Forfeited
Nonvested at December 31, 2017
Granted
Modified
Vested
Canceled
Forfeited
Nonvested at December 31, 2018
Shares
Fair value
per share
120,248 $
29,268 $
(40,700 ) $
(3,500 ) $
105,316 $
50,519 $
(40,762 ) $
(3,600 ) $
111,473 $
32,268 $
30,488 $
(68,289 ) $
(30,488 ) $
(2,550 ) $
72,902 $
26.99
33.98
25.56
29.18
29.41
40.69
27.18
33.37
35.21
49.10
52.47
40.16
38.62
36.83
42.58
As of December 31, 2018, there was $1.8 million of unrecognized compensation cost related to nonvested restricted stock
that is expected to be recognized over a weighted average period of 2.0 years.
Note 6 Commitments and Contingencies
Commitments
The Company makes commitments in the normal course of business. The Company leases equipment, vehicles and facilities
under non-cancelable operating leases, some of which contain renewal options. Total future minimum lease payments consisted of the
following at December 31, 2018:
2019
2020
2021
2022
2023
Thereafter
Total lease obligations
Total leases
(In thousands)
3,371
2,785
2,219
1,221
1,191
2,190
12,977
$
$
Total rental expense charged to operations under all operating leases was $3.7 million, $3.6 million and $3.3 million in 2018,
2017 and 2016, respectively.
Contingencies
In the normal course of business, the Company is named in legal proceedings. There are currently no material legal
proceedings pending with respect to the Company.
The Company is subject to contingencies related to environmental laws and regulations. A future change in circumstances
with respect to specific matters or with respect to sites formerly or currently owned or operated by the Company, off-site disposal
locations used by the Company, and property owned by third parties that is near such sites, could result in future costs to the Company
and such amounts could be material. Expenditures for compliance with environmental control provisions and regulations during 2018,
2017 and 2016 were not material.
The Company relies on single suppliers for most brass castings and certain resin and electronic subassemblies in several of its
product lines. The Company believes these items would be available from other sources, but that the loss of certain suppliers would
result in a higher cost of materials, delivery delays, short-term increases in inventory and higher quality control costs in the short term.
42
42
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.
Note 7 Employee Benefit Plans
Historically, the Company maintained a non-contributory defined benefit pension plan that covered substantially all U.S.
employees who were employed at December 31, 2011. After that date, no further benefits were accrued in the plan. For the frozen
pension plan, benefits were based primarily on years of service and, for certain employees, levels of compensation.
The Company maintains supplemental non-qualified plans for certain officers and other key employees, and an Employee
Savings and Stock Option Plan (“ESSOP”) for the majority of the U.S. employees.
The Company also has a postretirement healthcare benefit plan that provides medical benefits for certain U.S. retirees and
eligible dependents hired prior to November 1, 2004. Employees are eligible to receive postretirement healthcare benefits upon
meeting certain age and service requirements. No employees hired after October 31, 2004 are eligible to receive these benefits. This
plan requires employee contributions to offset benefit costs.
Amounts included in accumulated other comprehensive income (loss), net of tax, at December 31, 2018 that have not yet
been recognized in net periodic benefit cost are as follows:
Net actuarial loss (gain)
Pension
plans
Other
postretirement
benefits
$
(In thousands)
129 $
(868 )
Amounts included in accumulated other comprehensive income (loss), net of tax, at December 31, 2018 expected to be
recognized in net periodic benefit cost during the fiscal year ending December 31, 2019 are as follows:
Net actuarial loss (gain)
Qualified Pension Plan
Pension
plans
Other
postretirement
benefits
$
(In thousands)
29 $
(77 )
In 2018, the Company completed termination of its non-contributory defined benefit pension plan. In connection with the
Company’s activities to terminate the plan, lump-sum distributions were made in the second quarter of 2018 to individuals who
elected lump sum distributions, including rolling over their accounts or transferring them to a qualified Company plan. In the third
quarter of 2018, annuity contracts were purchased to settle obligations for the remaining participants. As a result, the Company
recorded pre-tax settlement charges of $8.2 million and $11.7 million during the second and third quarters of 2018, respectively.
The following table sets forth the components of net periodic pension cost for the years ended December 31, 2018, 2017 and
2016 based on a December 31 measurement date:
Service cost - benefits earned during the year
Interest cost on projected benefit obligations
Expected return on plan assets
Amortization of net loss
Settlement expense
Net periodic pension cost
2018
2017
(In thousands)
2016
$
$
— $
305
(835 )
262
19,900
19,632 $
2 $
1,228
(1,596 )
525
641
800 $
3
1,711
(2,199 )
575
1,510
1,600
43
43
Actuarial assumptions used in the determination of the net periodic pension cost are:
Discount rate
Expected long-term return on plan assets
Rate of compensation increase
2018
2017
2016
2.00 %
3.00 %
n/a
3.90 %
4.00 %
n/a
4.14 %
5.25 %
n/a
The Company's discount rate assumptions for the qualified pension plan are based on the average yield of a hypothetical high
quality bond portfolio with maturities that approximately match the estimated cash flow needs of the plan. The assumptions for
expected long-term rates of return on assets are based on historical experience and estimated future investment returns, taking into
consideration anticipated asset allocations, investment strategies and the views of various investment professionals. The use of these
assumptions can cause volatility if actual results differ from expected results.
The following table provides a reconciliation of benefit obligations, plan assets and funded status based on a December 31
measurement date:
Change in benefit obligation:
Benefit obligation at beginning of plan year
Service cost
Interest cost
Actuarial loss
Benefits paid
Projected benefit obligation at measurement date
Change in plan assets:
Fair value of plan assets at beginning of plan year
Actual return on plan assets
Company contribution
Benefits paid
Fair value of plan assets at measurement date
Funded status of the plan:
Benefit obligation in excess of plan assets
Benefit plan assets in excess of benefit obligation
Pension liability
2018
2017
(In thousands)
$
$
$
$
$
$
42,898 $
—
305
(198 )
(43,005 )
— $
41,517 $
(1,375 )
2,860
(43,002 )
— $
— $
—
— $
42,030
2
1,228
2,940
(3,302 )
42,898
42,061
1,933
825
(3,302 )
41,517
(1,381 )
—
(1,381 )
The actuarial assumption used in the determination of the benefit obligation of the above data is:
Discount rate
2018
N/A
2017
2.0%
The fair value of the qualified pension plan assets was $0 at December 31, 2018 and $41.5 million at December 31, 2017.
The Company made net contributions of $1.6 million and $1.3 million in the second and third quarter of 2018, respectively,
related to the 2017 plan year. No additional contributions will be required as the pension plan termination was finalized in
2018.
44
44
The fair value of the Company's qualified pension plan assets by category as of and for the year ended December 31, 2017
was as follows:
Fixed income funds (a)
Cash/cash equivalents (b)
Total
2017
Quoted
prices in active
markets for
identical assets
(Level 1)
Significant
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Market
value
$
$
40,776
741
41,517 $
(In thousands)
— $
741
741 $
40,776
—
40,776 $
—
—
—
(a) The Fixed income funds consist of bonds. In aggregate, the funds seek to provide investment results approximating the return of
the Plan’s obligations. The funds consist of long credit bonds, intermediate credit bonds, short duration government credit bonds
and bank loans.
(b) This category comprises the cash held to pay beneficiaries. The fair value of cash equals its book value.
Supplemental Non-qualified Unfunded Plans
The Company also maintains supplemental non-qualified unfunded plans for certain officers and other key employees. The
expense for these plans was not material for 2018, 2017 or 2016. The discount rate used to measure the net periodic pension cost was
2.16% for 2018, 1.91% for 2017 and 4.14% for 2016. The amount accrued was $2.3 million and $2.1 million as of December 31,
2018 and 2017, respectively.
Other Postretirement Benefits
The Company has a postretirement plan that provides medical benefits for certain U.S. retirees and eligible dependents hired
prior to November 1, 2004. The following table sets forth the components of net periodic postretirement benefit cost for the years
ended December 31, 2018, 2017 and 2016:
Service cost, benefits attributed for service of active
employees for the period
Interest cost on the accumulated postretirement benefit obligation
Net gain
Amortization of prior service credit
Net periodic postretirement benefit cost
2018
2017
(In thousands)
2016
$
$
124 $
189
(30 )
(13 )
270 $
121 $
195
(49 )
(25 )
242 $
137
257
—
(25 )
369
The discount rate used to measure the net periodic postretirement benefit cost was 3.65% for 2018, 4.16% for 2017 and
4.39% for 2016. It is the Company's policy to fund healthcare benefits on a cash basis. Because the plan is unfunded, there are no
plan assets. The following table provides a reconciliation of the projected benefit obligation at the Company's December 31
measurement date:
Benefit obligation at beginning of year
Service cost
Interest cost
Actuarial gain
Plan participants' contributions
Benefits paid
Benefit obligation and funded status at end of year
2018
2017
(In thousands)
$
$
6,073 $
124
189
(511 )
547
(871 )
5,551 $
6,131
121
195
(180 )
564
(758 )
6,073
45
45
The amounts recognized in the Consolidated Balance Sheets at December 31 are:
Accrued compensation and employee benefits
Accrued non-pension postretirement benefits
Amounts recognized at December 31
2018
2017
(In thousands)
367 $
5,184
5,551 $
370
5,703
6,073
$
$
The discount rate used to measure the accumulated postretirement benefit obligation was 4.33% for 2018 and 3.65% for
2017. The Company's discount rate assumptions for its postretirement benefit plan are based on the average yield of a hypothetical
high quality bond portfolio with maturities that approximately match the estimated cash flow needs of the plan. Because the plan
requires the Company to establish fixed Company contribution amounts for retiree healthcare benefits, future healthcare cost trends do
not generally impact the Company's accruals or provisions.
Estimated future benefit payments of postretirement benefits, assuming increased cost sharing, expected to be paid in each of
the next five years beginning with 2019 are $0.4 million through 2023, with an aggregate of $2.0 million for the five years thereafter.
These amounts can vary significantly from year to year because the cost sharing estimates can vary from actual expenses as the
Company is self-insured.
Badger Meter Employee Savings and Stock Ownership Plan
The ESSOP includes a voluntary 401(k) savings plan that allows certain employees to defer up to 20% of their income on a
pretax basis subject to limits on maximum amounts. The Company matches 25% of each employee’s contribution, with the match
percentage applying to a maximum of 7% of each employee's salary. The match is paid using the Company's Common Stock released
through the ESSOP loan payments. For ESSOP shares purchased prior to 1993, compensation expense is recognized based on the
original purchase price of the shares released and dividends on unreleased shares are charged to compensation expense. For shares
purchased in or after 1993, expense is based on the market value of the shares on the date released and dividends on unreleased shares
are charged to compensation expense. Compensation expense of $0.5 million was recognized for the match in 2018 and 2017
compared to $0.4 in 2016.
On December 31, 2010, the Company froze the qualified pension plan for its non-union participants and formed a new
defined contribution feature within the ESSOP plan in which each employee received a similar benefit. On December 31, 2011, the
Company froze the qualified pension plan for its union participants and included them in the same defined contribution feature within
the ESSOP. Compensation expense under the defined contribution feature totaled $3.0 million in 2018 and $2.8 million in 2017.
Note 8 Income Taxes
The Company is subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgment is
required in determining the worldwide provision for income taxes and recording the related deferred tax assets and liabilities.
Details of earnings before income taxes are as follows:
Domestic
Foreign
Total
2018
2017
(In thousands)
2016
$
$
31,584 $
4,268
35,852 $
52,745 $
2,088
54,833 $
47,407
2,437
49,844
46
46
The provision (benefit) for income taxes is as follows:
Current:
Federal
State
Foreign
Deferred:
Federal
State
Foreign
Total
2018
2017
(In thousands)
2016
$
$
9,223 $
2,640
1,468
(2,890 )
(1,765 )
(614 )
8,062 $
20,553 $
2,933
876
(3,051 )
(915 )
(134 )
20,262 $
14,435
1,275
1,129
922
151
(363 )
17,549
The provision for income tax differs from the amount that would be provided by applying the statutory U.S. corporate income
tax rate in each year due to the following items:
2018
2017
(In thousands)
2016
Provision at statutory rate
State income taxes, net of federal tax benefit
Valuation allowance
Foreign - tax rate differential and other
Domestic production activities deduction
Federal and state credits
Compensation subject to section 162(m)
Stock based compensation
Tax rate difference on temporary adjustments
Other
Actual provision
$
$
7,529 $
717
—
159
—
(742 )
562
(384 )
(460 )
681
8,062 $
19,192 $
1,292
564
29
(721 )
(542 )
—
—
—
448
20,262 $
The components of deferred income taxes as of December 31 are as follows:
Deferred tax assets:
Reserve for receivables and inventories
Accrued compensation
Payables
Non-pension postretirement benefits
Net operating loss and credit carryforwards
Accrued pension benefits and deferred compensation
Accrued employee benefits
Deferred revenue
Other
Total gross deferred tax assets
Less: valuation allowance
Total net deferred tax assets
Deferred tax liabilities:
Depreciation
Amortization
Prepaids
Other
Total deferred tax liabilities
Net deferred tax liabilities
47
47
2018
2017
(In thousands)
$
$
2,210 $
929
1,090
1,110
308
1,552
2,534
1,858
—
11,591
(366 )
11,225
4,679
7,146
517
52
12,394
(1,169 ) $
17,445
923
—
(87 )
(560 )
—
—
—
—
(172 )
17,549
2,405
861
886
1,561
364
1,071
3,219
1,504
450
12,321
(373 )
11,948
3,778
8,266
482
—
12,526
(578 )
The Company’s U.S. federal and state net operating loss and U.S. federal general business credit carryforwards are limited on
an annual basis to $1.2 million under Internal Revenue Code Section 382 and Section 383. The federal net operating loss
carryforwards must be fully utilized prior to the utilization of the federal credit carryforwards.
At December 31, 2017, the Company had an immaterial amount of U.S. federal net operating losses and general business
credits, all of which were utilized in 2018. The Company’s remaining tax credit carryforward of $0.3 million relates to state specific
tax credits that the Company expects to fully utilize in future tax periods.
No provision for federal income taxes was made on the earnings of foreign subsidiaries that are considered indefinitely
invested or that would be offset by foreign tax credits upon distribution. Such undistributed earnings at December 31, 2018 were
$23.6 million of which $21.7 million was previously taxed in the U.S. under the transition tax provisions (discussed below) and other
provisions of the Internal Revenue Code.
Changes in the Company's gross liability for unrecognized tax benefits, excluding interest and penalties, were as follows:
Balance at beginning of year
Increases in unrecognized tax benefits as a result of positions taken during the
prior period
Increases in unrecognized tax benefits as a result of positions taken during the
current period
Reductions to unrecognized tax benefits as a result of a lapse of the applicable
statute of limitations
Balance at end of year
2018
2017
$
(In thousands)
998 $
127
190
(194 )
1,121 $
$
814
6
230
(52 )
998
The Company does not expect a significant increase or decrease to the total amounts of unrecognized tax benefits during the
fiscal year ending December 31, 2019. To the extent these unrecognized tax benefits are ultimately recognized, they will impact the
effective tax rate.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various states and foreign
jurisdictions. The Company is no longer subject to U.S. federal income tax examinations by tax authorities for years prior to 2015
and, with few exceptions, state and local income tax examinations by tax authorities for years prior to 2014. The Company's policy is
to recognize interest related to unrecognized tax benefits as interest expense and penalties as operating expenses. Accrued interest was
less than $0.1 million at December 31, 2018 and 2017, respectively, and there were no penalties accrued in either year.
On December 22, 2017, the President signed H.R.1, “An Act to Provide for Reconciliation Pursuant to Titles II and V of the
Concurrent Resolution on the Budget for Fiscal Year 2018” (the “Tax Act”) (previously known as “The Tax Cuts and Jobs Act”). The
Tax Act made broad and complex changes to the U.S. tax code that affected 2017, including, but not limited to (i) reducing the future
U.S. federal corporate tax rate from 35% to 21%; (ii) requiring companies to pay a one-time transition tax on certain unrepatriated
earnings of foreign subsidiaries; and (iii) bonus depreciation that will allow for full expensing of qualified property.
The Tax Act also established new tax laws that affected 2018 and will affect future years, including, but not limited to (i)
reduction of the U.S. federal corporate tax rate; (ii) a general elimination of U.S. federal income taxes on dividends from foreign
subsidiaries; (iii) a new provision designed to tax global intangible low-taxed income (“GILTI”); (iv) the repeal of the domestic
production activity deductions; (v) limitations on the deductibility of certain executive compensation; (vi) limitations on the use of
foreign tax credits to reduce the U.S. income tax liability; and (vii) a new provision that allows a domestic corporation an immediate
deduction for a portion of its foreign derived intangible income (“FDII”). The Company considered the relevant provisions of the Tax
Act in recording its 2018 provision.
48
48
The Securities and Exchange Commission staff issued Staff Accounting Bulletin (“SAB”) 118 in December 2017, which
provided guidance on accounting for the tax effects of the Tax Act. SAB 118 provided a measurement period of up to one year from
the Tax Act enactment date for companies to complete the accounting under ASC 740, Accounting for Income Taxes. In accordance
with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASU
2016-16 is complete. To the extent that a company’s accounting for a certain income tax effect of the Tax Act is incomplete, but it is
able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot
determine a provisional estimate to be included in the financial statements, it should continue to apply ASU 2016-16 on the basis of
the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
As of December 31, 2017, the Company’s accounting for the certain elements of the Tax Act was incomplete. However, the
Company was able to make reasonable estimates of the effect, and therefore recorded provisional estimates for those items. In
connection with the initial analysis of the impact of the Tax Act, the Company recorded an immaterial discrete adjustment in the
period ended December 31, 2017. This provisional estimate consisted of a net tax expense of $0.8 million for the one-time transition
tax and a net tax benefit of $0.8 million related to revaluation of deferred tax assets and liabilities, caused by the new lower corporate
tax rate. To determine the transition tax, the Company determined the amount of post-1986 accumulated earnings and profits of the
relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. While the Company was able to make a
reasonable estimate of the transition tax, the Company continued to gather additional information to more precisely compute the final
amount reported in the 2017 U.S. federal income tax return filed in October 2018. This resulted in an immaterial adjustment to the
provisional amount. During 2018, the Company recorded a net tax benefit of $1.2 million primarily attributable to pension
contributions made in 2018 that were deductible on the 2017 tax return at the higher 35% federal tax rate and other changes to the
2017 tax provision related to the Tax Act and subsequently-issued tax guidance. During 2018, the Company recorded a favorable
provision-to-return adjustment of $0.5 million primarily related to the difference in income tax rates between 2017 and 2018.
Due to the complexity of the new GILTI tax rules, the Company continued to evaluate this provision of the Tax Act and the
application of ASC 740 “Income Taxes” throughout 2018. Under GAAP, the Company is allowed to make an accounting policy
choice to either: (i) treat taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when
incurred (the “period cost method”); or (ii) factor in such amounts into a company’s measurement of its deferred taxes (the “deferred
method”). The Company selected to apply the “period cost method” to account for the new GILTI tax, and treated it as a current
period expense for 2018. The Company will continue to analyze the full effects of the Tax Act on its financial statements in 2019 as
additional guidance is issued and interpretations evolve.
Note 9 Industry Segment and Geographic Areas
The Company is an innovator, manufacturer, marketer and distributor of products incorporating flow measurement, control
and communication solutions, which comprise one reportable segment. The Company manages and evaluates its operations as one
segment primarily due to similarities in the nature of the products, production processes, customers and methods of distribution.
Information regarding revenues by geographic area is as follows:
Revenues:
United States
Foreign:
Asia
Canada
Europe
Mexico
Middle East
Other
Total
2018
2017
(In thousands)
2016
$
374,650 $
355,768 $
347,853
9,081
11,893
20,147
3,603
11,318
3,040
433,732 $
9,133
10,407
15,718
3,601
4,904
2,909
402,440 $
6,539
12,587
15,299
3,460
5,520
2,503
393,761
$
49
49
Information regarding assets by geographic area is as follows:
Long-lived assets:
United States
Foreign:
Europe
Mexico
Total
Total assets:
United States
Foreign:
Europe
Mexico
Total
2018
2017
(In thousands)
$
54,904 $
56,980
15,247
20,170
90,321 $
15,806
20,815
93,601
$
2018
2017
(In thousands)
$
293,943 $
300,688
74,707
24,041
392,691 $
66,862
24,177
391,727
$
Note 10 Unaudited: Quarterly Results of Operations, Common Stock Price and Dividends
2018
Net sales
Gross margin
Net earnings
Earnings per share:
Basic
Diluted
Dividends declared
Stock price:
High
Low
Quarter-end close
2017
Net sales
Gross margin
Net earnings
Earnings per share:
Basic
Diluted
Dividends declared
Stock price:
High
Low
Quarter-end close
March 31
June 30
September 30 December 31
(In thousands except per share data)
Quarter ended
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
105,041 $
36,748 $
7,546 $
113,648 $
41,504 $
6,154 $
110,630 $
43,946 $
2,851 $
104,413
40,151
11,239
0.26 $
0.26 $
0.13 $
51.05 $
45.45 $
47.15 $
0.21 $
0.21 $
0.13 $
47.25 $
41.00 $
44.70 $
0.10 $
0.10 $
0.15 $
56.40 $
50.75 $
52.95 $
0.39
0.39
0.15
57.12
46.70
49.21
101,606 $
38,650 $
8,749 $
104,176 $
41,054 $
10,614 $
100,008 $
37,039 $
7,975 $
96,650
39,003
7,233
0.30 $
0.30 $
0.115 $
39.85 $
34.40 $
36.75 $
0.37 $
0.36 $
0.115 $
41.58 $
35.15 $
39.85 $
0.28 $
0.27 $
0.130 $
49.45 $
39.10 $
49.00 $
0.25
0.25
0.130
52.10
42.00
47.80
The Company's Common Stock is listed on the New York Stock Exchange under the symbol BMI. Earnings per share are
computed independently for each quarter. As such, the annual per share amount may not equal the sum of the quarterly amounts due
to rounding. The Company currently anticipates continuing to pay cash dividends. Shareholders of record as of December 31, 2018
50
50
and 2017 totaled 906 and 909, respectively. Voting trusts and street name shareholders are counted as single shareholders for this
purpose.
Note 11 Revenue Recognition
On January 1, 2018, the Company adopted ASU 2014-09 using the modified retrospective method applied to those contracts
that were not completed or substantially complete as of January 1, 2018. Results for the reporting period beginning after January 1,
2018 are presented under ASC 606 “Revenue from Contracts with Customers”, while prior period amounts have not been adjusted and
continue to be reported in accordance with the Company's historic accounting under ASC 605 “Revenue Recognition.” The Company
recorded a net reduction to opening Reinvested earnings of $0.1 million as of January 1, 2018 as a result of the cumulative impact of
adopting ASC 606. The impact to revenues as a result of applying ASC 606 in the year ended December 31, 2018 were not material.
Revenue for sales of products and services is derived from contracts with customers. The products and services promised in
contracts include the sale of municipal water and flow instrumentation products, such as flow meters and radios, software access and
other ancillary services. Contracts generally state the terms of sale, including the description, quantity and price of each product or
service. Since the customer typically agrees to a stated rate and price in the contract that does not vary over the life of the contract, the
majority of the Company's contracts do not contain variable consideration. The Company establishes a provision for estimated
warranty and returns as well as certain after-sale costs as discussed in Note 1 “Summary of Significant Accounting Policies.”
In accordance with Topic 606, the Company disaggregates revenue from contracts with customers into geographical regions
and by the timing of when goods and services are transferred. The Company determined that disaggregating revenue into these
categories meets the disclosure objective in Topic 606 which is to depict how the nature, amount, timing and uncertainty of revenue
and cash flows are affected by regional economic factors. Information regarding revenues disaggregated by geographic area is
disclosed in Note 9 “Industry Segment and Geographic Areas”.
Information regarding revenues disaggregated by the timing of when goods and services are transferred is as follows:
Revenue recognized over time
Revenue recognized at a point in time
Net Sales
Twelve Months Ended
December 31, 2018
(In thousands)
$
$
12,943
420,789
433,732
The Company performs its obligations under a contract by shipping products or performing services in exchange for
consideration. The Company typically invoices its customers as soon as control of an asset is transferred and a receivable to the
Company is established. The Company, however, recognizes a contract liability when a customer prepays for goods or services and
the Company has not transferred control of the goods or services.
The opening and closing balances of the Company's receivables and contract liabilities are as follows:
Receivables
Contract liabilities
December 31, 2018
December 31, 2017
(In thousands)
66,300 $
15,793
58,210
9,670
$
The balance of contract assets was immaterial as the Company did not have a significant amount of uninvoiced receivables at
December 31, 2018.
The amount of revenue recognized in the year ended December 31, 2018 that was included in the opening contract liability
balance was $1.2 million. The difference between the opening and closing balances of the Company's contract liabilities was the
result of a timing difference between the Company's performance and the customers' prepayments. The increased receivables balance
was due to higher sales compared to the prior year.
A performance obligation in a contract is a promise to transfer a distinct good or service to the customer, and is the unit of
measurement in Topic 606. At contract inception, the Company assesses the products and services promised in its contracts with
customers. The Company then identifies performance obligations to transfer distinct products or services to the customer. In order to
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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 97.0% of net sales for the year ended December
31, 2018. The majority of the Company's revenue recognized at a point in time is for the sale of municipal and flow 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 3.0% of net sales for the year ended December 31,
2018. The majority of the Company's revenue that is recognized over time relates to the BEACON AMA software as a service.
As of December 31, 2018, the Company had certain contracts with unsatisfied performance obligations. For contracts
recorded as long-term liabilities, $12.3 million was the aggregate amount of the transaction price allocated to performance obligations
that were unsatisfied or partially unsatisfied as of the end of the reporting period. The Company estimates that revenue recognized
from satisfying those performance obligations will be approximately $3.2 million in each year from 2020 through 2022 and $2.7
million in 2023.
The Company records revenue for BEACON AMA services over time as the customer benefits from the use of the
Company's software. Control of an asset is therefore transferred to the customer over time and the Company will recognize revenue
for BEACON AMA services as service units are used by the customer.
Revenue is recorded for various ancillary services, such as project management and training, over time as the customer
benefits from the services provided. The majority of this revenue will be recognized equally throughout the contract period as the
customer receives benefits from the Company's promise to provide such services. If the service is not provided evenly over the
contract period, revenue will be recognized by the associated input/output method that best measures the progress towards contract
completion.
The Company also has contracts that include both the sale and installation of flow meters as performance obligations. In
those cases, the Company records revenue for installed flow meters at the point in time when the flow meters have been accepted by
the customer. The customer cannot control the use of and obtain substantially all of the benefits from the equipment until the customer
has accepted the installed product. Therefore, for both the flow meter and the related installation, the Company has concluded that
control is transferred to the customer upon customer acceptance of the installed flow meter. In addition, the Company has a variety of
ancillary revenue streams which are minor. The types and composition of the Company's revenue streams did not materially change
during the year ended December 31, 2018.
Certain customers may receive cash-based incentives or credits, which are accounted for as variable consideration. Variable
consideration in contracts for the year ended December 31, 2018 was insignificant.
The transaction price for a contract is allocated to each distinct performance obligation and recognized as revenue when, or
as, each performance obligation is satisfied. For contracts with multiple performance obligations, the Company allocates the contract's
transaction price to each performance obligation using the best estimate of the standalone selling price of each distinct good or service
in a contract. The primary method used to estimate standalone selling price is the observable price when the good or service is sold
separately in similar circumstances and to similar customers. If standalone selling price is not directly observable, it is estimated using
either a market adjustment or cost plus margin approach.
The recording of assets recognized from the costs to obtain and fulfill customer contracts primarily relate to the deferral of
sales commissions on the Company's BEACON AMA software arrangements. The Company's costs incurred to obtain or fulfill a
contract with a customer are amortized over the period of benefit of the related revenue. The Company expenses any costs incurred
immediately when the amortization period would be one year or less. These costs are recorded within selling, engineering and
administration expenses.
For the year ended December 31, 2018, the Company elected the following practical expedients:
In accordance with Subtopic 340-40 “Other Assets and Deferred Costs - Contracts with Customers,” the Company elected to
expense the incremental costs of obtaining a contract when the amortization period for such contracts would have been one year or
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less. The Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of
one year or less, and contracts for which it has the right to invoice for services performed.
The Company has made an accounting policy election to exclude all taxes by governmental authorities from the measurement
of the transaction price.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), as amended, the Company's
management evaluated, with the participation of the Company's President and Chief Executive Officer and the Company's 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 year ended December 31, 2018.
Based upon their evaluation of these disclosure controls and procedures, the Company's President and Chief Executive Officer and the
Company's 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 Controls over Financial Reporting
There was no change in the Company's internal control over financial reporting that occurred during the quarter ended
December 31, 2018 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over
financial reporting.
Management's Annual Report on Internal Control over Financial Reporting
The report of management required under this Item 9A is contained in Item 8 of this 2018 Annual Report on Form 10-K
under the heading “Management's Annual Report on Internal Control over Financial Reporting.”
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting
The attestation report required under this Item 9A is contained in Item 8 of this 2018 Annual Report on Form 10-K under the
heading “Report of Independent Registered Public Accounting Firm.”
ITEM 9B. OTHER INFORMATION
None.
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ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Documents filed as part of this Annual Report on Form 10-K:
PART IV
1. Financial Statements. See the financial statements included in Part II, Item 8 “Financial Statements and Supplementary
Data” in this 2018 Annual Report on Form 10-K, under the headings “Consolidated Balance Sheets,” “Consolidated
Statements of Operations,” “Consolidated Statements of Comprehensive Income,” “Consolidated Statements of Cash Flows”
and “Consolidated Statements of Shareholders' Equity.”
2. Financial Statement Schedules. Financial statement schedules are omitted because the information required in these
schedules is included in the Notes to Consolidated Financial Statements.
3. Exhibits. The exhibits listed in the following Exhibit Index are filed as part of this 2018 Annual Report on Form 10-K that is
incorporated herein by reference.
ITEM 16. FORM 10-K SUMMARY
None.
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Pursuant to the requirements of Section 13 or 15(d) 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, on February 26, 2019.
SIGNATURES
BADGER METER, INC.
By: /s/ Kenneth C. Bockhorst
Kenneth C. Bockhorst
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities indicated on February 26, 2019.
Name
Title
/s/ Kenneth C. Bockhorst
Kenneth C. Bockhorst
/s/ Robert A. Wrocklage
Robert A. Wrocklage
/s/ Beverly L. P. Smiley
Beverly L. P. Smiley
/s/ Richard A. Meeusen
Richard A. Meeusen
/s/ Todd A. Adams
Todd A. Adams
/s/ Thomas J. Fischer
Thomas J. Fischer
/s/ Gale E. Klappa
Gale E. Klappa
/s/ Gail A. Lione
Gail A. Lione
/s/ James F. Stern
James F. Stern
/s/ Glen E. Tellock
Glen E. Tellock
/s/ Todd J. Teske
Todd J. Teske
President and
Chief Executive Officer and
Director (Principal executive officer)
Vice President — Finance,
Chief Financial Officer and Treasurer
(Principal financial officer)
Vice President — Controller
(Principal accounting officer)
Chairman
Director
Director
Director
Director
Director
Director
Director
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BADGER METER, INC.
BADGER METER, INC.
RECONCILIATION OF NON-GAAP PERFORMANCE MEASURES TO GAAP PERFORMANCE MEASURES
(in thousands, except share and earnings per share data)
RECONCILIATION OF NON-GAAP PERFORMANCE MEASURES TO GAAP PERFORMANCE MEASURES
(in thousands, except share and earnings per share data)
Operating earnings (GAAP measure)
2018
2017
2016
2015
2014
2018
2017
2016
2015
2014
$56,869
$56,595
$52,672
$43,791
$47,147
Operating earnings (GAAP measure)
$56,869
$56,595
$52,672
$43,791
$47,147
Executive retirement charges
Executive retirement charges
Adjusted operating earnings
Adjusted operating earnings
Net earnings (GAAP measure)
Net earnings (GAAP measure)
Executive retirement charges, net of tax
Executive retirement charges, net of tax
Pension termination settlement charge, net of tax
Pension termination settlement charge, net of tax
Adjusted net earnings
Adjusted net earnings
2,575
-
-
-
-
2,575
-
-
-
-
$59,444
$56,595
$52,672
$43,791
$47,147
$59,444
$56,595
$52,672
$43,791
$47,147
$27,790
$34,571
$32,295
$25,938
$29,678
$27,790
$34,571
$32,295
$25,938
$29,678
2,357
14,786
2,357
14,786
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$44,933
$34,571
$32,295
$25,938
$29,678
-
-
$44,933
$34,571
$32,295
$25,938
$29,678
Diluted earnings per share (GAAP measure)
$0.95
$1.19
$1.11
$0.90
$1.03
Diluted earnings per share (GAAP measure)
$0.95
$1.19
$1.11
$0.90
$1.03
Executive retirement charges, net of tax
Executive retirement charges, net of tax
Pension termination settlement charge, net of tax
Pension termination settlement charge, net of tax
0.09
0.50
-
-
0.09
0.50
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Adjusted diluted earnings per share
$1.54
$1.19
$1.11
$0.90
$1.03
Adjusted diluted earnings per share
$1.54
$1.19
$1.11
$0.90
$1.03
Cash provided by operations (GAAP measure)
$60,350
$49,751
$56,185
$35,831
$35,735
Cash provided by operations (GAAP measure)
$60,350
$49,751
$56,185
$35,831
$35,735
Capital expenditures
Capital expenditures
Free cash flow
Free cash flow
Free cash flow
Free cash flow
Adjusted net earnings
Adjusted net earnings
Free cash flow conversion
Free cash flow conversion
(8,643)
(15,069)
(10,596)
(19,766)
(12,332)
(8,643)
(15,069)
(10,596)
(19,766)
(12,332)
$51,707
$34,682
$45,589
$16,065
$23,403
$51,707
$34,682
$45,589
$16,065
$23,403
$51,707
$34,682
$45,589
$16,065
$23,403
$44,933
$51,707
$34,571
$34,682
$32,295
$45,589
$25,938
$16,065
$29,678
$23,403
$44,933
$34,571
$32,295
$25,938
$29,678
115%
100%
141%
62%
79%
115%
100%
141%
62%
79%
56
4545 West Brown Deer Road
P.O. Box 245036
Milwaukee, Wisconsin 53224-9536
www.badgermeter.com