Item 1. Business
Badger Meter, Inc. (the "company") is a marketer and manufacturer of products using flow measurement and control technology serving markets worldwide. The company was incorporated in 1905.
Markets and Products
The company's products are sold to water utilities, original equipment manufacturers and various industrial customers primarily operating in the following markets: energy and petroleum; food and beverage; pharmaceutical; chemical; water, wastewater and process waters; and concrete.
The company has eight major product lines: residential and large commercial/industrial water meters (with related technologies), automotive fluid meters, ultrasonic flowmeters, small valves, natural gas instrumentation, flow tubes and industrial process meters. Water meters and related systems produce the majority of the company's sales. A "water meter system" generally consists of a water meter, a register (some with an interface technology for communicating the reading), a packaging system and the monitoring or computerized management system used to collect and relay the reading.
The company's products are primarily manufactured in the company's Milwaukee, Wisconsin and Tulsa, Oklahoma facilities. Custom molded plastic products are also produced in a facility in Rio Rico, Arizona for use as components in the company's products and, to a limited extent, for sale to original equipment manufacturers. Products are also assembled in facilities in Nogales, Mexico. Assembly and some light manufacturing are done in the Stuttgart, Germany facility.
Badger Meter's products are sold throughout the world through various selling arrangements including direct sales representatives, distributors and independent sales representatives. There is only a moderate seasonal impact on sales, primarily relating to slightly higher sales of certain utility products during the spring and summer months. No single customer accounts for more than 10% of the company's sales.
Competition
There are several competitors in each of the markets in which the company sells its products, and the competition varies from moderate to intense. Major competitors include Sensus Technologies, Inc., Schlumberger Industries, Inc. and ABB-Kent Meters, Inc. A number of the company's competitors in certain markets have greater financial resources. The company believes it currently provides the leading technology in certain types of automated and automatic water meter systems, high precision valves and energy instruments. As a result of significant research and development activities, the company enjoys favorable patent positions for many of its products.
Backlog
The dollar amount of the company's total backlog of unshipped orders at December 31, 1998 and 1997 was $32,290,000 and $27,884,000, respectively. Substantially, the entire December 31, 1998 backlog is expected to be shipped in 1999.
Raw Materials
Raw materials used in the manufacture of the company's products include metal or alloys (such as bronze, aluminum, stainless steel, cast iron, brass and stellite), plastic resins, glass, microprocessors and other electronic subassemblies. There are multiple sources for these raw materials, but the company purchases bronze castings and certain electronic subassemblies from single suppliers. The company believes these items would be available from other sources, but that the loss of its current suppliers would result in higher cost of materials, delivery delays, short-term increases in inventory and higher quality control costs. Prices may also be affected by world commodity markets.
Research and Development
Expenditures for research and development activities relating to the development of new products, the improvement of existing products and manufacturing process improvements were $6,105,000 during 1998, as compared to $4,397,000 during 1997 and $3,851,000 during 1996. Research and development activities are primarily sponsored by the company. The company also engages in some joint research and development with other companies.
Intangible Assets
The company owns or controls many patents, trademarks, tradenames and license agreements, in the United States and other countries, related to its products and technologies. No single patent, trademark, tradename or license is material to the company's business as a whole.
Environmental Protection
The company is subject to contingencies relative to compliance with Federal, State and local provisions and regulations relating to the protection of the environment. Currently the company is in the process of resolving an issue relative to a landfill site and a suit alleging a violation of Proposition 65, California's environmental regulation (see Item 3). The company is also involved in litigation filed by the owner of property near one of the company's plants, alleging damage to property value by virtue of spillage from past company operations. The company believes that this suit is without merit. The company does not believe the ultimate resolution of any of these claims will have a material adverse effect on the results of operations. Expenditures during 1998 and 1997 for compliance with environmental control provisions and regulations were not material and the company does not anticipate any material future expenditures.
To insure compliance with all environmental regulations at all company sites, the Board of Directors has a Compliance Committee that monitors the company's compliance with various regulatory authorities in regard to environmental matters, among other things.
Employees
The company and its subsidiaries employed 956 persons at December 31, 1998, of which 247 employees are covered by a collective bargaining agreement with District 10 of the International Association of Machinists. The company is currently operating under a four-year contract with the union, which expires on October 31, 2000. The company has good relations with the union and all of its employees.
Foreign Operations and Export Sales
The company has distributors and sales representatives throughout the world. Additionally, the company has a sales, assembly, light manufacturing and distribution facility in Stuttgart, Germany, a sales and customer service office in Mexico City, and two assembly facilities in Nogales, Mexico. The company exports products manufactured in Milwaukee, WI, Tulsa, OK, and Rio Rico, AZ. The company has international personnel with responsibility for managing the company's activities in all countries outside of the United States and Canada.
Information about the company's foreign operations and export sales is included on Note 10 in the Notes to Consolidated Financial Statements of the company's 1998 Annual Report to Shareholders and such information is incorporated herein by reference.
Financial Information about Industry Segments
The company operates in one industry segment as a marketer and manufacturer of various flow measurement and control products.
Item 2.
Item 2. Properties
The principal facilities utilized by the company at December 31, 1998, are listed below. Except as indicated, the company owns all of such facilities in fee simple.
(1) Includes 30,000 sq. ft. leased facility. Lease term expires December 31, 1999. (2) Leased facility. Lease term expires January 31, 2000. (3) Leased facility. Lease term expires October 31, 1999. (4) Leased facility. Lease term expires December 31, 2005.
In addition to the foregoing facilities, the company leases several sales offices. The company believes that its facilities are generally well maintained and have sufficient capacity for its current needs. The company is nearing completion of the construction of a 67,000 square foot addition to its Milwaukee, Wisconsin facility. The addition is estimated to cost approximately $12 million and will house a new engineering laboratory, design facility, offices and expanded manufacturing operations. The addition is expected to be completed in early 1999 and will address future capacity requirements.
Item 3.
Item 3. Legal Proceedings
There are currently no material legal proceedings pending with relation to the company, except as discussed below.
In February, 1997, the company, along with other major manufacturers of water meters, was named as a defendant in a California lawsuit filed by the Natural Resources Defense Council. The lawsuit claims that the meter manufacturers are violating the standards established by California's Proposition 65 by selling bronze water meters in California that allegedly leach lead in excess of the Proposition 65 limits.
The company believes that its meters are in compliance with national standards established by the American Water Works Association and that the meters fully comply with the Federal Safe Drinking Water Act. The California standards are unique to California and are set at a level of one-thousandth of the point of no observable effect. Substantially all of the company's sales of residential water meters in California are to, and in response to specifications issued by, water utilities which are exempt from compliance with the Proposition 65 regulation. Also, since 1972 Badger Meter has been the only meter manufacturer to continuously offer a plastic meter as an option to utility customers. The plastic meter fully complies with Proposition 65 and the Federal Safe Drinking Water Act, as certified by the National Sanitation Foundation. The utilities had the opportunity to specify the plastic meter, as many of them did. As such, the company disputes the claims of the lawsuit and does not believe the ultimate resolution of the lawsuit will have a material adverse effect on the results of operations.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the company's shareholders during the quarter ended December 31, 1998.
Executive Officers of the Company
The following table sets forth certain information regarding the executive officers of the company.
There are no family relationships between any of the executive officers. All of the 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 successor has been elected or until his death, resignation or removal. There is no arrangement or understanding between any executive officer and any other person pursuant to which he was elected as an officer.
Mr. Forbes has served as President and Chief Executive Officer for more than five years.
Mr. Belan was elected Executive Vice President in April 1998. From 1992 to 1998, Mr. Belan was Vice President - Utility.
Mr. Vander Heyden has served as Vice President - Industrial for more than five years.
Mr. Townsend joined the company and was elected Vice President - International in February 1996. From 1993 to 1995, Mr. Townsend was Managing Director of International Gas Measurement, based in London, England for twelve companies related to Elster/Kromshroder and American Meter Companies.
Mr. Dix has served as Vice President - Administration and Human Resources for more than five years.
Ms. Elliott has served as Vice President - Corporate Counsel and Secretary for more than five years.
Mr. Meeusen joined the company and was elected Vice President - Finance and elected Chief Financial Officer in November 1995 and was elected Treasurer in January 1996. Prior to joining the company, Mr. Meeusen was Vice President - Finance and Treasurer for Zenith Sintered Products for more than five years.
Ms. Smiley was elected Corporate Controller of the company in April 1997. Prior to that date, Ms. Smiley served as Accounting Manager of the company for more than five years.
Part II
Item 5.
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters
The information set forth on page 27 in the company's 1998 Annual Report to Shareholders is incorporated herein by reference in response to this Item.
Item 6.
Item 6. Selected Financial Data
The information set forth on pages 1 and 29 in the company's 1998 Annual Report to Shareholders is incorporated herein by reference in response to this Item.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The information set forth on pages 15, 16 and 17 in the company's 1998 Annual Report to Shareholders is incorporated herein by reference in response to this Item.
Item 7.a. Quantitative and Qualitative Disclosures of Market Risk
The information set forth on page 17 in the company's 1998 Annual Report to Shareholders is incorporated herein by reference in response to this Item.
Item 8.
Item 8. Financial Statements and Supplementary Data
Consolidated financial statements of the company at December 31, 1998 and 1997 and for each of the three years in the period ended December 31, 1998 and the auditor's report thereon and the company's unaudited quarterly financial data for the two-year period ended December 31, 1998 are incorporated herein by reference from the 1998 Annual Report to Shareholders, pages 18 through 28.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Part III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
Information required by this Item with respect to directors is included under the headings "Nomination and Election of Directors" and Section 16(a) "Beneficial Ownership Reporting Compliance" in the company's definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held on April 23, 1999, and is incorporated herein by reference.
Information concerning the executive officers of the company is included in Part I of this Form 10-K.
Item 11.
Item 11. Executive Compensation
Information required by this Item is included under the headings "Nomination and Election of Directors-Director Compensation" and "Executive Compensation" in the company's definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held on April 23, 1999, and is incorporated herein by reference; provided, however, that the subsection entitled "Executive Compensation-Board Management Review Committee Report on Executive Compensation" shall not be deemed to be incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information required by this Item is included under the heading "Stock Ownership of Management and Others" in the company's definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held on April 23, 1999, and is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions
Information required by this Item is included under the headings "Management Review Committee Interlocks and Insider Participation" and "Certain Transactions" in the company's definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held on April 23, 1999, and is incorporated herein by reference.
Part IV
Item 14.
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K
(a) Documents filed
1. and 2. Financial Statements and Financial Statement Schedule. See Index to Financial Statements and Financial Statement Schedule on page which is incorporated herein by reference.
3. Exhibits. See the Exhibit Index included as the last pages of this report which is incorporated herein by reference.
(b) Reports on Form 8-K
No report on Form 8-K was required to be filed by the registrant during the quarter ended December 31, 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.
BADGER METER, INC. Registrant
By: /s/ Richard A. Meeusen ---------------------- Richard A. Meeusen Vice President - Finance and Treasurer Chief Financial Officer February 12, 1999
By: /s/ Beverly L.P. Smiley ---------------------- Corporate Controller February 12, 1999
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 and on the dates indicated:
/s/ James O. Wright /s/ James L. Forbes - ------------------- ------------------- James O. Wright James L. Forbes Director and Chairman Director, President and February 12, 1999 Chief Executive Officer February 12, 1999
/s/ Robert M. Hoffer /s/ Pamela B. Strobel - ------------------- --------------------- Robert M. Hoffer Pamela B. Strobel Director Director February 12, 1999 February 12, 1999
/s/ Charles F. James, Jr. /s/ Andrew J. Policano - ------------------------- ---------------------- Charles F. James, Jr. Andrew J. Policano Director Director February 12, 1999 February 12, 1999
/s/ Donald J. Schuenke /s/ Kenneth P. Manning - ---------------------- ---------------------- Donald J. Schuenke Kenneth P. Manning Director Director February 12, 1999 February 12, 1999
/s/ John J. Stollenwerk /s/ James O. Wright, Jr. - ----------------------- ------------------------ John J. Stollenwerk James O. Wright, Jr. Director Director February 12, 1999 February 12, 1999
BADGER METER, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
All other schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedules, or because the information required is included in the financial statements and the notes thereto.
BADGER METER, INC.
SCHEDULE II - CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 1998, 1997, and 1996
Note:
(a) Accounts receivable written off, less recoveries, against the allowance.
EXHIBIT INDEX
*A management contract or compensatory plan or arrangement.
EXHIBIT INDEX (CONTINUED)
*A management contract or compensatory plan or arrangement.