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BADGER METER INC - Quarter Report: 2022 September (Form 10-Q)

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022

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

 

39-0143280

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

4545 W. Brown Deer Road

Milwaukee, Wisconsin

 

53233

(Address of principal executive offices)

 

(Zip code)

 

 

(414) 355-0400

 

 

(Registrant’s telephone number, including area code)

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

BMI

New York Stock Exchange

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ 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 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

 

Smaller reporting company

Accelerated filer

 

Emerging growth company

Non‑accelerated filer

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No

As of October 11, 2022 there were 29,269,149 shares of Common stock outstanding with a par value of $1 per share.

 

 


Table of Contents

 

BADGER METER, INC.

Quarterly Report on Form 10-Q for the Period Ended September 30, 2022

Index

 

 

Page No.

 

 

Part I. Financial Information:

 

 

 

 

Item 1

Financial Statements (unaudited):

4

 

 

 

 

Consolidated Condensed Balance Sheets - September 30, 2022 and December 31, 2021

4

 

 

 

 

Consolidated Condensed Statements of Operations - Three and Nine Months Ended September 30, 2022 and 2021

5

 

 

 

 

Consolidated Condensed Statements of Comprehensive Income - Three and Nine Months Ended September 30, 2022 and 2021

6

 

 

 

 

Consolidated Condensed Statements of Cash Flows - Nine Months Ended September 30, 2022 and 2021

7

 

 

 

 

Consolidated Condensed Statements of Shareholders’ Equity – Three and Nine Months Ended September 30, 2022 and 2021

8

 

 

 

 

Notes to Unaudited Consolidated Condensed Financial Statements

9

 

 

 

Item 2

Management's Discussion and Analysis of Financial Condition and Results of Operations

14

 

 

 

Item 3

Quantitative and Qualitative Disclosures about Market Risk

19

 

 

 

Item 4

Controls and Procedures

19

 

 

Part II. Other Information:

 

 

 

 

Item 1A

Risk Factors

20

 

 

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

20

 

 

 

Item 6

Exhibits

20

 

 

Signatures

21

 

2


Table of Contents

 

Special Note Regarding Forward Looking Statements

Certain statements contained in this Quarterly Report on Form 10-Q, as well as other information provided from time to time by Badger Meter, Inc. (the “Company” or "Badger Meter") or its employees, may contain forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those 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. See Item 1A "Risk Factors" of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 for further information regarding risks and uncertainties that could cause actual results to differ materially from those expressed or implied in forward looking statements. The Company disclaims any obligation to publicly update or revise any forward-looking statements as a result of new information, future events or any other reason.

3


Table of Contents

 

Part I – Financial Information

Item 1 Financial Statements

BADGER METER, INC.

Consolidated Condensed Balance Sheets

 

 

 

September 30,

 

 

December 31,

 

 

 

(Unaudited)

 

 

 

 

 

 

(In thousands)

 

 

 

2022

 

 

2021

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

114,787

 

 

$

87,174

 

Receivables

 

 

83,491

 

 

 

65,866

 

Inventories:

 

 

 

 

 

 

Finished goods

 

 

23,783

 

 

 

25,991

 

Work in process

 

 

25,970

 

 

 

24,747

 

Raw materials

 

 

63,855

 

 

 

48,873

 

Total inventories

 

 

113,608

 

 

 

99,611

 

Prepaid expenses and other current assets

 

 

13,742

 

 

 

8,709

 

Total current assets

 

 

325,628

 

 

 

261,360

 

Property, plant and equipment, at cost

 

 

216,159

 

 

 

216,796

 

Less accumulated depreciation

 

 

(143,790

)

 

 

(138,746

)

Net property, plant and equipment

 

 

72,369

 

 

 

78,050

 

Intangible assets, at cost less accumulated amortization

 

 

54,314

 

 

 

64,176

 

Other assets

 

 

15,450

 

 

 

15,390

 

Deferred income taxes

 

 

7,512

 

 

 

7,529

 

Goodwill

 

 

99,100

 

 

 

104,313

 

Total assets

 

$

574,373

 

 

$

530,818

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Payables

 

$

65,462

 

 

$

41,859

 

Accrued compensation and employee benefits

 

 

17,734

 

 

 

20,644

 

Warranty and after-sale costs

 

 

10,369

 

 

 

12,868

 

Other current liabilities

 

 

8,220

 

 

 

6,775

 

Total current liabilities

 

 

101,785

 

 

 

82,146

 

Other long-term liabilities

 

 

36,540

 

 

 

29,804

 

Deferred income taxes

 

 

4,575

 

 

 

5,385

 

Accrued non-pension postretirement benefits

 

 

5,072

 

 

 

5,214

 

Other accrued employee benefits

 

 

3,542

 

 

 

5,199

 

Commitments and contingencies (Note 5)

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

Common stock

 

 

37,221

 

 

 

37,221

 

Capital in excess of par value

 

 

51,780

 

 

 

49,224

 

Reinvested earnings

 

 

384,207

 

 

 

353,535

 

Accumulated other comprehensive (loss) income

 

 

(12,984

)

 

 

136

 

Less: Treasury stock, at cost

 

 

(37,365

)

 

 

(37,046

)

Total shareholders’ equity

 

 

422,859

 

 

 

403,070

 

Total liabilities and shareholders’ equity

 

$

574,373

 

 

$

530,818

 

 

See accompanying notes to unaudited consolidated condensed financial statements.

4


Table of Contents

 

BADGER METER, INC.

Consolidated Condensed Statements of Operations

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

(Unaudited)

 

 

(Unaudited)

 

 

 

(In thousands except share and per share amounts)

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

148,009

 

 

$

128,738

 

 

$

418,244

 

 

$

369,449

 

Cost of sales

 

 

90,487

 

 

 

77,554

 

 

 

255,239

 

 

 

218,801

 

Gross margin

 

 

57,522

 

 

 

51,184

 

 

 

163,005

 

 

 

150,648

 

Selling, engineering and administration

 

 

33,651

 

 

 

31,744

 

 

 

98,184

 

 

 

94,786

 

Operating earnings

 

 

23,871

 

 

 

19,440

 

 

 

64,821

 

 

 

55,862

 

Interest (income) expense, net

 

 

(108

)

 

 

14

 

 

 

(86

)

 

 

28

 

Other pension and postretirement costs

 

 

32

 

 

 

30

 

 

 

97

 

 

 

90

 

Earnings before income taxes

 

 

23,947

 

 

 

19,396

 

 

 

64,810

 

 

 

55,744

 

Provision for income taxes

 

 

6,014

 

 

 

3,541

 

 

 

15,853

 

 

 

12,136

 

Net earnings

 

$

17,933

 

 

$

15,855

 

 

$

48,957

 

 

$

43,608

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.61

 

 

$

0.54

 

 

$

1.68

 

 

$

1.50

 

Diluted

 

$

0.61

 

 

$

0.54

 

 

$

1.67

 

 

$

1.49

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.23

 

 

$

0.20

 

 

$

0.63

 

 

$

0.56

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares used in computation of earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

29,215,982

 

 

 

29,157,628

 

 

 

29,211,488

 

 

 

29,124,491

 

Impact of dilutive securities

 

 

156,482

 

 

 

184,204

 

 

 

151,609

 

 

 

200,043

 

Diluted

 

 

29,372,464

 

 

 

29,341,832

 

 

 

29,363,097

 

 

 

29,324,534

 

 

See accompanying notes to unaudited consolidated condensed financial statements.

5


Table of Contents

 

BADGER METER, INC.

Consolidated Condensed Statements of Comprehensive Income

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

(Unaudited)

 

 

(Unaudited)

 

 

 

(In thousands)

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Net earnings

 

$

17,933

 

 

$

15,855

 

 

$

48,957

 

 

$

43,608

 

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(5,424

)

 

 

(2,248

)

 

 

(13,104

)

 

 

(155

)

Pension and postretirement benefits, net of tax

 

 

(16

)

 

 

4

 

 

 

(16

)

 

 

9

 

Comprehensive income

 

$

12,493

 

 

$

13,611

 

 

$

35,837

 

 

$

43,462

 

 

See accompanying notes to unaudited consolidated condensed financial statements.

6


Table of Contents

 

BADGER METER, INC.

Consolidated Condensed Statements of Cash Flows

 

 

 

Nine Months Ended September 30,

 

 

 

(Unaudited)
(In thousands)

 

 

 

2022

 

 

2021

 

Operating activities:

 

 

 

 

 

 

Net earnings

 

$

48,957

 

 

$

43,608

 

Adjustments to reconcile net earnings to net cash provided by operations:

 

 

 

 

 

 

Depreciation

 

 

8,413

 

 

 

8,619

 

Amortization

 

 

11,748

 

 

 

12,358

 

Deferred income taxes

 

 

24

 

 

 

11

 

Noncurrent employee benefits

 

 

(138

)

 

 

232

 

Stock-based compensation expense

 

 

2,170

 

 

 

1,537

 

Changes in:

 

 

 

 

 

 

Receivables

 

 

(18,860

)

 

 

(8,985

)

Inventories

 

 

(16,207

)

 

 

(5,685

)

Payables

 

 

23,870

 

 

 

7,420

 

Prepaid expenses and other assets

 

 

(9,405

)

 

 

(11,648

)

Other liabilities

 

 

2,171

 

 

 

12,967

 

Total adjustments

 

 

3,786

 

 

 

16,826

 

Net cash provided by operations

 

 

52,743

 

 

 

60,434

 

Investing activities:

 

 

 

 

 

 

Property, plant and equipment expenditures

 

 

(4,690

)

 

 

(5,843

)

Proceeds from company owned life insurance plans

 

 

-

 

 

 

596

 

Acquisitions, net of cash acquired

 

 

-

 

 

 

(45,273

)

Net cash used for investing activities

 

 

(4,690

)

 

 

(50,520

)

Financing activities:

 

 

 

 

 

 

Dividends paid

 

 

(18,292

)

 

 

(16,318

)

Proceeds from exercise of stock options

 

 

61

 

 

 

2,037

 

Repurchase of treasury stock

 

 

(427

)

 

 

(460

)

Issuance of treasury stock

 

 

-

 

 

 

72

 

Net cash used for financing activities

 

 

(18,658

)

 

 

(14,669

)

Effect of foreign exchange rates on cash

 

 

(1,782

)

 

 

(480

)

Increase (Decrease) in cash and cash equivalents

 

 

27,613

 

 

 

(5,235

)

Cash and cash equivalents – beginning of period

 

 

87,174

 

 

 

72,273

 

Cash and cash equivalents – end of period

 

$

114,787

 

 

$

67,038

 

 

See accompanying notes to unaudited consolidated condensed financial statements.

7


Table of Contents

 

BADGER METER, INC.

Consolidated Condensed Statements of Shareholders’ Equity

 

 

 

Quarter and year-to-date ended September 30,

 

 

 

Common
Stock at $1
par value*

 

 

Capital in
excess of
par value

 

 

Reinvested
earnings

 

 

Accumulated
other
comprehensive
income
(loss)

 

 

Treasury
stock (at cost)

 

 

Total

 

 

 

(Unaudited)

 

 

 

(In thousands except share and per share amounts)

 

Balance, June 30, 2021

 

$

37,221

 

 

$

46,500

 

 

$

332,104

 

 

$

3,411

 

 

$

(37,389

)

 

$

381,847

 

Net earnings

 

 

-

 

 

 

-

 

 

 

15,855

 

 

 

-

 

 

 

-

 

 

 

15,855

 

Pension and postretirement benefits
   (net of $(
0) tax effect)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

4

 

 

 

-

 

 

 

4

 

Foreign currency translation

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,248

)

 

 

-

 

 

 

(2,248

)

Cash dividends of $0.20 per share

 

 

-

 

 

 

-

 

 

 

(5,909

)

 

 

-

 

 

 

-

 

 

 

(5,909

)

Stock options exercised

 

 

-

 

 

 

1,342

 

 

 

-

 

 

 

-

 

 

 

343

 

 

 

1,685

 

Stock-based compensation

 

 

-

 

 

 

590

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

590

 

Balance, September 30, 2021

 

$

37,221

 

 

$

48,432

 

 

$

342,050

 

 

$

1,167

 

 

$

(37,046

)

 

$

391,824

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2020

 

$

37,221

 

 

$

44,964

 

 

$

314,850

 

 

$

1,313

 

 

$

(37,089

)

 

$

361,259

 

Net earnings

 

 

-

 

 

 

-

 

 

 

43,608

 

 

 

-

 

 

 

-

 

 

 

43,608

 

Pension and postretirement benefits
   (net of $(
2) tax effect)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

9

 

 

 

-

 

 

 

9

 

Foreign currency translation

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(155

)

 

 

-

 

 

 

(155

)

Cash dividends of $0.56 per share

 

 

-

 

 

 

-

 

 

 

(16,408

)

 

 

-

 

 

 

-

 

 

 

(16,408

)

Stock options exercised

 

 

-

 

 

 

1,623

 

 

 

-

 

 

 

-

 

 

 

414

 

 

 

2,037

 

Stock-based compensation

 

 

-

 

 

 

1,537

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,537

 

Purchase of common stock for treasury stock

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(460

)

 

 

(460

)

Issuance of treasury stock (46 shares)

 

 

-

 

 

 

308

 

 

 

-

 

 

 

-

 

 

 

89

 

 

 

397

 

Balance, September 30, 2021

 

$

37,221

 

 

$

48,432

 

 

$

342,050

 

 

$

1,167

 

 

$

(37,046

)

 

$

391,824

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2022

 

$

37,221

 

 

$

51,015

 

 

$

372,856

 

 

$

(7,544

)

 

$

(37,365

)

 

$

416,183

 

Net earnings

 

 

-

 

 

 

-

 

 

 

17,933

 

 

 

-

 

 

 

-

 

 

 

17,933

 

Pension and postretirement benefits
   (net of $(
5) tax effect)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(16

)

 

 

-

 

 

 

(16

)

Foreign currency translation

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(5,424

)

 

 

-

 

 

 

(5,424

)

Cash dividends of $0.23 per share

 

 

-

 

 

 

-

 

 

 

(6,582

)

 

 

-

 

 

 

-

 

 

 

(6,582

)

Stock options exercised

 

 

-

 

 

 

50

 

 

 

-

 

 

 

-

 

 

 

11

 

 

 

61

 

Stock-based compensation

 

 

-

 

 

 

704

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

704

 

Issuance of treasury stock (2 shares)

 

 

-

 

 

 

11

 

 

 

-

 

 

 

-

 

 

 

(11

)

 

 

-

 

Balance, September 30, 2022

 

$

37,221

 

 

$

51,780

 

 

$

384,207

 

 

$

(12,984

)

 

$

(37,365

)

 

$

422,859

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2021

 

$

37,221

 

 

$

49,224

 

 

$

353,535

 

 

$

136

 

 

$

(37,046

)

 

$

403,070

 

Net earnings

 

 

-

 

 

 

-

 

 

 

48,957

 

 

 

-

 

 

 

-

 

 

 

48,957

 

Pension and postretirement benefits
   (net of $(
5) tax effect)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(16

)

 

 

-

 

 

 

(16

)

Foreign currency translation

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(13,104

)

 

 

-

 

 

 

(13,104

)

Cash dividends of $0.63 per share

 

 

-

 

 

 

-

 

 

 

(18,285

)

 

 

-

 

 

 

-

 

 

 

(18,285

)

Stock options exercised

 

 

-

 

 

 

50

 

 

 

-

 

 

 

-

 

 

 

11

 

 

 

61

 

Stock-based compensation

 

 

-

 

 

 

2,170

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,170

 

Purchase of common stock for treasury stock

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(427

)

 

 

(427

)

Issuance of treasury stock (28 shares)

 

 

-

 

 

 

336

 

 

 

-

 

 

 

-

 

 

 

97

 

 

 

433

 

Balance, September 30, 2022

 

$

37,221

 

 

$

51,780

 

 

$

384,207

 

 

$

(12,984

)

 

$

(37,365

)

 

$

422,859

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

* Each common share of stock equals $1 par value; therefore, the number of common shares is the same as the dollar value.

See accompanying notes to unaudited consolidated condensed financial statements.

8


Table of Contents

 

BADGER METER, INC.

Notes to Unaudited Consolidated Condensed Financial Statements

Note 1 Basis of Presentation

In the opinion of management, the accompanying unaudited consolidated condensed financial statements of Badger Meter contain all adjustments (consisting only of normal recurring accruals except as otherwise discussed) necessary to present fairly the Company’s consolidated condensed financial position at September 30, 2022 and December 31, 2021, results of operations, comprehensive income, and statements of shareholders’ equity for the three and nine-month periods ended September 30, 2022 and 2021, and cash flows for the nine-month period ended September 30, 2022 and 2021. The results of operations for any interim period are not necessarily indicative of the results to be expected for the full year.

The preparation of financial statements in conformity with United States generally accepted accounting principles 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. Certain prior year amounts have been reclassified to conform to current year presentation.

Note 2 Additional Financial Information Disclosures

The consolidated condensed balance sheet at December 31, 2021 was derived from amounts included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. Refer to the notes to consolidated financial statements included in that report for a description of the Company’s accounting policies and for additional details of the Company’s financial condition. The details in those notes have not changed except as discussed below and as a result of normal adjustments in the interim.

Cash Equivalents

The Company considers all highly liquid investments with original maturities of ninety days or less to be cash equivalents.

Warranty and After-Sale Costs

The Company estimates and records provisions for warranties and other after-sale costs in the period in which the sale is recorded, based on a lag factor and historical warranty claim experience. After-sale costs represent a variety of activities outside of the written warranty policy, such as investigation of unanticipated problems after the customer has installed the product, or analysis of water quality issues. Changes in the Company’s warranty and after-sale costs reserve are as follows:

 

 

 

Three months ended

 

 

Nine months ended

 

 

 

September 30,

 

 

September 30,

 

(In thousands)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Balance at beginning of period

 

$

10,859

 

 

$

12,965

 

 

$

12,868

 

 

$

11,617

 

Net additions charged to earnings

 

 

1,312

 

 

 

935

 

 

 

3,564

 

 

 

3,667

 

Costs incurred

 

 

(1,802

)

 

 

(1,014

)

 

 

(6,063

)

 

 

(2,398

)

Balance at end of period

 

$

10,369

 

 

$

12,886

 

 

$

10,369

 

 

$

12,886

 

 

Note 3 Accumulated Other Comprehensive (Loss) Income

Components of and changes in accumulated other comprehensive loss at September 30, 2022 are as follows:

 

(In thousands)

 

Unrecognized
pension and
postretirement
 benefits

 

 

Foreign currency

 

 

Total

 

Balance at beginning of period

 

$

394

 

 

$

(258

)

 

$

136

 

Other comprehensive loss before reclassifications

 

 

-

 

 

 

(13,104

)

 

 

(13,104

)

Amounts reclassified from accumulated other comprehensive loss, net of tax of ($5)

 

 

(16

)

 

 

-

 

 

 

(16

)

Net current period other comprehensive loss, net of tax

 

 

(16

)

 

 

(13,104

)

 

 

(13,120

)

Accumulated other comprehensive loss

 

$

378

 

 

$

(13,362

)

 

$

(12,984

)

 

9


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Components of and changes in accumulated other comprehensive income at September 30, 2021 are as follows:

 

(In thousands)

 

Unrecognized
pension and
postretirement
 benefits

 

 

Foreign currency

 

 

Total

 

Balance at beginning of period

 

$

55

 

 

$

1,258

 

 

$

1,313

 

Other comprehensive loss before reclassifications

 

 

-

 

 

 

(155

)

 

 

(155

)

Amounts reclassified from accumulated other comprehensive income, net of tax of ($2)

 

 

9

 

 

 

-

 

 

 

9

 

Net current period other comprehensive loss, net of tax

 

 

9

 

 

 

(155

)

 

 

(146

)

Accumulated other comprehensive income

 

$

64

 

 

$

1,103

 

 

$

1,167

 

 

Details of reclassifications out of accumulated other comprehensive income during the nine months ended September 30, 2022 and 2021 are immaterial.

 

Note 4 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 acquisition did not have a material impact on the Company's consolidated financial statements or the notes thereto.

Effective January 1, 2021, the Company acquired 100% of the outstanding stock of Analytical Technology, LLC (“ATi”), headquartered in Collegeville, Pennsylvania, a provider of water quality monitoring systems.

The total purchase consideration for ATi, net of cash acquired, was $44.0 million. The Company's allocation of the purchase price at December 31, 2021 included $3.9 million of receivables, $3.9 million of inventory, $2.5 million of other assets, $21.0 million of intangibles and $16.4 million of goodwill that is deductible for tax purposes. The intangible assets acquired are primarily customer relationships, developed technology and trademarks with estimated average useful lives of 12 to 15 years. The Company also assumed $1.4 million of accounts payable, $0.6 million of deferred tax liabilities and $1.7 million of other liabilities as part of the acquisition. The 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, 2021, the Company had completed its analysis for estimating the fair value of the assets acquired with no additional adjustments.

Note 5 Contingencies, Litigation and Commitments

In the normal course of business, the Company is named in legal proceedings. There are currently no material legal proceedings pending with respect to the Company.

The Company is subject to contingencies related to environmental laws and regulations. A future change in circumstances with respect to specific matters or with respect to sites formerly or currently owned or operated by the Company, off-site disposal locations used by the Company, and property owned by third parties that is near such sites, could result in future costs to the Company and such amounts could be material. Expenditures for compliance with environmental control provisions and regulations during 2021 and the first nine months of 2022 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 could result in a higher cost of materials, delivery delays, short-term increases in inventory and higher quality control costs in the short term. The Company attempts to mitigate these risks by working closely with key suppliers, purchasing minimal amounts from alternative suppliers and by purchasing business interruption insurance where appropriate.

The Company reevaluates its exposures on a periodic basis and makes adjustments to reserves as appropriate.

Note 6 Income Taxes

The Company is subject to income taxes in the United States and numerous foreign jurisdictions. The Company’s income tax positions are based on interpretations of income tax laws and rulings in each of the jurisdictions that the Company operates. Significant judgment is required in determining the worldwide provision for income taxes and recording the related deferred tax assets and liabilities. The Company’s deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income for the years in which the assets or liabilities are expected to be realized or settled.

10


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Interim provisions are tied to an estimate of the overall annual rate which can vary due to the relationship of foreign and domestic earnings, state taxes and available deductions, credits and discrete items.

The Company’s earnings before incomes taxes, provision for income taxes, and effective income tax rate are as follows:

 

 

 

Three months ended September 30,

 

 

Nine months ended September 30,

 

(In thousands)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Earnings before income taxes

 

$

23,947

 

 

$

19,396

 

 

$

64,810

 

 

$

55,744

 

Provision for income taxes

 

 

6,014

 

 

 

3,541

 

 

 

15,853

 

 

 

12,136

 

Effective income tax rate

 

 

25.1

%

 

 

18.3

%

 

 

24.5

%

 

 

21.8

%

 

Note 7 Fair Value Measurements of Financial Instruments

The Company applies the accounting standards for fair value measurements and disclosures for its financial assets and financial liabilities. The carrying amounts of cash and cash equivalents, receivables and payables in the financial statements approximate their fair values due to the short-term nature of these financial instruments. Included in other assets are insurance policies on various individuals who were previously employed by the Company. The carrying amounts of these insurance policies approximate their fair value.

Note 8 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 that the accompanying financial statements were issued, and has determined that no material subsequent events exist through the date of this filing.

Note 9 Revenue Recognition

Revenue for sales of products and services is derived from contracts with customers. The products and services promised in contracts include the sale of utility water and flow instrumentation products, such as flow meters and radios, quality sensing equipment, 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 2 "Additional Financial Information Disclosures" in the Notes to Unaudited Consolidated Condensed Financial Statements.

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 depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by regional economic factors.

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Table of Contents

 

Information regarding revenues disaggregated by geographic area is as follows:

 

Three months ended

 

 

Nine months ended

 

 

September 30,

 

 

September 30,

 

(In thousands)

2022

 

 

2021

 

 

2022

 

 

2021

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

United States

$

128,434

 

 

$

111,281

 

 

$

362,012

 

 

$

313,326

 

Foreign:

 

 

 

 

 

 

 

 

 

 

 

Asia

 

4,257

 

 

 

3,927

 

 

 

11,384

 

 

 

12,402

 

Canada

 

3,761

 

 

 

3,021

 

 

 

9,669

 

 

 

9,086

 

Europe

 

7,489

 

 

 

7,044

 

 

 

22,842

 

 

 

23,396

 

Mexico

 

1,034

 

 

 

948

 

 

 

2,419

 

 

 

4,025

 

Middle East

 

2,475

 

 

 

1,996

 

 

 

6,258

 

 

 

5,757

 

Other

 

559

 

 

 

521

 

 

 

3,660

 

 

 

1,457

 

Total

$

148,009

 

 

$

128,738

 

 

$

418,244

 

 

$

369,449

 

Information regarding revenues disaggregated by the timing of when goods and services are transferred is as follows:

 

 

Three months ended

 

Nine months ended

 

 

September 30,

 

September 30,

(In thousands)

 

2022

 

2021

 

2022

 

2021

Revenue recognized over time

 

$

9,324

 

6.3%

 

$

7,427

 

5.8%

 

$

25,554

 

6.1%

 

$

21,006

 

5.7%

Revenue recognized at a point in time

 

 

138,685

 

93.7%

 

 

121,311

 

94.2%

 

 

392,690

 

93.9%

 

 

348,443

 

94.3%

Total

 

$

148,009

 

100.0%

 

$

128,738

 

100.0%

 

$

418,244

 

100.0%

 

$

369,449

 

100.0%

The majority of the Company's revenue that is recognized over time relates to the BEACON® software as a service, but also includes training, certain installation and other revenues. The majority of the Company's revenue recognized at a point in time is for the sale of utility 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 shipping.

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 closing balances of the Company's receivables and contract liabilities are as follows:

 

 

 

September 30,
2022

 

 

December 31,
2021

 

(In thousands)

 

 

 

 

 

 

Receivables

 

$

83,491

 

 

$

65,866

 

Contract liabilities

 

 

37,205

 

 

 

30,194

 

Contract liabilities are included in Payables and Other long-term liabilities on the Company’s Consolidated Condensed Balance Sheets. The balance of contract assets was immaterial as the Company did not have a significant amount of uninvoiced receivables in the nine-month period ended September 30, 2022 and twelve-month period ended December 31, 2021.

A performance obligation is a promise to transfer a distinct good or service to the customer. At contract inception, the Company assesses the products and services promised in its contracts with customers. The Company then identifies performance obligations to transfer distinct products or services to the customer. In order to identify performance obligations, the Company considers all of the products or services promised in the contract regardless of whether they are explicitly stated or are implied by customary business practices.

The Company's performance obligations are satisfied at a point in time or over time as work progresses. The majority of the Company's revenue recognized at a point in time is for the sale of utility 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. The majority of the Company's revenue that is recognized over time relates to the BEACON software as a service.

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As of September 30, 2022, the Company had certain contracts with unsatisfied performance obligations. For contracts recorded as contract liabilities, $37.2 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 $3.1 million in 2022, $6.3 million in 2023, $4.8 million in 2024, $4.0 million in 2025, $3.7 million in 2026, $3.3 million in 2027 and $12.0 million thereafter.

 

Note 10 Leases

The Company rents facilities, equipment and vehicles under operating leases, some of which contain renewal options. Upon inception of a rent agreement, the Company determines whether the arrangement contains a lease based on the unique conditions present. Leases that have a term over a year are recognized on the balance sheet as right-of-use assets and lease liabilities. Right-of-use assets are included in Other assets on the Company’s Consolidated Condensed Balance Sheets. Lease liabilities are included in Other current liabilities and Other long-term liabilities on the Company’s Consolidated Condensed Balance Sheets. Information regarding the Company's right-of-use assets and the corresponding lease liabilities are as follows:

 

 

September 30,
2022

 

 

December 31,
2021

 

(In thousands)

 

 

 

 

 

 

Right-of-use assets

 

$

6,907

 

 

$

5,877

 

Lease liabilities

 

 

7,163

 

 

 

6,177

 

The Company’s operating lease agreements have lease and non-lease components that require payments for common area maintenance, property taxes and insurance. The Company has elected to account for both lease and non-lease components as one lease component. The fixed and in-substance fixed consideration in the Company’s rent agreements constitute operating lease expense that is included in the capitalized right-of-use assets and lease liabilities. The variable and short-term lease expense payments are not included in the present value of the right-of use-assets and lease liabilities on the Consolidated Condensed Balance Sheets. The Company’s rent expense is as follows:

 

Three months ended

 

 

Nine months ended

 

 

September 30,

 

 

September 30,

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Operating lease expense

$

819

 

 

$

768

 

 

$

2,517

 

 

$

2,420

 

Variable and short-term lease expense

 

37

 

 

 

38

 

 

 

140

 

 

 

115

 

Rent expense

$

856

 

 

$

806

 

 

$

2,657

 

 

$

2,535

 

The Company records right-of-use assets and lease liabilities based upon the present value of lease payments over the expected lease term. The Company’s lease agreements typically do not have implicit interest rates that are readily determinable. As a result, the Company utilizes an incremental borrowing rate that would be incurred to borrow on a collateralized basis over a similar term in a comparable economic environment. As of September 30, 2022 and December 31, 2021, the remaining lease term on the Company’s leases was 5.3 years. As of September 30, 2022 and December 31, 2021, the discount rate was 5.0%. The future minimum lease payments to be paid under operating leases are as follows:

 

 

September 30,
2022

 

(In thousands)

 

 

 

2022 (remaining three months)

 

$

592

 

2023

 

 

2,341

 

2024

 

 

1,978

 

2025

 

 

1,795

 

2026

 

 

714

 

Thereafter

 

 

801

 

Total future lease payments

 

 

8,221

 

Present value adjustment

 

 

(1,058

)

Present value of future lease payments

 

$

7,163

 

 

13


Table of Contents

 

Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations

BUSINESS DESCRIPTION AND OVERVIEW

With more than a century of water technology innovation, Badger Meter is a global provider of industry leading water solutions encompassing flow measurement, quality and other system parameters. These offerings provide customers with the data and analytics essential to optimize their operations and contribute to the sustainable use and protection of the world’s most precious resource. The Company’s flow measurement products measure water 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 water quality monitoring solutions include optical sensing and electrochemical instruments that provide real-time, on-demand data parameters. The Company’s product lines fall into two categories: sales of water meters, radios, software and related technologies, and water quality monitoring solutions to water utilities (utility water) and sales of meters and other sensing instruments, valves, software and other solutions for industrial applications in water, wastewater, and other industries (flow instrumentation). The Company estimates that over 90% of its products are used in water related applications.

Utility 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 water utilities as the basis for generating their water and wastewater revenues, enabling operating efficiencies and engaging with their end consumers. It further comprises other sensor technology used in the water distribution system to ensure the safe and efficient delivery of clean water. These sensors are used to detect leaks in the distribution piping system and to monitor various water quality parameters throughout the distribution system. The largest geographic market for the Company’s utility 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, static meters are an increasing percentage of the water meters sold by the Company and in the industry, due to a variety of factors, including their ability to maintain measurement accuracy over their useful life. Providing ultrasonic water meter technology, combined with advanced radio technology, provides the Company with the opportunity to sell into other geographical markets, for example the Middle East, Europe and Southeast Asia.

The flow instrumentation product line primarily serves water applications throughout the broader industrial markets. This product line includes meters, valves and other sensing instruments sold worldwide to measure and control the quantity of fluids going through a pipe or pipeline including water, air, steam, 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) and corporate sustainability. 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.

Utility 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 the 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 (ME) for migratable 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.

Information and analytics are critical to the water metering ecosystem. The Company’s BEACON® software suite improves utility visibility to their water and water usage. BEACON 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

14


Table of Contents

 

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. There continues to be a growing trend in the conversion from manually read water meters to meters with radio technology, and for AMR systems to be upgraded to AMI. The Company estimates that approximately 70% of water meters installed in the United States have been converted to some form of radio solution technology.

In addition to our water utility flow measurement solutions, the Company provides various water quality monitoring solutions utilizing optical sensors and electrochemical instruments that measure a variety of parameters including turbidity, pH, chlorine, nitrates and approximately 40 others. Utilizing these solutions, water quality can be monitored continually or periodically throughout the network from its original source to the point in which it is recycled and returned. Real-time water quality parameters enhance the scope of actionable data for water utilities to improve operational security, awareness and efficiency.

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 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 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®, ModMag® 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.

In addition, the Company provides various water quality monitoring solutions utilizing optical sensors and electrochemical instruments that measure a variety of parameters providing industrial customers with both process and discharge water quality monitoring capabilities.

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 utility water products during the spring and summer months. No single customer accounts for more than 10% of the Company's sales.

Long-Term Business Trends

Across the globe, increasing regulations and a focus on sustainability are driving companies and utilities to better manage critical resources like water. 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 including those associated with process and discharge water quality monitoring. The Company provides flow measurement technology to primarily measure water, but also other fluids, gases and steams. This technology is critical to provide baseline usage data and to quantify reductions as customers attempt to reduce consumption. For example, once water usage metrics are better understood, a strategy for water-use reduction can be developed with specific water-reduction initiatives targeted to those areas where it is most viable. With the Company’s technology, customers have found costly leaks, pinpointed equipment in need of repair, and identified areas for process improvements.

Increasingly, customers in the utility water market are interested in more frequent and diverse data collection and the use of water metering and quality analytics to evaluate water distribution activity. Specifically, AMI technology enables water

15


Table of Contents

 

utilities to capture readings from each meter at more frequent and variable intervals. There are more than 50,000 water utilities in the United States and the Company estimates that approximately 70% of their respective connections have converted to a radio solution. The Company believes it is well positioned to meet this continuing conversion trend with its comprehensive radio and software solutions.

In addition, certain water utilities are converting from mechanical to static meters. Ultrasonic water metering maintains a high level of measurement accuracy over the life of the meter, reducing a utility’s non-revenue water. The Company has over a decade of proven reliability in the market with its ultrasonic meters and has recently launched its next generation of ultrasonic metering with its D-Flow technology, which the Company believes increases its competitive differentiation.

For over 117 years, the Company has offered innovative flow metering and control solutions for smart water management, smart buildings and smart industrial processes. The acquisition of s::can and ATi, leading providers of water quality monitoring solutions, adds real-time water quality parameters to the Company's capabilities and enhances the scope of actionable data for our customers to help measure, conserve and protect water. The combined solutions from Badger Meter, s::can and ATi offer technology that measures both the quantity and quality of water.

Finally, the concept of “Smart Cities” is 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 water. Badger Meter is well positioned to benefit from the advancement of Smart Water applications. Cities have a keen interest in Smart Water as it provides both a revenue base, quality monitoring and conservation outcome. With its strong relationship with AT&T, among others, Badger Meter stays abreast of emerging cellular technology changes which the Company believes is the premier infrastructure-free AMI solution.

Current Business Trends

During the first nine months of 2022, customer order rates have remained strong and modestly improving logistics constraints and effective supply chain execution have led to sustained year-over-year sales growth. However, the Company’s ability to fully satisfy the increase in demand for certain products continues to be challenged due to varying component availability and supply chain issues. In addition, cost inflation of materials and other expenses are pervasive. In response, the Company has continued to pursue pricing initiatives to offset inflationary cost pressures where possible. The Company believes the broader market, including its primary competitors, also have experienced lead time extensions, inflation, and pricing dynamics, and therefore does not believe its competitive position has been negatively impacted. While the Company is navigating this dynamic and fluid environment through operational agility to support customers, these disruptions increased the Company’s backlog to record levels and have the potential to increase the unevenness of sales patterns for the remainder of 2022 and 2023.

It remains difficult to estimate the severity and duration of the impact of the ongoing effects of supply chain disruptions and the current inflationary environment on the Company’s business, financial position or results of operations. The magnitude of the impact will be determined by any operational disruptions, including those resulting from delivery interruptions due to component supply availability or global logistics constraints and the overall impact of the economic environment on the Company's business.

Acquisitions

Effective January 1, 2021, the Company acquired 100% of the outstanding stock of ATi, headquartered in Collegeville, Pennsylvania, a provider of water quality monitoring systems.

The total purchase consideration, net of cash acquired, was $44.0 million. The Company's preliminary allocation of the purchase price at December 31, 2021 included $3.9 million of receivables, $3.9 million of inventory, $2.5 million of other assets, $21.0 million of intangibles and $16.4 million of goodwill that is deductible for tax purposes. The intangible assets acquired are primarily customer relationships, developed technology and trademarks with estimated average useful lives of 12 to 15 years. The Company also assumed $1.4 million of accounts payable, $0.6 million of deferred tax liabilities and $1.7 million of other liabilities as part of the acquisition. The 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, 2021, the Company had completed its analysis for estimating the fair value of the assets acquired with no additional adjustments. This acquisition is further described in Note 4 “Acquisitions” in the Notes to Consolidated Financial Statements.

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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 digital 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.

In addition, the Company has expanded its smart water offering with the addition of online water quality monitoring solutions, adding real-time water quality parameters to augment the scope of actionable data for water utility and industrial customers to optimize their operations.

The Company also seeks opportunities for additional revenue enhancement. For instance, the Company has made inroads into the Middle East market with its ultrasonic meter technology and is pursuing other geographic expansion opportunities. Additionally, the Company is periodically asked to oversee and perform field installation of its products for certain customers. In these cases, the Company assumes the role of general contractor and either performs the installation or hires installation subcontractors and supervises their work.

Results of Operations - Three Months Ended September 30, 2022

Net Sales

The Company’s net sales for the three months ended September 30, 2022 were $148.0 million, an increase of 15.0% compared to $128.7 million during the same period in 2021. Excluding the impact of a stronger US dollar, sales increased 16.6%. Sales into the utility water market were $123.1 million, an increase of 17.1% from the prior year’s $105.1 million. The Company’s net sales grew as a result of increased ultrasonic meter, ORION® Cellular endpoint and BEACON® SaaS revenues, as well as ongoing price realization. Sales of products into the global flow instrumentation end markets were $24.9 million compared to the prior year’s $23.6 million, an increase of 5.3%. Flow instrumentation sales increased as a result of strong order demand partially offset by supply chain constraints which limited production.

Earnings

Total operating earnings for the three months ended September 30, 2022 were $23.9 million, or 16.1% of sales, compared to $19.4 million, or 15.1% of sales, in the comparable prior year quarter. Gross margin dollars increased $6.3 million, with gross margin as a percent of sales of 38.9%, a decrease from 39.8% of sales in the prior year comparable quarter. The year-over-year increase in inflationary cost pressures, coupled with production volatility caused by intermittent component delays, tempered gross margins in the current year. Selling, engineering and administration (“SEA”) expenses were $33.7 million or 22.7% of sales compared to $31.7 million or 24.7% of sales in the comparable prior year quarter. The year-over-year improvement in SEA expense leverage is the result of effective spending controls and higher sales.

The provision for income taxes as a percentage of earnings before income taxes for the quarter ended September 30, 2022 was 25.1% compared to 18.3% for the comparable prior year period. The prior year quarter effective tax rate included a discrete income tax benefit related to stock option exercises and restricted stock vesting transactions. Interim provisions are based on an estimate of the overall annual rate that can vary due to state taxes, the relationship of foreign and domestic earnings, and other credits and allowances.

As a result of the above-mentioned items, net earnings for the three months ended September 30, 2022 were $17.9 million, or $0.61 per diluted share, compared to $15.9 million, or $0.54 per diluted share, for the same period in 2021.

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Results of Operations - Nine Months Ended September 30, 2022

Net Sales

The Company’s net sales for the nine months ended September 30, 2022 were $418.2 million, an increase of 13.2%, compared to $369.4 million during the same period in 2021. Excluding the impact of a strong US dollar, sales increased 14.5%. Sales into the utility water market were $347.6 million, an increase of 15.5% from the prior year’s $301.0 million. The Company’s net sales grew as a result of increased ultrasonic meter, ORION® Cellular endpoint and BEACON® SaaS revenues, as well as ongoing price realization. Sales of products into the global flow instrumentation end markets were $70.6 million compared to the prior year’s $68.4 million, an increase of 3.2%. Flow instrumentation sales increased due to strong demand across the majority of end-markets and applications, offset by supply chain constraints.

Earnings

Total operating earnings for the nine months ended September 30, 2022 were $64.8 million, or 15.5% of sales, compared to $55.9 million, or 15.1% of sales, in the comparable prior year period. Gross margin dollars increased $12.4 million, with gross margin as a percent of sales of 39.0%, a decrease from 40.8% of sales in the prior year comparable period. As expected, inflationary pressures were seen across nearly all elements of the cost structure, which was partially offset by successful pricing actions and increased production volumes. SEA expenses were $98.2 million or 23.5% of sales compared to $94.8 million or 25.7% of sales in the comparable prior year period. The year-over-year improvement in SEA expense leverage is the result of effective spending controls and higher sales.

The provision for income taxes as a percentage of earnings before income taxes for the nine months ended September 30, 2022 was 24.5% compared to 21.8% for the comparable prior year period. Interim provisions are based on an estimate of the overall annual rate that can vary due to state taxes, the relationship of foreign and domestic earnings, and other credits and allowances.

As a result of the above-mentioned items, net earnings for the nine months ended September 30, 2022 were $49.0 million, or $1.67 per diluted share, compared to $43.6 million, or $1.49 per diluted share, for the same period in 2021.

 

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

The Company uses primary working capital (“PWC”) as a percentage of sales as a key metric for working capital efficiency. The Company defines this metric as the sum of Receivables and Inventories less Payables, divided by trailing twelve-month net sales. The following table shows the components of our PWC:

 

 

 

September 30, 2022

 

December 31, 2021

(In thousands)

 

$

 

 

PWC%

 

$

 

 

PWC%

Receivables

 

$

83,491

 

 

15.1%

 

$

65,866

 

 

13.1%

Inventories

 

 

113,608

 

 

20.5%

 

 

99,611

 

 

19.7%

Payables

 

 

(65,462

)

 

-11.8%

 

 

(41,859

)

 

-8.3%

Primary Working Capital

 

$

131,637

 

 

23.8%

 

$

123,618

 

 

24.5%

 

Overall, PWC increased $8.0 million compared to the previous year-end. Receivables at September 30, 2022 increased $17.6 million due to higher sales activity and shipment pacing in the quarter. Inventories increased $14.0 million due to component cost inflation and higher safety stock levels associated with varied component shortages. Payables at September 30, 2022 were $23.6 million higher than year-end due to inflationary increases, the increased inventory balance and the timing of payments relative to quarter end.

Cash Provided by Operations

Cash provided by operations in the first nine months of 2022 was $52.7 million compared to $62.8 million in the same period of 2021. Strong earnings drove solid cash generation in both years. The year-over-year decline in operating cash flow was due primarily to higher working capital to support increased order activity, and the impact of ongoing supply chain

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challenges to the timing of shipments between years. Additionally, management incentive payouts negatively impacted cash from operations between years.

Property, plant and equipment expenditures for the first nine months of 2022 were $4.7 million compared to $5.8 million in the comparable prior year period.

Cash and cash equivalents increased to $114.8 million from $87.2 million at December 31, 2021, the result of cash provided by operations offset by the quarterly dividend payments.

In July 2021, the Company entered into a new credit agreement, replacing its prior facility. The credit agreement includes a $150.0 million multi-currency line of credit that supports commercial paper (up to $100.0 million). The facility includes several features that enhance the Company’s financial flexibility including an increase feature, acquisition holiday, and favorable financial covenants. The Company was in compliance with all covenants as of September 30, 2022. 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 had $156.1 million of unused credit lines available at September 30, 2022.

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 2021 and the first three quarters of 2022 were not material.

See the “Special Note Regarding Forward Looking Statements” at the front of this Quarterly Report on Form 10-Q and Part I, Item 1A “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 for a discussion of risks and uncertainties that could impact the Company’s financial performance and results of operations.

Contractual Obligations

The Company’s contractual obligations are discussed in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the heading “Contractual Obligations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 and have not materially changed since that report was filed unless otherwise indicated in this Quarterly Report on Form 10-Q.

Item 3 Quantitative and Qualitative Disclosures about Market Risk

The Company’s quantitative and qualitative disclosures about market risk are included in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the heading “Market Risks” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 and have not materially changed since that report was filed.

Item 4 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”), the Company’s management evaluated, with the participation of the Company’s Chairman, President and Chief Executive Officer and the Company’s Senior Vice President - Chief Financial Officer, the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the quarter ended September 30, 2022. Based upon their evaluation of these disclosure controls and procedures, the Company’s Chairman, President and Chief Executive Officer and the Company’s Senior Vice President – Chief Financial Officer concluded that, as of the date of such evaluation, the Company’s disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

There was no change in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2022 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Part II – Other Information

 

Item 1A Risk Factors

 

There have been no material changes from the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

 

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds

 

In February 2020, the Board of Directors authorized the repurchase of up to an additional 400,000 shares of the Company’s Common Stock through February 2023. The following table provides information about the Company's purchases during the quarter ended September 30, 2022 of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act.

 

 

 

Total number
of shares
purchased

 

 

Average price
paid per share

 

 

Total number
of shares
purchased as
part of a
publicly
announced
program

 

 

Maximum
number of
shares that
may yet be
purchased
under the
program

 

July 1, 2022 - July 31, 2022

 

 

-

 

 

$

-

 

 

 

-

 

 

 

339,678

 

August 1, 2022 - August 31, 2022

 

 

-

 

 

$

-

 

 

 

-

 

 

 

339,678

 

September 1, 2022 - September 30, 2022

 

 

-

 

 

$

-

 

 

 

-

 

 

 

339,678

 

Total as of September 30, 2022

 

 

-

 

 

 

 

 

 

-

 

 

 

339,678

 

 

Item 6 Exhibits

EXHIBIT INDEX

 

Exhibit No.

 

Description

 

 

 

 

 

 

 

 

 

31.1

 

Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

31.2

 

Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

32

 

Certification of Periodic Financial Report by the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

101

 

The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2022 formatted in Inline Extensible Business Reporting Language (iXBRL): (i) the Consolidated Condensed Balance Sheets, (ii) the Consolidated Condensed Statements of Operations, (iii) the Consolidated Condensed Statements of Comprehensive Income, (iv) the Consolidated Condensed Statements of Cash Flows, (v) the Consolidated Condensed Statements of Shareholders’ Equity and (vi) Notes to Unaudited Consolidated Condensed Financial Statements, tagged as blocks of text and including detailed tags.

 

 

 

104

 

Cover Page Interactive Data File (formatted as iXBRL and contained in Exhibit 101).

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

BADGER METER, INC.

 

 

 

 

 

Dated: October 25, 2022

 

By

 

/s/ Kenneth C. Bockhorst

 

 

 

 

Kenneth C. Bockhorst

 

 

 

 

Chairman, President and Chief Executive Officer

 

 

 

 

 

 

 

By

 

/s/ Robert A. Wrocklage

 

 

 

 

Robert A. Wrocklage

 

 

 

 

Senior Vice President – Chief Financial Officer

 

 

 

 

 

 

 

By

 

/s/ Daniel R. Weltzien

 

 

 

 

Daniel R. Weltzien

 

 

 

 

Vice President – Controller

 

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