UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
For the quarterly period ended
or
For the transition period from to
Commission File No.
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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(Address of principal executive offices) |
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(Registrant’s telephone number, including area code) |
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Securities registered pursuant to Section 12(b) of the Act:
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.
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Smaller reporting company |
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Accelerated filer |
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Emerging growth company |
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Non‑accelerated filer |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As of October 10, 2024 there were
BADGER METER, INC.
Quarterly Report on Form 10-Q for the Period Ended September 30, 2024
Index
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Item 1 |
4 |
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Consolidated Condensed Balance Sheets - September 30, 2024 and December 31, 2023 |
4 |
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5 |
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6 |
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Consolidated Condensed Statements of Cash Flows - Nine Months Ended September 30, 2024 and 2023 |
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8 |
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Notes to Unaudited Consolidated Condensed Financial Statements |
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Item 2 |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3 |
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Item 4 |
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Item 1A |
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Item 2 |
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Item 5 |
21 |
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Item 6 |
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22 |
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2
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, 2023 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
Part I – Financial Information
Item 1 Financial Statements
BADGER METER, INC.
Consolidated Condensed Balance Sheets
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September 30, |
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December 31, |
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(Unaudited) |
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(In thousands) |
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2024 |
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2023 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Receivables |
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Inventories: |
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Finished goods |
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Work in process |
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Raw materials |
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Total inventories |
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Prepaid expenses and other current assets |
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Total current assets |
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Property, plant and equipment, at cost |
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Less accumulated depreciation |
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Net property, plant and equipment |
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Intangible assets, at cost less accumulated amortization |
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Other assets |
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Deferred income taxes |
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Goodwill |
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Total assets |
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$ |
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$ |
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Liabilities and shareholders’ equity |
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Current liabilities: |
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Payables |
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$ |
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$ |
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Accrued compensation and employee benefits |
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Warranty and after-sale costs |
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Other current liabilities |
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Total current liabilities |
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Long-term deferred revenue |
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Deferred income taxes |
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Accrued non-pension postretirement benefits |
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Other accrued employee benefits |
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Other long-term liabilities |
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(Note 5) |
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Shareholders’ equity: |
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Common stock, $ |
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Capital in excess of par value |
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Reinvested earnings |
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Accumulated other comprehensive loss |
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( |
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Less: Treasury stock, at cost, |
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( |
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( |
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Total shareholders’ equity |
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Total liabilities and shareholders’ equity |
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$ |
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$ |
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See accompanying notes to unaudited consolidated condensed financial statements.
4
BADGER METER, INC.
Consolidated Condensed Statements of Operations
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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(Unaudited) |
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(Unaudited) |
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(In thousands except share and per share amounts) |
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2024 |
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2023 |
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2024 |
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2023 |
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Net sales |
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$ |
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$ |
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$ |
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$ |
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Cost of sales |
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Gross margin |
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Selling, engineering and administration |
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Operating earnings |
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Interest income, net |
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Other pension and postretirement costs |
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Earnings before income taxes |
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Provision for income taxes |
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Net earnings |
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$ |
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$ |
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$ |
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$ |
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Earnings per share: |
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Basic |
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$ |
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$ |
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$ |
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$ |
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Diluted |
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$ |
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$ |
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$ |
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$ |
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Dividends declared per common share |
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$ |
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$ |
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$ |
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$ |
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Shares used in computation of earnings per share: |
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Basic |
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Impact of dilutive securities |
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Diluted |
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See accompanying notes to unaudited consolidated condensed financial statements.
5
BADGER METER, INC.
Consolidated Condensed Statements of Comprehensive Income
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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(Unaudited) |
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(Unaudited) |
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(In thousands) |
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2024 |
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2023 |
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2024 |
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2023 |
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Net earnings |
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$ |
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$ |
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$ |
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$ |
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Other comprehensive income (loss): |
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Foreign currency translation adjustments |
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( |
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Pension and postretirement benefits, net of tax |
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( |
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( |
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( |
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( |
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Comprehensive income |
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$ |
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$ |
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$ |
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$ |
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See accompanying notes to unaudited consolidated condensed financial statements.
6
BADGER METER, INC.
Consolidated Condensed Statements of Cash Flows
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Nine Months Ended September 30, |
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(Unaudited) |
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2024 |
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2023 |
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Operating activities: |
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Net earnings |
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$ |
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$ |
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Adjustments to reconcile net earnings to net cash provided by operations: |
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Depreciation |
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Amortization |
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Deferred income taxes |
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( |
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Noncurrent employee benefits |
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( |
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( |
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Stock-based compensation expense |
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Changes in: |
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Receivables |
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( |
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( |
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Inventories |
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( |
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( |
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Payables |
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( |
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Prepaid expenses and other assets |
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( |
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( |
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Other liabilities |
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Total adjustments |
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Net cash provided by operations |
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Investing activities: |
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Property, plant and equipment expenditures |
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( |
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( |
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Acquisitions, net of cash acquired |
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( |
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( |
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Net cash used for investing activities |
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( |
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( |
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Financing activities: |
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Dividends paid |
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( |
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Proceeds from exercise of stock options |
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Net cash used for financing activities |
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( |
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( |
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Effect of foreign exchange rates on cash |
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( |
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Increase in cash and cash equivalents |
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Cash and cash equivalents – beginning of period |
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Cash and cash equivalents – end of period |
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$ |
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$ |
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See accompanying notes to unaudited consolidated condensed financial statements.
7
BADGER METER, INC.
Consolidated Condensed Statements of Shareholders’ Equity
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Quarter and year-to-date ended September 30, |
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Common |
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Capital in |
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Reinvested |
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Accumulated |
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Treasury |
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Total |
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(Unaudited) |
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(In thousands except share and per share amounts) |
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Balance, June 30, 2023 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
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Net earnings |
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- |
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- |
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- |
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- |
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Pension and postretirement benefits |
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- |
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- |
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- |
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( |
) |
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- |
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( |
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Foreign currency translation |
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- |
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- |
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- |
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( |
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- |
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( |
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Cash dividends of $ |
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- |
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- |
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( |
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- |
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- |
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( |
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Stock options exercised |
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- |
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- |
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- |
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Stock-based compensation |
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- |
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- |
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- |
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- |
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Issuance of treasury stock (< |
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- |
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( |
) |
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- |
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- |
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- |
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Balance, September 30, 2023 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
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$ |
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Balance, December 31, 2022 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
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$ |
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Net earnings |
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- |
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- |
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- |
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- |
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Pension and postretirement benefits |
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- |
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- |
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- |
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( |
) |
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- |
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( |
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Foreign currency translation |
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- |
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- |
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- |
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( |
) |
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- |
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( |
) |
Cash dividends of $ |
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- |
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- |
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( |
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- |
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- |
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( |
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Stock options exercised |
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- |
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- |
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- |
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Stock-based compensation |
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- |
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- |
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- |
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- |
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Issuance of treasury stock ( |
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- |
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( |
) |
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- |
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- |
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Balance, September 30, 2023 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
) |
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$ |
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||||||
Balance, June 30, 2024 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
) |
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$ |
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Net earnings |
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- |
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- |
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- |
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- |
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||
Pension and postretirement benefits |
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- |
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- |
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- |
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( |
) |
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- |
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( |
) |
Foreign currency translation |
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- |
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- |
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- |
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- |
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Cash dividends of $ |
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- |
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- |
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( |
) |
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- |
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- |
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( |
) |
Stock-based compensation |
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- |
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- |
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- |
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- |
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Issuance of treasury stock ( |
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- |
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- |
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- |
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( |
) |
|
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- |
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|
Balance, September 30, 2024 |
|
$ |
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$ |
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$ |
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|
$ |
( |
) |
|
$ |
( |
) |
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$ |
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||||
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||||||
Balance, December 31, 2023 |
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$ |
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|
$ |
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$ |
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$ |
( |
) |
|
$ |
( |
) |
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$ |
|
||||
Net earnings |
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- |
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- |
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- |
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- |
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||
Pension and postretirement benefits |
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- |
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- |
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- |
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( |
) |
|
|
- |
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( |
) |
Foreign currency translation |
|
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- |
|
|
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- |
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- |
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- |
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|
||
Cash dividends of $ |
|
|
- |
|
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|
- |
|
|
|
( |
) |
|
|
- |
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|
- |
|
|
|
( |
) |
Stock options exercised |
|
|
- |
|
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|
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|
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- |
|
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- |
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|
|||
Stock-based compensation |
|
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- |
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- |
|
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|
- |
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- |
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||
Issuance of treasury stock ( |
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- |
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( |
) |
|
|
- |
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|
- |
|
|
|
|
|
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- |
|
|
Balance, September 30, 2024 |
|
$ |
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|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
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$ |
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||||
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*
See accompanying notes to unaudited consolidated condensed financial statements.
8
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, 2024 and December 31, 2023, results of operations, comprehensive income, and statements of shareholders’ equity for the three and nine-month periods ended September 30, 2024 and 2023, and cash flows for the nine-month period ended September 30, 2024 and 2023. 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.
Recently Adopted Accounting Pronouncements
In November 2023, the FASB issued ASU No. 2023-07, "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures," which requires enhanced disclosures on segment expenses, interim segment disclosures, and requirements for entities operating under a single segment. The guidance is effective on a retrospective basis for fiscal years beginning after December 15, 2023 and interim periods beginning after January 1, 2025, early adoption is permitted. The Company is currently assessing the impact of this proposed change on its consolidated financial statements.
In December 2023, the FASB issued ASU No. 2023-09, "Income Taxes (Topic 740): Improvements to Income Tax Disclosures," which requires additional disclosure associated with the effective tax rate reconciliation and payment of income taxes. The guidance is effective for fiscal years beginning after December 15, 2025 and will be applied on a prospective basis with the option to apply the standard retrospectively. The Company is currently assessing the impact of this proposed change on its consolidated financial statements.
Note 2 Additional Financial Information Disclosures
The consolidated condensed balance sheet at December 31, 2023 was derived from amounts included in the Company's Annual Report on Form 10-K for the year ended December 31, 2023. 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.
|
|
Three months ended |
|
|
Nine months ended |
|
||||||||||
|
|
September 30, |
|
|
September 30, |
|
||||||||||
(In thousands) |
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Balance at beginning of period |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Net additions charged to earnings |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Costs incurred |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Balance at end of period |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
9
Note 3 Accumulated Other Comprehensive Loss
Components of and changes in accumulated other comprehensive loss at September 30, 2024 are as follows:
(In thousands) |
|
Unrecognized |
|
|
Foreign currency |
|
|
Total |
|
|||
Balance at beginning of period |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
Other comprehensive income before reclassifications |
|
|
|
|
|
|
|
|
|
|||
Amounts reclassified from accumulated other comprehensive loss, net of tax of $ |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Net current period other comprehensive loss, net of tax |
|
|
( |
) |
|
|
|
|
|
|
||
Accumulated other comprehensive loss |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
Components of and changes in accumulated other comprehensive loss at September 30, 2023 are as follows:
(In thousands) |
|
Unrecognized |
|
|
Foreign currency |
|
|
Total |
|
|||
Balance at beginning of period |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
Other comprehensive loss before reclassifications |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Amounts reclassified from accumulated other comprehensive loss, net of tax of ($ |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Net current period other comprehensive loss, net of tax |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Accumulated other comprehensive loss |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
Details of reclassifications out of accumulated other comprehensive income during the nine months ended September 30, 2024 and 2023 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 acquisitions did not have a material impact on the Company's consolidated financial statements or the notes thereto.
Effective
The preliminary allocation of purchase price to the assets acquired was based upon the estimated fair values at the date of acquisition. As of September 30, 2024, the Company has not completed its analysis for estimating the fair value of the assets acquired.
Effective
The total purchase consideration for Syrinix, net of cash acquired, was $
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.
10
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 2023 and the first nine months of 2024 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. 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) |
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Earnings before income taxes |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Provision for income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Effective income tax rate |
|
|
% |
|
|
% |
|
|
% |
|
|
% |
||||
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.
11
Note 8 Subsequent Events
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 measurement hardware, communication devices, data and analytics software 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.
Information regarding revenues disaggregated by geographic area is as follows:
|
Three months ended |
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|
Nine months ended |
|
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|
September 30, |
|
|
September 30, |
|
||||||||||
(In thousands) |
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Revenues: |
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|
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|
||||
United States |
$ |
|
|
$ |
|
|
$ |
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$ |
|
||||
Foreign: |
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Asia |
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Canada |
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Europe |
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Mexico |
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Middle East |
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Other |
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Total |
$ |
|
|
$ |
|
|
$ |
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$ |
|
||||
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Three months ended |
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Nine months ended |
||||||||||||||||
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September 30, |
|
September 30, |
||||||||||||||||
(In thousands) |
|
2024 |
|
2023 |
|
2024 |
|
2023 |
||||||||||||
Revenue recognized over time |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||||
Revenue recognized at a point in time |
|
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||||||||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||||
The majority of the Company's revenue that is recognized over time relates to the BEACON® software as a service ("SaaS"), 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
12
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 Company's receivables and contract liabilities are as follows:
|
|
September 30, |
|
|
December 31, |
|
||
(In thousands) |
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Receivables |
|
$ |
|
|
$ |
|
||
Contract liabilities |
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|
||
Contract liabilities are included in payables and long-term deferred revenue 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 as of September 30, 2024 and December 31, 2023.
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 SaaS.
As of September 30, 2024, the Company had certain contracts with unsatisfied performance obligations. For contracts recorded as contract liabilities, $
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, |
|
|
December 31, |
|
||
(In thousands) |
|
|
|
|
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|
||
|
$ |
|
|
$ |
|
|||
|
|
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|
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|
|||
13
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, |
|
||||||||||
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
||||
Operating lease expense |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Variable and short-term lease expense |
|
|
|
|
|
|
|
|
|
|
|
||||
Rent expense |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
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, 2024 and December 31, 2023, the remaining lease term on the Company's leases was
|
|
September 30, |
|
|
(In thousands) |
|
|
|
|
2024 (remaining three months) |
|
$ |
|
|
2025 |
|
|
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|
2026 |
|
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2027 |
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|
2028 |
|
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|
Thereafter |
|
|
|
|
Total future lease payments |
|
|
|
|
Present value adjustment |
|
|
( |
) |
Present value of future lease payments |
|
$ |
|
|
14
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 management solutions, with nearly 95% of net sales derived from water-related applications. These tailorable solutions encompass smart measurement hardware, reliable communications, data and analytics software as well as ongoing support and expertise essential to optimize customers' operations and contribute to the sustainable use and protection of the world’s most precious resource.
The Company’s smart measurement hardware is primarily comprised of the following product families:
• meters that measure the flow of water and other fluids and are known for accuracy, long-lasting durability and for providing valuable and timely flow measurement data.
• water quality monitoring solutions, including optical sensing and electrochemical instruments that provide real-time, on-demand data parameters.
• high frequency pressure and acoustic leak detection hardware that provides real-time monitoring data.
The Company’s broad range of communication solutions include the ORION® branded family of radio endpoints, providing customers with a choice of industry-leading options for communicating data from hardware into usable applications.
The Company’s hardware-enabled software provides the insights and analytics critical to the holistic management of our customers’ water systems. These digital solutions increase visibility, empowering customers to monitor system performance and make decisions aiding efficiency, resiliency, and sustainability.
The Company also provides training, project management, technical support and other collaborative services for customers.
The Company’s solutions fall into two product lines: sales of meters, water quality sensors and other hardware, communication, and software and related technologies, to water utilities (utility water) and sales of meters, other sensing instruments, valves, software and other solutions to commercial and industrial customers, including water related applications (flow instrumentation).
Utility Water Product Line (approximately 85% of Net Sales in fiscal 2023)
Utility water smart metering solutions are comprised of 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. This product line further comprises other instruments and sensors used in the water distribution system to ensure the safe and efficient delivery of clean water. These sensors are used to detect leaks and to monitor various water quality parameters throughout the distribution system. The largest geographic market in which the Company operates is North America, primarily the United States. The majority of water meters sold are mechanical in nature, with increasing adoption over time of ultrasonic (static) metering technology due to a variety of attributes, including their ability to maintain measurement accuracy over their useful life.
Utility water meters (both residential and commercial sizes) 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 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. Among other benefits, AMI systems eliminate the need for utility personnel to drive through service territories to collect data from the meters and provide utilities with more frequent and diverse data from their meters at specified intervals.
The ORION® family of endpoints offers water utilities a choice of industry-leading options for communicating meter reading and event data. ORION Cellular endpoints power our Network as a Service (NaaS) approach to AMI, eliminating the
15
need for the utility to install or maintain infrastructure, enabling rapid or gradual deployment, and enhancing network reliability. ORION mobile read endpoints support customers looking to deploy an AMR solution.
Information and analytics are critical to the smart water ecosystem. The Company’s BEACON® SaaS, amongst others, 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 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 technologies comprise the majority of smart water product sales, including radio products. To a much lesser extent, housing starts also contribute to sales annually. The industry continues to undergo a conversion from manually read water meters to meters with radio technology, and for AMR systems to be upgraded to digital AMI solutions. The Company estimates that approximately one-third of water meters installed in the United States have been converted to AMI systems.
In addition, the Company provides various other hardware, instruments and sensors, and related software, to enhance the scope and breadth of connected data valuable to a water utility's operation. This includes 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. It also includes high frequency pressure and leak detection sensors that provide real-time alarms and event location triangulation to aid operators in responding to burst pipe and other leak events quickly, reducing water loss and system downtime. The data and insights collected from these additional operational sensors are often conveyed by cellular networks and can be leveraged alongside of the metering data within BEACON to unlock powerful insights about the operations of a customer's distribution network.
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 coupled with radio technology, software, water quality monitoring and on ultrasonic compared to mechanical meters.
Flow Instrumentation Product Line (approximately 15% of Net Sales in fiscal 2023)
The flow instrumentation product line primarily serves water applications throughout the broader industrial market, with both standard and customized solutions. These solutions include meters, valves and other sensing instruments sold worldwide to measure and control the quantity of fluids, including water, air, steam, and other liquids and gases. These products, oftentimes leveraging the same technologies used in utility water, 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 through manufacturers’ representatives and original equipment manufacturers as the primary flow measurement device within a product or system. Specialized communication protocols that control the entire flow measurement process and mandatory certifications drive these markets.
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 and water quality monitoring in wastewater treatment, industrial process, building automation and precision engineering applications where flow measurement, quality and control are critical.
The Company offers one of the broadest flow measurement, control and communication portfolios in the market. 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.
Long-Term Business Trends
Across the globe significant infrastructure investment needs, aging workforce, increasing regulations and a focus on climate-change and 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 critical to providing baseline usage data and to quantify reductions as customers attempt to reduce consumption. For example, once
16
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, pressure and quality analytics to evaluate water distribution activity. Specifically, AMI technology enables water utilities to capture readings from each meter at more frequent and variable intervals. There are more than 50,000 water utilities in the United States and the Company estimates that approximately one-third of their respective connections have converted to an AMI radio solution. The Company believes it is well positioned to meet the continuing conversion trends to AMI 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.
As noted above, customers are increasingly looking for more frequent and diverse data to holistically manage their water networks. As a leading provider of water quality and pressure management monitoring solutions, we are able to meet these needs and enhance the scope of actionable data for customers to help measure, conserve and protect water.
Together, our tailorable smart water solutions provide actionable information through data analytics derived 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 adoption of smart water solutions. With strong relationships with telecommunication providers such as AT&T and Verizon (among others), we stay abreast of emerging cellular technology changes to provide the premier infrastructure-free AMI solution.
Acquisitions
Effective January 1, 2024, the Company acquired select remote water monitoring hardware and software, inclusive of the Telog® product line and Unity Remote Monitoring software as a service (the "Telog/Unity Assets). The total purchase consideration for the Telog/Unity Assets was $3.0 million in cash.
Effective January 1, 2023, the Company acquired 100% of the outstanding stock of Syrinix Ltd. ("Syrinix"), headquartered in the United Kingdom, a provider of high-frequency pressure monitoring and leak detection solutions.
The total purchase consideration for Syrinix, net of cash acquired, was $17.1 million. The Company's allocation of the purchase price at December 31, 2023 included $0.6 million of receivables, $0.7 million of inventories, $2.1 million of other assets, $7.7 million of intangible assets and $10.3 million of goodwill. The intangible assets acquired were primarily developed technology, customer relationships and trademarks with estimated average useful lives of 13 to 15 years. The Company also assumed $1.9 million of payables, $2.0 million of deferred income taxes and $0.4 million of other liabilities as part of the acquisition.
Revenue and Product Mix
As the industry continues to evolve, the Company has been at the forefront of innovation across measurement hardware (metering, water quality, pressure sensors, etc.), radio and software technologies in order to meet its customers’ increasing expectations for accurate and actionable data and insights. As technologies such as ORION Cellular and BEACON digital solutions have become more widely adopted, the Company’s revenue from SaaS has increased significantly, and is margin accretive.
The Company also seeks opportunities for additional revenue enhancement. For instance, the Company has made inroads into select regional markets outside the US such as the Middle East, UK and others with its tailorable smart water solutions portfolio. The Company is periodically asked to oversee and supervise field installation of its products and provide training and other services for certain customers. Strategic mergers and acquisitions are another avenue for profitable sales growth.
17
Results of Operations - Three Months Ended September 30, 2024
Net Sales
The Company's net sales for the three months ended September 30, 2024 were $208.4 million, an increase of 11.9% compared to $186.2 million during the same period in 2023. Sales into the utility water market were $183.0 million, an increase of 13.8% from the prior year’s $160.8 million. The Company's net sales grew as a result of increased smart water solutions including higher sales across various hardware, communication and BEACON SaaS solutions. Sales of products into the flow instrumentation end markets were $25.4 million in the third quarter of 2024 and 2023. Flow instrumentation sales were flat on steady order demand within the water-focused end markets, generally offset by declines across de-emphasized applications.
Earnings
Total operating earnings for the three months ended September 30, 2024 were $40.6 million, or 19.5% of sales, compared to $31.4 million, or 16.9% of sales, in the comparable prior year quarter. Gross margin dollars increased $11.2 million, with gross margin as a percent of sales of 40.2%, an increase from 39.1% of sales in the prior year comparable quarter. Gross margin improvement in the current year was driven by positive sales mix, including strong AMI and software-related sales, as well as ongoing price/cost benefit and operating execution. Selling, engineering and administration (“SEA”) expenses were $43.3 million or 20.8% of sales compared to $41.3 million or 22.2% of sales in the comparable prior year quarter. The increase in spending primarily relates to higher personnel-related investments, while the year-over-year improvement in SEA expense leverage was 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, 2024 was 25.3% compared to 20.3% 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, 2024 were $32.0 million, or $1.08 per diluted share, compared to $26.0 million, or $0.88 per diluted share, for the same period in 2023.
Results of Operations - Nine Months Ended September 30, 2024
Net Sales
The Company's net sales for the nine months ended September 30, 2024 were $621.4 million, an increase of 19.2%, compared to $521.2 million during the same period in 2023. Sales into the utility water market were $543.7 million, an increase of 22.5% from the prior year’s $443.9 million. Utility water net sales grew as a result of increased adoption of smart water technologies, notably AMI. Sales increased across meters, both mechanical and ultrasonic, as well as increased ORION Cellular endpoints and BEACON SaaS revenues. Sales of products into the global flow instrumentation end markets were $77.7 million compared to the prior year’s $77.3 million, an increase of 0.5%.
Earnings
Total operating earnings for the nine months ended September 30, 2024 were $118.7 million, or 19.1% of sales, compared to $86.0 million, or 16.5% of sales, in the comparable prior year period. Gross margin dollars increased $41.5 million, with gross margin as a percent of sales of 39.7%, an increase from 39.3% of sales in the prior year comparable period. Gross margin improvement was the result of increased sales volume and favorable structural product mix. SEA expenses were $127.7 million or 20.6% of sales compared to $119.0 million or 22.8% of sales in the comparable prior year period. The year-over-year improvement in SEA expense leverage was 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, 2024 was 24.2% compared to 23.3% 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.
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As a result of the above-mentioned items, net earnings for the nine months ended September 30, 2024 were $94.2 million, or $3.19 per diluted share, compared to $67.9 million, or $2.30 per diluted share, for the same period in 2023.
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, 2024 |
|
December 31, 2023 |
||||||||
(In thousands) |
|
$ |
|
|
PWC% |
|
$ |
|
|
PWC% |
||
Receivables |
|
$ |
93,427 |
|
|
11.6% |
|
$ |
83,507 |
|
|
11.9% |
Inventories |
|
|
158,517 |
|
|
19.7% |
|
|
153,674 |
|
|
21.8% |
Payables |
|
|
(77,381 |
) |
|
-9.6% |
|
|
(81,807 |
) |
|
-11.6% |
Primary Working Capital |
|
$ |
174,563 |
|
|
21.7% |
|
$ |
155,374 |
|
|
22.1% |
Overall, PWC increased $19.2 million compared to the previous year-end. Receivables at September 30, 2024 increased $9.9 million due to higher sales activity. Inventories increased $4.8 million due to component cost inflation, higher safety stock levels and increased sales activity. Payables at September 30, 2024 were $4.5 million less than year-end due primarily to a stabilizing inventory balance and timing of payments relative to quarter-end.
Cash Provided by Operations
Cash provided by operations in the first nine months of 2024 was $103.0 million compared to $72.2 million in the same period of 2023. Higher net earnings and favorable working capital trends contributed to the increase in cash provided by operations compared to the same period in 2023.
Property, plant and equipment expenditures for the first nine months of 2024 were $8.1 million compared to $9.9 million in the comparable prior year period.
Cash and cash equivalents increased to $259.0 million from $191.8 million at December 31, 2023, the result of the $103.0 million cash provided by operations, offset by the $3.0 million deployed to acquire the Telog/Unity net assets and payment of quarterly dividends.
The Company's credit facility 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, 2024. 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 $154.5 million of unused credit lines available at September 30, 2024.
Other Matters
On March 6, 2024, the SEC adopted final rules to enhance disclosures pertaining to climate related risks and associated board and management governance of such risks. On April 4, 2024, the SEC voluntarily stayed implementation of the rules pending the completion of judicial review of consolidated legal challenges to the rules by the United States Court of Appeals for the Eighth Circuit. If the rules go effective as currently contemplated, disclosures will be made prospectively, with phased-in effective dates starting with fiscal years beginning on or after January 1, 2025, subject to any additional regulatory or judicial delays. Other governing bodies have passed or are considering passing related legislature requiring certain environmental, social and governance disclosures. The Company is currently assessing the impact of these changes to its consolidated financial statements.
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
19
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 2023 and the first three quarters of 2024 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, 2023 and Part II, Item 1A "Risk Factors" in this Quarterly Report on Form 10-Q for a discussion of risks and uncertainties that could impact the Company's financial performance and results of operations.
Off-Balance Sheet Arrangements and Contractual Obligations
The Company's off-balance sheet arrangements and contractual obligations are discussed in Part II, Item 7 "Management’s Discussion and Analysis of Financial Condition and Results of Operations" under the headings "Off-Balance Sheet Arrangements" and "Contractual Obligations" in the Company's Annual Report on Form 10-K for the year ended December 31, 2023 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, 2023 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, 2024. 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, 2024 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
20
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, 2023.
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
In February 2023, the Board authorized the repurchase of up to 200,000 shares of the Company's Common Stock through February 2026. The following table provides information about the Company's purchases under this repurchase program during the quarter ended September 30, 2024 of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act.
|
|
Total number |
|
|
Average price |
|
|
Total number |
|
|
Maximum |
|
||||
July 1, 2024 - July 31, 2024 |
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
|
200,000 |
|
August 1, 2024 - August 31, 2024 |
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
|
200,000 |
|
September 1, 2024 - September 30, 2024 |
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
|
200,000 |
|
Total as of September 30, 2024 |
|
|
- |
|
|
|
|
|
|
- |
|
|
|
200,000 |
|
|
Item 5 Other Information
During the third quarter of 2024, none of our directors or executive officers
Item 6 Exhibits
EXHIBIT INDEX
Exhibit No. |
|
Description |
|
|
|
31.1 |
|
|
|
|
|
31.2 |
|
|
|
|
|
32 |
|
|
|
|
|
101 |
|
The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2024 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, (vi) Notes to Unaudited Consolidated Condensed Financial Statements, tagged as blocks of text and including detailed tags and (vii) the information in Part II, Item 5 Other Information. |
|
|
|
104 |
|
Cover Page Interactive Data File (formatted as iXBRL and contained in Exhibit 101). |
21
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 18, 2024 |
|
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 |
22