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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-K

 

 

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

 

For the fiscal year ended December 31, 2023

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:

 

Common Stock

 

BMI

 

New York Stock Exchange

(Title of each class)

 

(Trading Symbol)

 

(Name of each exchange on which registered)

 

Securities registered pursuant to Section 12(g) of the Act: None.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

 

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

 

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.

 

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: As of June 30, 2023, the aggregate market value of the shares of Common Stock held by non-affiliates of the Registrant was approximately $4.30 billion. For purposes

 

 


 

of this calculation only, (i) shares of Common Stock are deemed to have a market value of $147.56 per share, the closing price of the Common Stock as reported on the New York Stock Exchange on June 30, 2023, and (ii) each of the Company's executive officers and directors is deemed to be an affiliate of the Company.

As of January 31, 2024, there were 29,352,121 shares of Common Stock outstanding with a par value of $1 per share.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company's Proxy Statement for the 2024 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission under Regulation 14A within 120 days after the end of the registrant's fiscal year, are incorporated by reference from the definitive Proxy Statement into Part III of this Annual Report on Form 10-K.

 

 

 


 

Table of Contents

 

Page

PART I

5

Item 1.

Business

5

Item 1A.

Risk Factors

11

Item 1B.

Unresolved Staff Comments

16

Item 1C.

Cybersecurity

16

Item 2.

Properties

17

Item 3.

Legal Proceedings

18

Item 4.

Mine Safety Disclosures

18

 

PART II

19

Item 5.

Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

19

Item 6.

Reserved

21

Item 7.

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

21

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

26

Item 8.

Financial Statements and Supplemental Data

26

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

53

Item 9A.

Controls and Procedures

53

Item 9B.

Other Information

53

Item 9C.

Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

53

 

 

 

PART III

54

Item 10.

Directors, Executive Officers and Corporate Governance

54

Item 11.

Executive Compensation

54

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

54

Item 13.

Certain Relationships and Related Transactions, and Director Independence

54

Item 14.

Principal Accountant Fees and Services

54

 

PART IV

55

Item 15.

Exhibits and Financial Statement Schedules

55

Item 16

Form 10-K Summary

55

 

 

Exhibit Index

56

Signatures

58

 

3

 


 

Special Note Regarding Forward Looking Statements

Certain statements contained in this Annual Report on Form 10-K, as well as other information provided from time to time by Badger Meter, Inc. (the “Company”) or its employees, may contain forward looking statements that involve risks and uncertainties that could cause actual results to differ materially from those in the forward looking statements. The words “anticipate,” “believe,” “estimate,” “expect,” “think,” “should,” “could” and “objective” or similar expressions are intended to identify forward looking statements. All such forward looking statements are based on the Company’s then current views and assumptions and involve risks and uncertainties. Some risks and uncertainties that could cause actual results to differ materially from those expressed or implied in forward looking statements include those described in Item 1A of this Annual Report on Form 10-K for the year ended December 31, 2023.

4

 


 

PART I

ITEM 1. BUSINESS

Badger Meter, Inc. (the “Company”) is a leading innovator, manufacturer and marketer of products incorporating flow measurement, quality, control and other system solutions serving markets worldwide. The Company was incorporated in 1905.

Throughout this 2023 Annual Report on Form 10-K, the words “we,” “us” and “our” refer to the Company.

Available Information

The Company's internet address is http://www.badgermeter.com. The Company makes available free of charge through its website its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports, on the same day they are electronically filed with, or furnished to, the Securities and Exchange Commission. The Company is not including the information contained on or available through its website as a part of, or incorporating such information by reference into, this Annual Report on Form 10-K.

Market Overview, Products and Solutions

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 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

5

 


 

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 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® Software as a Service (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 2023)

The flow instrumentation product line primarily serves water applications throughout the broader industrial market, with both standard and customized solutions. This product line includes 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.

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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.

Customers and Competition

The Company's products are sold throughout the world through employees, resellers and representatives, with utility water sales largely via a direct salesforce and regional distributors, and flow instrumentation sales largely via representatives and distributors. No single customer accounts for more than 10% of the Company's sales.

The Company faces competition for both its utility water and flow instrumentation product lines. Major competitors for utility water meters include Roper Technologies, Inc. (“Neptune”) and Xylem, Inc. (“Sensus”). Together with Badger Meter, it is estimated that these companies sell roughly 85% of the water meters in the North American market. The remaining market share is comprised of competitors such as Master Meter, Inc., Mueller Water Products, Inc., Kamstrup A/S and Diehl Metering GmbH depending on the metering technology.

The Company’s primary competitors for utility water radio products in North America are Hubbel, Inc. (Aclara Technologies), Itron, Inc., Neptune and Sensus.

The Company’s primary competitors for water quality monitoring solutions vary depending on the products and offerings. Traditional water quality monitoring relies on reagents or test kits, along with lab samples with waiting time for results. The number and scale of competition can be extensive. The Company’s online, real-time water quality monitoring capabilities generally compete with smaller, specialized firms.

A number of the Company's competitors in certain markets have greater financial resources than the Company. The Company, however, believes it currently provides the leading technologies in water meters and water-dedicated radio and software solutions. As a result of significant research and development activities, the Company enjoys favorable patent positions and trade secret protections for several of its technologies, products and processes.

There are many competitors in the flow instrumentation markets due to the various end markets and applications served. They include, among others, Emerson Electric Company, Krohne Messtechnik GmbH, Endress+Hauser AG, Yokogawa Electric Corporation and Cameron International. With a broad portfolio of meter technologies, the Company is well positioned to compete in niche, specialized applications primarily focused on water/wastewater and HVAC.

Raw Materials and Components

Raw materials used in the manufacture of the Company's products include purchased castings made of metal or alloys (such as brass, which uses copper as its main component, aluminum, stainless steel and cast iron), plastic resins, glass, microprocessors and other electronic subassemblies, and components. There are multiple sources for these raw materials and components, but the Company relies on single suppliers for certain brass castings, resins and electronic subassemblies. The Company believes these items would be available from other sources, but that the loss of certain suppliers may result in a higher cost of materials, delivery delays, short-term increases in inventory and higher quality control costs. The Company carries business interruption insurance generally. The Company's purchases of raw materials are based on production schedules, and as a result, inventory on hand is generally not exposed to price fluctuations. World commodity markets and currency exchange rates may also affect the prices of material purchased in the future. The Company does not hold significant amounts of precious metals.

Research and Development

Expenditures for research and development activities related to development of new products, the improvement of existing products and manufacturing process improvements were $19.0 million in 2023, $15.8 million in 2022 and $14.7 million in 2021. Research and development activities are primarily sponsored by the Company. The Company also engages from time to time in joint research and development with other companies and organizations.

Intangible Assets

The Company owns or controls several trade secrets and many patents, trademarks and trade names in the United States and other countries that relate to its products and technologies. No single patent, trademark, trade name or trade secret is material to the Company's business as a whole.

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Environmental Protection

The Company is subject to contingencies related to environmental laws and regulations. A future change in circumstances with respect to these specific matters or with respect to sites formerly or currently owned or operated by the Company, off-site disposal locations used by the Company, and property owned by third parties that is near such sites, could result in future costs to the Company and such amounts could be material. Expenditures for compliance control provisions and regulations during 2023, 2022 and 2021 were not material.

 

Government Regulations

 

The Company’s operations worldwide are subject to various federal, state, local and foreign laws and regulations. Whether at the federal, state, or local level, the intent of these laws and regulations is to protect product safety, public health and the environment. Similar laws and regulations have been adopted by government authorities in other countries in which we manufacture, distribute, and sell our products.

The Company believes that its operations, including its manufacturing locations, are in substantial compliance with all applicable government laws and regulations, including those related to environmental, consumer protection, international trade, labor and employment, human rights, tax, anti-bribery and competition matters. Any additional measures to maintain compliance are not expected to materially affect the Company's capital expenditures, competitive position, financial position or results of operations.

There are currently no legislative or administrative regulations pending which we anticipate will have a substantial adverse impact on the Company's revenues, earnings or cash flows. However, if new or amended laws or regulations impose significant operational restrictions and compliance requirements upon the Company or its products, the Company's business, capital expenditures, results of operations, financial condition and competitive position could be negatively impacted. Refer to Part I, Item 1A. “Risk Factors” of this 2023 Annual Report on Form 10-K for further information.

Human Capital Resources

 

Our employees are our greatest strength and are critical to the achievement of our vision and successful execution of our global business strategy. We are committed to recruiting, developing and retaining top talent, in addition to fostering an inclusive environment where all employees can thrive.

The Company and its subsidiaries employed 2,140 persons at December 31, 2023. Approximately 117 of those employees are covered by a collective bargaining agreement with District 10 of the International Association of Machinists. The Company currently operates under a three-year contract with the union, which expires on October 31, 2025. The Company believes it has good relations with the union and its employees.

 

The below information strives to provide further details on our core values and the key programs and initiatives we utilize to attract, develop and retain a diverse and engaged workforce:

 

Core Values. Living our core values is at the heart of Badger Meter’s culture. Our global employee engagement survey consistently measures this sentiment and our employees highly rate our adherence to our stated company values. Our culture prioritizes trust, responsibility, collaboration, excellence and customer focus. The first of these, trust, calls for us to act honestly, ethically and with integrity. We maintain a formal ethics and compliance program that encourages doing the right thing at all times. As part of this program, all ethical and legal concerns raised by employees are fully investigated and resolved. Employees have the ability to raise concerns confidentially through our Ethics Hotline, without fear of retaliation. Employee training is used to reinforce our values companywide, and our annual ethics and compliance training is administered globally with nearly 100% completion by eligible employees. In addition to trust, our values include a focus on diversity, equity, and inclusion, as well as continuous improvement and environmental responsibility.

 

Recruitment, Development and Retention. In addition to market competitive compensation and benefits, we focus on open, two-way communication, training and development and early talent pipeline programs, among other activities to attract and retain key talent:

 

We focus on the physical, mental and financial wellbeing of our employees and this is reflected in our employee benefit offerings. We offer employee assistance and work life benefits to all global employees. Our comprehensive benefits include healthcare, disability and life insurance, paid time off, and various leave programs, as well as retirement savings plans and financial advisory services.

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We invest in the growth and development of our employees, offering a range of all employee, managerial, and leader training that spans on-demand, virtual, and live instructor-led formats.
We offer flexible, remote work and part-time arrangements, as business roles permit.
Our regrettable turnover decreased to 8.3% in 2023, compared to 10.0% in 2022, and 9.6% in 2021. A stabilizing labor market in the US was the primary driver of the decrease.
We implemented our third annual global employee engagement survey in 2023, with over 93% of all global employees voluntarily participating. The 2023 survey showed improvement in many areas, as a result of our targeted engagement action plan and commitment to continuous improvement. We will continue to utilize feedback received from the survey to identify meaningful actions targeted at fostering improvement in employee engagement, including pulse surveys to monitor effectiveness of action plans.

 

Diversity, Equity and Inclusion. We believe that developing a diverse and inclusive business makes us and society stronger, energizes our growth through customer engagement and helps us attract and retain talent:

 

We maintain a Human Rights policy, Equal Employment Opportunity policy and partner with a variety of recruiting and hiring agencies focused on diverse candidates.
Currently, 36% of our executive officer group is diverse (three women, one Southeast Asian).
We conduct an external pay equity analysis on an annual basis, with no findings requiring adjustments.
We have a dedicated DEI team focused on fostering diversity, equity and inclusion across our global workforce.
We are a signatory to the Equality Act, supporting LGBTQ rights.
We actively participate as part of the Metropolitan Milwaukee Association of Commerce (MMAC) Diversity Pledge, a commitment to increasing diversity representation in the workforce.
The following provides the percentage of certain employee demographic details aligned with the Sustainability Accounting Standards Board (SASB) and the Global Reporting Initiative (GRI) reporting frameworks:

 

 

2023

 

2022

Females in the workforce, globally

40%

 

40%

Female representation in management, globally

28%

 

27%

Female representation in manufacturing, globally

51%

 

51%

Female representation on the Board of Directors

33%

 

30%

Minorities in the U.S. workforce

32%

 

30%

Minority representation in U.S. management

15%

 

12%

Minority representation in U.S. manufacturing

56%

 

54%

 

Employee Rights, Health and Safety. The safety and health of our employees is a top priority. In addition to on-the-job safety, we take a holistic view of employee health and well-being, including our multifaceted wellness program, B|Well, which aims to provide information, activities, support and rewards for smart and healthy choices.

 

Safety, as measured by our global Total Case Incident Rate (TCIR), was 0.40 in 2023, compared to 0.59 in 2022, and 0.75 in 2021. Our goal is zero. While we are proud of our performance in 2023, most notably in relation to industry averages, we recognize there is more work to be done.
Badger Meter’s Human Rights Policy outlines our commitment to respecting and supporting internationally recognized human rights and freedoms.
We provide an Employee Assistance Program (EAP) and mental health coverage.

 

Community and Social Activities. Through both financial contributions and volunteer efforts of our employees, Badger Meter supports programs and organizations that address water conservation and quality, education and community concerns which are all vital to community sustainability.

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Information about the Company’s Executive Officers

The following table sets forth certain information regarding the Executive Officers of the Registrant.

 

Name

Position

Age at

2/28/2024

Kenneth C. Bockhorst

Chairman, President and Chief Executive Officer

51

Robert A. Wrocklage

Senior Vice President — Chief Financial Officer

45

Karen M. Bauer

Vice President — Investor Relations, Corporate Strategy and Treasurer

56

Fred J. Begale

Vice President — Engineering

59

William R. A. Bergum

Vice President — General Counsel and Secretary

59

Sheryl L. Hopkins

Vice President — Human Resources

56

Richard Htwe

Vice President — Global Operations

 

57

Lars Bo Kristensen

 

Vice President — Global Flow Instrumentation and International Utility

 

58

Kimberly K. Stoll

Vice President — Sales and Marketing

57

Matthew L. Stuyvenberg

Vice President — Software and Water Quality

 

41

Daniel R. Weltzien

Vice President — Controller

45

 

There are no family relationships between any of the executive officers. Officers are elected annually at the first meeting of the Board of Directors (the "Board") held after each annual meeting of the shareholders. Each officer holds office until his or her successor has been elected or until his or her death, resignation or removal. There is no arrangement or understanding between any executive officer and any other person pursuant to which he or she was elected as an officer.

Mr. Bockhorst was elected President in April 2018, Chief Executive Officer in January 2019 and Chairman in January 2020 after serving as Senior Vice President - Chief Operating Officer for the Company from October 2017 to April 2018.

Mr. Wrocklage was elected Vice President – Chief Financial Officer and Treasurer in 2019 and Senior Vice President – Chief Financial Officer in January 2020 after serving as Vice President - Finance for the Company from August 2018 to December 2018.

Ms. Bauer was elected Vice President - Investor Relations, Corporate Strategy and Treasurer effective June 2019. She joined Badger Meter in July 2018 as Director, Investor Relations and Corporate Strategy. In her role she also oversees the Company’s ESG (Environmental, Social & Governance) initiatives.

Mr. Begale has served as Vice President - Engineering for more than five years.

Mr. Bergum has served as Vice President - General Counsel and Secretary for more than five years.

Ms. Hopkins was elected Vice President - Human Resources in October 2020. Prior to joining the Company, Ms. Hopkins served as Vice President of Human Resources for ADVENT from April 2019 to October 2020 and Senior Vice President of Human Resources for Runzheimer International from July 2010 to March 2018. Previously, she held roles of increasing responsibility at Eaton Corporation and other multinational public companies.

Mr. Htwe was elected Vice President - Global Operations in January 2023. Prior to joining the Company, Mr. Htwe served as Vice President of Global Operations for Emerson Commercial and Residential Solutions for its InSinkErator business unit from January 2022 to December 2022 and Vice President of Operations for Wahl Clipper Corporation from March 2013 to December 2021. Previously, he held roles of increasing responsibility at Oshkosh Corporation.

Mr. Kristensen was elected Vice President - Flow Instrumentation and International Utility in December 2022. Prior to joining the Company, Mr. Kristensen served as Group CEO for Agramkow Fluid Systems from October 2020 to November 2022. Additionally, Mr. Kristensen spent 20 years with Kamstrup, holding various international management roles, including General Manager for Kamstrup Water Metering, LLC and Senior Vice President of North America.

Ms. Stoll has served as Vice President - Sales and Marketing for more than five years.

Mr. Stuyvenberg was elected Vice President – Water Quality in January 2022 and Vice President - Software and Water Quality in January 2023. Mr. Stuyvenberg joined Badger Meter in April 2007 as Mechanical Engineer of Applied Research and has since held roles of increasing responsibility, including Manager of Mechanical Engineering and Director of Utility Engineering.

Mr. Weltzien was elected Vice President – Controller in March 2019.

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Foreign Operations and Export Sales

The Company sells its products and software through employees, resellers and representatives throughout the world. Additionally, the Company has sales, distribution and manufacturing facilities in Neuffen, Germany and Vienna, Austria; sales and customer service offices in Mexico, United Kingdom, Singapore, China, United Arab Emirates and other similar locations throughout the world; manufacturing facilities in Nogales, Mexico, Brno, Czech Republic and Bern, Switzerland; and a development facility in Luleå, Sweden. The Company exports products from the United States that are manufactured in Milwaukee, Wisconsin, Racine, Wisconsin, Tulsa, Oklahoma and Collegeville, Pennsylvania.

Information about the Company's foreign operations and export sales is included in Note 9 “Industry Segment and Geographic Areas” in the Notes to Consolidated Financial Statements in Part II, Item 8 of this 2023 Annual Report on Form 10-K.

Financial Information about Industry Segments

The Company operates in one industry segment as an innovator, manufacturer and marketer of products incorporating flow measurement, quality, control and communication solutions. Information about the Company's sales, operating earnings and assets is included in the Consolidated Financial Statements and in Note 9 “Industry Segment and Geographic Areas” in the Notes to Consolidated Financial Statements in Part II, Item 8 of this 2023 Annual Report on Form 10-K.

Risk Management

 

The Company’s Enterprise Risk Management (ERM) process aims to identify, manage and monitor significant and material risks. The ERM process assesses, manages, and monitors risks consistent with the integrated risk framework in the Enterprise Risk Management-Integrated Framework (2017) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). We believe that risk-taking is an inherent aspect of the execution of our strategy. Our goal is to manage risks pragmatically as opposed to avoiding risks altogether. We can mitigate risks and their impact on our Company only to a limited extent.

 

A group of executives prioritizes identified risks and assigns an executive to address each major identified risk area and lead action plans to manage each risk. Our Board of Directors provides oversight of the ERM process and reviews the significant identified risks. The Audit and Compliance Committee of the Board of Directors also reviews financial reporting risk exposures and the processes management utilizes to monitor, manage and mitigate risks wherever possible. Our other Board committees also play a role in risk management, as detailed in their respective charters.

 

Our goal is to proactively manage risks using a structured approach in combination with strategic planning, with the intent to preserve and enhance shareholder value. However, the risks set forth Item 1A. Risk Factors and elsewhere in this Annual Report on Form 10-K and other risks and uncertainties could unfavorably affect us and cause our results to vary materially from recent results or from our anticipated future results.

ITEM 1A. RISK FACTORS

Shareholders, potential investors and other readers are urged to consider the significant business risks described below in addition to the other information set forth or incorporated by reference in this 2023 Annual Report on Form 10-K, including the “Special Note Regarding Forward Looking Statements” at the front of this 2023 Annual Report on Form 10-K. If any of the events contemplated by the following risks actually occur, our financial condition or results of operations could be materially adversely affected. The following list of risk factors may not be exhaustive. We operate in a continually changing business, economic and geopolitical environment, and new risk factors may emerge from time to time. We can neither predict these new risk factors with certainty nor assess the precise impact, if any, on our business, or the extent to which any factor, or combination of factors, may adversely impact our results of operations. While there is much uncertainty, we do analyze the risks we face, perform a probability assessment of their impacts and attempt to soften their potential impact when and if possible.

PRODUCTS, TECHNOLOGY AND SERVICES

The inability to develop technologically advanced products and solutions could harm our future success.

We believe our future success depends, in part, on our ability to develop technologically advanced products that meet or exceed appropriate industry standards. Although we believe that we currently have a competitive advantage in this area, maintaining such advantage will require continued investment in research and development, sales, marketing and manufacturing capabilities. There can be no assurance that we will have sufficient resources to make such investments or that we will be able to make the technological advances necessary to maintain such competitive advantage. If we are unable to maintain our competitive advantage, our future financial performance may be adversely affected. We are not currently aware of any emerging standards, technologies or

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new products that could render our existing products obsolete in the near term. Our radios operate on networks which are changing as part of the natural evolution of technology. The pace of that change is largely outside of the Company’s control and the sun-setting of a network may have an adverse impact on the Company, however, we have strong relationships with telecommunication providers that assist in mitigating this risk. The municipal water industry is continuing to see the adoption of static water meters. Static water metering has lower barriers to entry than mechanical metering that could affect the competitive landscape in North America. We believe we have a competitive product and market position. If the adoption rate for static meters were to accelerate, we believe competitors lack brand recognition and product breadth and do not have extensive water utility channel distribution to effectively reach the more than 50,000 water utilities in the United States.

Failure to manufacture quality products could have a material adverse effect on our business.

If we fail to maintain and enforce quality control and testing procedures, our products will not meet required performance standards. Our products have an extended expected life and we therefore offer extended duration warranty coverages. Product quality and performance are a priority for us since our products are used in various applications where precise control of fluids is essential. Although we believe our products are perceived as high quality, any future production and/or sale of substandard products could seriously harm our reputation, resulting in both a loss of current customers to competitors and damage to our ability to attract new customers. In addition, if any of our products prove to be defective, we may be required to participate in a recall involving such products or incur warranty related expenses. A successful claim brought against us with respect to a defective product in excess of available insurance coverage, if any, or a requirement to participate in a major product recall, could have a material adverse effect on our business, results of operations or financial condition.

If our software products do not operate as intended, our business could be materially and adversely affected.

We sell software products, including cloud-based solutions, that may contain unexpected design defects or may encounter unexpected complications when used with other technologies utilized by the customer. A failure of our software products to operate as intended and in a seamless fashion with other products or a failure or breach of a cloud network could materially and adversely affect our results of operations, financial position and cash flows.

Our role as a prime contractor brings certain risks that could have a material adverse effect to our business.

We periodically assume the role of prime contractor for providing complete technology systems, installation and other services and project management to customers and governmental entities, which brings with it added risks, including but not limited to, our responsibility for managing subcontractor performance and project timelines and the potential for expanded warranty and performance obligations. While we routinely manage these types of arrangements, it is possible to encounter a situation where we may not be able to perform to the expectations of the customer or governmental entity, and thus incur additional costs that could affect our profitability or harm our reputation.

If we are not able to protect our proprietary rights to our software and related products, our ability to market our software products could be hindered and our results of operations, financial position and cash flows could be materially and adversely affected.

We rely on our agreements with customers, confidentiality agreements with employees, and our trademarks, trade secrets, copyrights and patents to protect our proprietary rights. These legal protections and precautions may not prevent misappropriation of our proprietary information. In addition, substantial litigation regarding intellectual property rights exists in the software industry, and software products and other components may increasingly be subject to third-party infringement claims. Such litigation and misappropriation of our proprietary information could hinder our ability to market and sell products and services and our results of operations, financial position and cash flows could be materially and adversely affected.

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BUSINESS CONDITIONS

The inability to obtain adequate supplies of raw materials and component parts at reasonable prices could decrease our profit margins and negatively impact timely delivery to customers and could have a material adverse effect on our business, results of operations and financial condition.

We are affected by the availability and prices for raw materials and component parts, including purchased castings made of metal or alloys (such as brass, which uses copper as its main component, aluminum, stainless steel and cast iron), plastic resins, microprocessors and other electronic subassemblies, and components that are used in the manufacturing process. Further, supply chain disruptions and challenges may be caused by a number of factors affecting our suppliers, including, but not limited to, capacity constraints, port congestion, labor disputes or unrest, labor shortages and costs, economic downturns, availability of credit, a high interest rate environment, impaired financial condition, sanctions/tariffs, energy inflation/availability and geopolitical risks (such as the current conflict between Russia and Ukraine and in the Middle East). The effects of climate change, including extreme weather events, may exacerbate these risks.

The inability to obtain adequate supplies of raw materials and component parts for our products at reasonable prices could have a material adverse effect on our business, financial condition or results of operations by decreasing profit margins and by negatively impacting timely deliveries to customers. In the past, we have been able to offset price increases in raw materials and component parts by increased sales prices, active materials management, product engineering programs and the diversity of materials used in the production processes. However, we cannot be certain that we will be able to accomplish this in the future. Since we do not control the actual production of these raw materials and component parts, there may be continued delays in the production or transportation of these materials for reasons that are beyond our control. World commodity markets and inflationary environments may affect raw material and component part prices. In addition, we rely on single suppliers for microprocessors, castings and components in several of our product lines and the loss of such suppliers could temporarily disrupt operations in the short term.

 

Global public health pandemics could have a material adverse effect on our business, results of operations and financial condition.

Global health pandemics and related containment measures taken by federal and state governments could result in business slowdowns or shutdowns, weakened economic conditions, economic uncertainty, and volatility in the financial markets and could interfere with the ability of our employees, suppliers, and customers to perform our and their respective responsibilities and obligations relative to the conduct of our business and operations.

The extent to which future pandemics impact our business operations in future periods will depend on multiple factors that cannot be accurately predicated at this time, such as the duration and scope of any pandemic, the extent and effectiveness of containment actions, the disruption caused by such actions, and the impact of these and other factors on our employees, suppliers and customers. If we are not able to respond to and manage the impact of such events effectively, we could experience a material adverse effect on our business, results of operations and overall financial performance.

Economic conditions could cause a material adverse impact on our sales and operating results.

As a supplier of products and software, the majority of which are to water utilities, we may be adversely affected by global economic conditions, rising interest rates, delays in governmental programs created to stimulate the economy, and the impact of government budget cuts or partial shutdowns of governmental operations that affect our customers, including independent distributors, large city utilities, public and private water companies and numerous smaller water utilities. These customers may delay capital projects, including non-critical maintenance and upgrades, or may not have the ability to authorize and finance purchases during economic downturns, instability in world markets, and a higher interest rate environment. We also sell products for other applications to reduce our dependency on the municipal water market. A significant downturn in this market could cause a material adverse impact on sales and operating results. Therefore, a downturn in general economic conditions, as well as in the municipal water market, rising interest rates, delays in the timing or amounts of possible annual federal funding, government budget cuts or partial shutdowns of governmental operations, or the availability of funds to municipalities could result in a reduction in demand for our products and services and could have a material adverse effect on our business, results of operations and overall financial performance.

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Geopolitical crisis, including terrorism or pandemics, could adversely affect our business.

Our operations are susceptible to global events, including acts or threats of war or terrorism, international conflicts, political instability, and a widespread outbreak of an illness or other health issue. The occurrence of any of these events could have an adverse effect on our business results and financial condition.

Risks related to foreign markets could decrease our profitability.

Since we sell products worldwide as well as manufacture products in several countries, we are subject to risks associated with doing business internationally. These risks include such things as changes in foreign currency exchange rates, including the effect of a strong or weak U.S. dollar, changes in political or economic conditions of specific countries or regions, potentially negative consequences from changes in tax laws or regulatory requirements, differing labor regulations, and the difficulty of managing widespread operations.

An inability to attract and retain skilled employees could negatively impact our growth and decrease our profitability.

Our success depends on our continued ability to identify, attract, develop and retain skilled personnel throughout our organization. Current and future compensation arrangements, including benefits, may not be sufficient to attract new employees or retain existing employees, which may hinder our growth. Increased labor competition from accelerated retirements, wage inflation and scarcity of labor may negatively impact costs and negatively impact employee engagement, productivity and efficiency.

Competitive pressures in the marketplace could decrease our revenues and profits.

Competitive pressures in the marketplace for our products could adversely affect our competitive position, leading to a possible loss of market share or a decrease in prices, either of which could result in decreased revenues and profits. We operate in an environment where competition varies from moderate to strong and a number of our competitors have greater financial resources. The principal elements of competition for our most significant product applications, residential and commercial water meters for the municipal water utility market (with various radio technology systems), are price, product technology, quality and service. The competitive environment is also affected by the movement toward radio technologies and away from manually read meters, the demand for replacement units and, to some extent, such things as global economic conditions, the timing and size of governmental programs such as stimulus programs, the ability of municipal water utility customers to authorize and finance purchases of our products, our ability to obtain financing, housing starts in the United States, and overall economic activity. For our flow instrumentation products, the competitive environment is affected by the general economic health of various industrial sectors particularly in the United States and Europe.

GOVERNMENT REGULATION

Violations or alleged violations of laws that impose requirements for the conduct of the Company’s overseas operations, including the Foreign Corrupt Practices Act (FCPA) or other anti-corruption laws, trade sanctions and sanctioned parties restrictions could adversely affect our business.

In foreign countries where we operate, a risk exists that our employees, third party partners or agents could engage in business practices prohibited by applicable laws and regulations, such as the FCPA. Such anti-corruption laws generally prohibit companies from making improper payments to foreign officials, require companies to keep accurate books and records, and maintain appropriate internal controls. Our policies mandate strict compliance with such laws and we devote resources to ensure compliance. However, we operate in some parts of the world that have experienced governmental corruption, and, in certain circumstances, local customs and practice might not be consistent with the requirements of anti-corruption laws. We remain subject to the risk that our employees, third party partners or agents will engage in business practices that are prohibited by our policies and violate such laws and regulations. Violations by us or a third party acting on our behalf could result in significant internal investigation costs and legal fees, civil and criminal penalties, including prohibitions on the conduct of our business and reputational harm.

We may also be subject to legal liability and reputational damage if we violate U.S. trade sanctions administered by the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC), the European Union, the United Nations and trade sanction laws, such as the Iran Threat Reduction and Syria Human Rights Act of 2012 or Russian and Belarus Financial Sanctions Act of 2022. Our policies mandate strict compliance with such laws and we devote resources to ensure compliance.

Changes in environmental or regulatory requirements, including climate change legislation, could entail additional expenses that could decrease our profitability.

We are subject to a variety of laws in various countries and markets, such as those regulating lead or other material content in certain of our products, the handling, recycling and disposal of certain electronic and other materials, the use and/or licensing of radio

14

 


 

frequencies necessary for radio products, data privacy and protection, as well as customs and trade practices. We cannot predict the nature, scope or effect of future environmental or regulatory requirements to which our operations might be subject or the manner in which existing or future laws will be administered or interpreted. Currently, the cost of complying with existing laws is included as part of our on-going expenses and does not have a material effect on our business or financial position, but a change in the future could adversely affect our profitability.

Concern over climate change has resulted in, and could continue to result in, new legal or regulatory requirements designed to reduce or mitigate the effects of greenhouse gas (GHG) emissions. We may become subject to additional legislation, regulations or accords regarding climate change, and compliance with any new rules could be difficult and costly, as a result of increased energy, environmental and other costs and capital expenditures. Our failure to successfully comply with any such legislation, regulation, or accord could have a material adverse effect on our business, results of operations and overall financial performance.

GENERAL

Economic impacts due to leadership or policy changes in the countries where we do business could negatively affect our profitability.

We may be affected by adjustments to economic and trade policies, such as taxation, changes to or withdrawal from international trade agreements, or the like, when countries where we produce or sell our products change leadership or economic policies. These types of changes, as well as any related regulatory changes, could significantly increase our costs and adversely affect our profitability and financial condition.

Climate change, extreme weather and other natural phenomena could adversely affect our business.

Climate changes and weather conditions may affect, or cause volatility in, our financial results. Drought conditions could drive higher demand for smart water solutions that advance conservation efforts in residential and commercial applications. Our sales also may be adversely affected by unusual weather, weather patterns or other natural phenomena that could have an impact on the timing of orders in given periods, depending on the particular mix of customers being served by us at the time. The unpredictable nature of weather conditions and climate change therefore may result in volatility for certain portions of our business, as well as the operations of certain of our customers and suppliers.

Failure to meet ESG expectations or standards, or to achieve our ESG goals, could adversely affect our business, results of operations and overall financial performance.

In recent years, there has been an increased focus from stakeholders on ESG matters, including GHG emissions and climate-related risks, renewable energy, water stewardship, waste management, diversity, equity and inclusion, responsible sourcing and supply chain, human rights and social responsibility. Given our commitment to certain ESG principles, we actively manage these issues and have established certain goals, commitments and targets. These goals, commitments and targets reflect our current plans and are not guarantees that we will be able to achieve them. Evolving stakeholder expectations and our efforts to manage these issues, report on them and accomplish our goals present numerous operational, regulatory, reputational, financial, legal and other risks, any of which could have a material adverse impact on our financial condition.

Litigation against us could be costly, time consuming to defend and could adversely affect our profitability.

From time to time, we are subject to legal proceedings and claims that arise in the ordinary course of business. For example, we may be subject to workers' compensation claims, employment/labor disputes, customer and supplier disputes, product liability claims, intellectual property disputes and contractual disputes related to warranties arising out of the conduct of our business. Litigation may result in substantial costs and may divert management's attention and resources, which could adversely affect our profitability or financial condition.

Disruptions and other damages to our information technology and other networks and operations, and breaches in data security or cybersecurity attacks could have a negative financial impact and damage our reputation.

Our ability to serve customers, as well as increase revenues and control costs, depends in part on the reliability of our sophisticated technologies, system networks and cloud-based software. We use information technology and other systems to manage our business in order to maximize our revenue, effectiveness and efficiency. Unauthorized parties gaining access to digital systems and networks for purposes of misappropriating assets or sensitive financial, personal or business information, corrupting data, causing operational disruptions and other cyber-related risks could adversely impact our customer relationships, business plans and our reputation. In some cases, we are dependent on third-party technologies and service providers for which there is no certainty of

15

 


 

uninterrupted availability or through which hackers could gain access to sensitive and/or personal information. These potential disruptions and cyber-attacks could negatively affect revenues, costs, customer demand, system availability and our reputation.

Further, as the Company pursues its strategy to grow through acquisitions and to pursue newer technologies that improve our operations and cost structure, the Company is also expanding and improving its information technologies, resulting in a larger technological presence and corresponding exposure to cybersecurity risk. Certain new technologies present new and significant cybersecurity safety risks that must be analyzed and addressed before implementation. If we fail to assess and identify cybersecurity risks associated with acquisitions and new initiatives, we may become increasingly vulnerable to such risks.

Failure to successfully identify, complete and integrate acquired businesses or products could adversely affect our operations.

As part of our business strategy, we continue to evaluate and may pursue selected business or product acquisition opportunities that we believe may provide us with certain operating and financial benefits. There can be no assurance that we will identify or complete transactions with suitable acquisition candidates in the future. If we complete any such acquisitions, they may require integration into our existing business with respect to administrative, financial, legal, sales, marketing, manufacturing and other functions to realize these anticipated benefits. If we are unable to successfully integrate a business or product acquisition, we may not realize the benefits identified in our due diligence process, and our financial results may be negatively impacted. Additionally, significant unexpected liabilities may arise during or after completion of an acquisition.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 1C. CYBERSECURITY

The Company’s Board and management recognize the importance of maintaining the trust and confidence of our customers, clients, business partners and employees, and that effective risk oversight is critical in running a successful business and fulfilling its fiduciary responsibilities to the company and its shareholders. Our Board is responsible for assuring that an appropriate culture of risk management exists within the Company and for setting the right “tone at the top.” The Board oversees an enterprise-wide approach to risk management, designed to support the achievement of organizational objectives, including strategic objectives, to improve long-term organizational performance and enhance shareholder value.

A fundamental part of risk management is not only understanding the risks a company faces and what steps management is taking to manage those risks, but also understanding what level of risk is appropriate for the Company. The involvement of the full Board in setting the Company’s business strategy is a key part of its assessment of management’s tolerance for risk and also a determination of what constitutes an appropriate level of risk for the Company.

Refer to Part I, Item 1A. “Risk Factors” of this 2023 Annual Report on Form 10-K for further information about the Company's overall ERM process.

Risk Management and Strategy

Cybersecurity is a critical component of the Company’s ERM program. The Company has established an information security framework to help safeguard the confidentiality, integrity, and availability of information assets and ensure regulatory, operational, and contractual requirements are fulfilled. The Company’s cybersecurity program is focused on the following key areas:

Governance: The Board provides oversight of the ERM process and reviews the significant identified risks. The Board’s oversight of cybersecurity risk management is supported by the Audit and Compliance Committee, which regularly interacts with the Company’s senior management, including the Director - Information Systems (i.e. the Company's chief information officer). The Company’s various Board committees also play a role in risk management, as detailed in their respective charters.

Collaborative Approach: The Company has implemented a comprehensive, cross-functional approach to identifying, preventing and mitigating cybersecurity threats and incidents, while also implementing controls and procedures that provide for the prompt escalation of certain cybersecurity incidents so that decisions regarding the materiality, public disclosure and reporting of such incidents can be made by management in a timely manner. Senior leadership also briefs the Board on information security matters at least annually.

Technical Safeguards: The Company deploys technical safeguards that are designed to protect the Company’s information systems from cybersecurity threats, such as machine learning intelligence platforms with an array of technologies, extensive encryption, firewalls, intrusion prevention and detection systems, anti-malware functionality and access controls, which are evaluated

16

 


 

and improved through vulnerability assessments and cybersecurity threat intelligence. The frameworks used to guide the deployment of technical safeguards include: International Organization for Standardization (ISO) 27001, Service Organization Control 2 (SOC 2), Sarbanes Oxley (SOX), and National Institute of Standards and Technology (NIST). The Company has been ISO 27001 certified since 2015 and is externally audited and certified annually by a leading IT compliance attestation firm.

Incident Response Planning: The Company has established, maintains and regularly tests incident response plans that address the Company’s overall preparedness and response to a cybersecurity incident. The plans include, among other steps, assessment processes to determine the magnitude and materiality of an incident, an analysis of the need and method to communicate to various constituencies (customers, employees, authorities, etc.), and the requirements for public and regulatory disclosure. In addition to this response planning framework, among other mitigating actions the Company maintains an insurance policy for cybersecurity liability that provides not only coverage for breaches, but also loss prevention services and claims advisors.

Third Party Risk Management: The Company maintains a comprehensive, risk-based approach to identifying and overseeing cybersecurity risks presented by third parties, including vendors, service providers and other external users of the Company’s systems, as well as the systems of third parties that could adversely impact our business in the event of a cybersecurity incident affecting those third party systems. Third parties are granted access to systems based on the principle of least privilege.

Education and Awareness: The Company provides mandatory annual training for personnel regarding cybersecurity threats to educate employees with effective tools and knowledge to address cybersecurity threats, and to communicate the Company’s evolving information security policies, standards, processes and practices. Quarterly internal phishing tests are performed, and periodic and/or thematic email communications are provided throughout the year to raise awareness. Individual training is given to personnel as needed.

Governance

The Board oversees the Company’s ERM process, including the management of risks arising from cybersecurity threats. The Board receives annual cybersecurity updates from senior management, and the Audit and Compliance Committee provides a deeper level of oversight through an annual review to management’s approach to cybersecurity risk with the Director – Information Systems. The Board and the Audit and Compliance Committee also receive prompt and timely information regarding any cybersecurity incident that meets established reporting thresholds, as well as ongoing updates regarding any such incident until it has been addressed.

The Director – Information Systems, in coordination with management, works collaboratively across the Company to implement a program designed to protect the Company’s information systems from cybersecurity threats and to promptly respond to any cybersecurity incidents in accordance with the Company’s incident response plans. Management is actively involved in the incident response and risk management process (mitigation, transference, and acceptance).

IT Management and General Counsel are explicitly informed by the internal security team and Managed Security Service Provider (MSSP) of incidents and periodically updated on the investigation progress and impact of the incident. Management also receives explicit monthly summaries on all incidents. Major incidents are reported to company management and summarized at an annual management review meeting.

Internal IT Management has the following certifications: Certified Information Systems Security Professional (CISSP), Certified Information Systems Auditor (CISA), GIAC/SANS Certified Forensic Examiner, Magnet Certified Forensic Examiner, BBA Information Technology Emphasis Security, and CompTIA Security+.

While the Company has experienced, and expects to continue to experience, cyber threats, no material security breaches of third-party information have occurred. Cybersecurity threats, including as a result of any previous cybersecurity incidents, have not materially affected the Company, including its business strategy, results of operations or financial condition. Additional information on cybersecurity risks we face is discussed in Part I, Item 1A “Risk Factors” under the heading “General,” which should be read in conjunction with the foregoing information.

 

ITEM 2. PROPERTIES

The Company has sales, development, distribution and manufacturing facilities and customer service offices as noted in Part I, Item 1 of this 2023 Annual Report on Form 10-K under the heading “Foreign Operations and Export Sales.” The principal facilities

17

 


 

utilized by the Company at December 31, 2023 are listed below. The Company owns all such facilities except as noted. The Company believes that its facilities are generally well maintained and have sufficient capacity for its current needs.

 

Location

 

Principal Use

 

Approximate area (square feet)

 

 

Milwaukee, Wisconsin, USA

 

Manufacturing and offices

 

 

324,200

 

 

Racine, Wisconsin, USA

 

Manufacturing and offices

 

 

134,300

 

 (1)

Nogales, Mexico

 

Manufacturing

 

 

181,300

 

 

 

(1)
Leased facility. Lease term expires December 31, 2025.

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

The Company is subject to contingencies related to environmental laws and regulations. Information about the Company's compliance with environmental regulations is included in Part I, Item 1 of this 2023 Annual Report on Form 10-K under the heading “Environmental Protection.”

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

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PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

The Company’s Common Stock is traded on the New York Stock Exchange (NYSE Trading Symbol: BMI). At January 31, 2024, there were approximately 560 holders of the Company’s Common Stock. Other information required by this Item is set forth in Note 2 “Common Stock” and Note 10 “Unaudited: Quarterly Results of Operations, Common Stock Price and Dividends” in the Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

 

The following information in Item 5 of this Annual Report on Form 10-K is not deemed to be “soliciting material” or to be “filed” with the Securities and Exchange Commission or subject to Regulation 14A or 14C under the Securities Exchange Act of 1934, as amended, or to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended, and will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent the Company specifically incorporates it by reference into such a filing.

 

The following graph compares on a cumulative basis the yearly percentage change since January 1, 2019 in (a) the total shareholder return on the Company’s Common Stock with (b) the total return on the Russell 2000® Index, and (c) the total return of the peer group made up of 17 companies, including the Company, in similar industries, employment markets and with similar market capitalization. The Russell 2000® Index is a trademark of the Frank Russell Company, and is used herein for comparative purposes in accordance with Securities and Exchange Commission regulations.

 

The graph assumes $100 invested on December 31, 2018. It further assumes the reinvestment of dividends. The returns of each component company in the peer groups have been weighted based on such company's relative market capitalization.

 

img115751213_0.jpg 

 

December 31

 

2018

2019

2020

2021

2022

2023

Badger Meter, Inc.

 Return %

 

33.45%

46.39%

14.12%

3.21%

42.56%

 

 Cumulative $

 $ 100.00

 $ 133.45

 $ 195.35

 $ 222.95

 $ 230.10

 $ 328.04

Russell 2000 Index

 Return %

 

25.52%

19.96%

14.82%

-20.44%

16.93%

 

 Cumulative $

 $ 100.00

 $ 125.52

 $ 150.58

 $ 172.90

 $ 137.56

 $ 160.85

Peer Group

 Return %

 

39.76%

12.49%

21.01%

-19.26%

33.38%

 

 Cumulative $

 $ 100.00

 $ 139.76

 $ 157.21

 $ 190.25

 $ 153.61

 $ 204.89

 

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The peer group consists of Badger Meter, Inc. (BMI), Brady Corporation (BRC), CIRCOR International, Inc. (CIR), CTS Corporation (CTS), Enerpac Tool Group Corp. (EPAC), ESCO Technologies Inc. (ESE), The Gorman-Rupp Company (GRC), Helios Technologies, Inc. (HLIO), Itron, Inc. (ITRI), Kadant Inc. (KAI), Lindsay Corporation (LNN), Mueller Water Products, Inc. (MWA), Douglas Dynamics, Inc. (PLOW), Strattec Security Corporation (STRT), Standex International Corporation (SXI), Watts Water Technologies, Inc. (WTS) and Zurn Water Solutions Corporation (ZWS).

 

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 December 31, 2023 of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act.

 

 

 

Total number
of shares
purchased

 

 

Average price
paid per share

 

 

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

 

 

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

 

October 1, 2023 - October 31, 2023

 

 

-

 

 

$

-

 

 

 

-

 

 

 

200,000

 

November 1, 2023 - November 30, 2023

 

 

-

 

 

$

-

 

 

 

-

 

 

 

200,000

 

December 1, 2023 - December 31, 2023

 

 

-

 

 

$

-

 

 

 

-

 

 

 

200,000

 

Total as of December 31, 2023

 

 

-

 

 

 

 

 

 

-

 

 

 

200,000

 

 

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ITEM 6. RESERVED

 

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Long Term Business Trends

Across the globe significant infrastructure investments 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 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.

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 Software as a Service (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.

Acquisitions

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 are 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 current and long-term liabilities as part of the acquisition.

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As of December 31, 2023, the Company had completed its analysis for estimating the fair value of the assets acquired with no additional adjustments. This acquisition is further described in Note 3 “Acquisitions” in the Notes to Consolidated Financial Statements.

RESULTS OF OPERATIONS

Net Sales

Net sales in 2023 increased $138.0 million, or 24.4%, to $703.6 million from $565.6 million in 2022. Sales into the utility water market were $603.1 million, an increase of 27.8% over the prior year’s $471.8 million. The increase in utility water sales reflected strong growth across the Company's broad smart water solutions and the continued robust adoption of cellular AMI solutions, specifically ORION Cellular endpoints and BEACON SaaS revenues, as well as increased E-Series Ultrasonic meter volumes. Sales of products into the global flow instrumentation end markets were $100.5 million, 7.2% higher than the prior year’s $93.8 million due to steady order demand across the water-focused end markets, offset by modest decline in de-emphasized general industrial markets.

Net sales in 2022 increased $60.4 million, or 11.9%, to $565.6 million from $505.2 million in 2021. Excluding the unfavorable impact of the strong US dollar between years, sales increased 13.2%. Sales into the utility water market were $471.8 million, an increase of 13.6% over the prior year’s $415.2 million. The utility water sales growth reflected strong market demand and the continued adoption of cellular AMI solutions, specifically ORION Cellular endpoints and BEACON SaaS revenue, as well as increased meter volumes including E-Series Ultrasonic meters. Sales of products into the global flow instrumentation end markets were $93.8 million, 4.3% greater than the prior year’s $89.9 million due strong order demand and modestly improving supply chain dynamics year-over-year. Excluding the unfavorable impact of the strong US dollar between years, flow instrumentation sales increased 7.1%.

Operating Earnings

Operating earnings in 2023 were $118.0 million, or 16.8% of sales, compared to $87.3 million, or 15.4% of sales, in 2022. Gross margin dollars increased $56.5 million due to higher net sales, with gross margin as a percent of sales increasing from 38.9% in 2022 to 39.3% in 2023. The gross margin improvement was due to higher volumes and favorable sales mix. Selling, engineering and administration (“SEA”) expenses were $158.4 million or 22.5% of sales compared to $132.7 million or 23.5% of sales in the prior year. The increase in SEA expenses year-over-year was due to higher personnel costs, including headcount, salaries and incentive compensation, as well as the acquisition of Syrinix and the associated intangible asset amortization.

Operating earnings in 2022 were $87.3 million, or 15.4% of sales, compared to $78.7 million, or 15.6% of sales, in 2021. Gross margin dollars increased $14.5 million due to higher net sales, with gross margin as a percent of sales decreasing from 40.7% in 2021 to 38.9% in 2022. The year-over-year increase in inflationary cost pressures, coupled with production volatility caused by intermittent component delays, tempered gross margin percent in the current year. SEA expenses were $132.7 million or 23.5% of sales compared to $126.8 million or 25.1% of sales in the prior year. The increase in SEA expenses year-over-year was due to higher personnel and incentive compensation costs, R&D investments, and travel.

Interest Income, Net

Net interest income was $4.0 million in 2023, $0.6 million in 2022 and less than $0.1 million in 2021. The increase in interest income in 2023 and 2022 was due to increased cash balances and increased interest rates. Changes in net interest income in 2021 was immaterial.

Income Taxes

There were no significant variations in the provision for income taxes as a percentage of earnings before income taxes which was 24.1%, 24.2% and 22.6% for 2023, 2022 and 2021, respectively.

Earnings and Diluted Earnings per Share

For 2023, the increase in operating earnings resulted in net earnings of $92.6 million compared to $66.5 million in 2022. On a diluted basis, earnings per share were $3.14 in 2023 compared to $2.26 in 2022.

For 2022, the increase in operating earnings resulted in net earnings of $66.5 million compared to $60.9 million in 2021. On a diluted basis, earnings per share were $2.26 in 2022 compared to $2.08 in 2021.

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LIQUIDITY AND CAPITAL RESOURCES

The main sources of liquidity for the Company are cash from operations and borrowing capacity. In addition, depending on market conditions, the Company may access the capital markets to strengthen its capital position and to provide additional liquidity for general corporate purposes.

Primary Working Capital

We use primary working capital ("PWC") as a percentage of sales as a key metric for working capital efficiency. We define this metric as the sum of receivables and inventories less payables, divided by annual net sales. The following table shows the components of our PWC:

 

 

 

December 31, 2023

 

December 31, 2022

 

 

$

 

 

PWC%

 

$

 

 

PWC%

 

 

(In thousands)

Receivables

 

$

83,507

 

 

11.9%

 

$

76,651

 

 

13.5%

Inventories

 

 

153,674

 

 

21.8%

 

 

119,856

 

 

21.2%

Payables

 

 

(81,807

)

 

-11.6%

 

 

(71,440

)

 

-12.6%

Primary Working Capital

 

$

155,374

 

 

22.1%

 

$

125,067

 

 

22.1%

 

Overall, PWC increased $30.3 million compared to the previous year-end. Receivables at December 31, 2023 were $83.5 million compared to $76.7 million at the end of 2022, an increase of $6.9 million due to increased sales, partially offset by improved days sales outstanding. The Company believes its receivables balance is fully collectible. Inventories at December 31, 2023 were $153.7 million compared to $119.9 million at the end of 2022. Inventory increased $33.8 million, due to component cost inflation, higher safety stock levels and increased sales activity. Payables at December 31, 2023 were $81.8 million compared to $71.4 million at the end of 2022. The increase was due to increased inventory balances and the timing of payments relative to year end.

Cash Provided by Operations

Cash provided by operations in 2023 was $110.1 million compared to $82.5 million in 2022. The increase from 2022 was driven primarily by increased operating earnings and working capital management. Operating cash flow was more than adequate to fund acquisitions ($17.1 million, net of cash acquired), capital expenditures of $12.0 million and dividends of $29.1 million in 2023.

Cash provided by operations in 2022 was $82.5 million compared to $87.5 million in 2021. The decrease from 2021 was driven primarily by increased operating earnings offset by increased working capital requirements. Operating cash flow was more than adequate to fund capital expenditures of $5.9 million and dividends of $24.9 million.

Capital expenditures were $12.0 million, $5.9 million and $6.7 million in fiscal 2023, 2022 and 2021, respectively. Capital expenditures for fiscal 2024 are expected to be in the $14.0-18.0 million range, but could vary depending on timing of projects, growth opportunities and the amount of assets purchased.

The Company had no short-term borrowings as of the end of 2023 or 2022. At the end of 2023, the Company was in a net cash position of $191.8 million.

The Company’s financial condition remains strong. On July 8, 2021, the Company entered into a new credit agreement, with a maturity date of July 8, 2026. 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 December 31, 2023. 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 $154.4 million of unused credit lines available at December 31, 2023.

CONTRACTUAL OBLIGATIONS

The Company's significant contractual obligations as of December 31, 2023 are discussed in Note 12 “Leases” in the Notes to Consolidated Financial Statements in Part II, Item 8 of this 2023 Annual Report on Form 10-K. There are no material undisclosed guarantees. As of December 31, 2023 the Company had no additional material purchase obligations other than those created in the ordinary course of business related to inventory and property, plant and equipment, which generally have terms of less than 90 days. The Company also has long-term obligations related to its postretirement plans which are discussed in detail in Note 7 “Employee Benefit Plans” in the Notes to Consolidated Financial Statements in Part II, Item 8 of this 2023 Annual Report on Form 10-K.

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Postretirement medical claims are paid by the Company as they are submitted, and they are anticipated to be $0.3 million in 2024 based on actuarial estimates; however, these amounts can vary significantly from year to year because the Company is self-insured.

 

APPLICATION OF CRITICAL ACCOUNTING ESTIMATES

 

We believe the following accounting estimates are the most critical to the understanding of our financial statements as they could have the most significant effect on our reported results and require subjective or complex judgments by management. Accounting principles generally accepted in the United States require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the periods reported. These estimates are based on our best judgment about current and future conditions, but actual results could differ from those estimates. Refer to Note 1 "Basis of Presentation and Accounting Policies" in the Notes to Consolidated Financial Statements in Part II, Item 8 of this 2023 Annual Report on Form 10-K for information regarding our significant accounting policies.

 

Warranty and After-Sale Costs

 

Our products carry warranties that generally range from one to twenty years and are based on terms that are generally accepted in the market. We provide for the estimated cost of product warranty at the time of sale. The product warranty provision is estimated based upon warranty loss experience using actual historical failure rates and estimated costs of product replacement. The variables used in the calculation of the provision are reviewed at least annually. At times, warranty issues may arise which are beyond the scope of our historical experience. We provide for any such warranty issues as they become known and estimable. The introduction of additional technology, such as our ORION cellular radios, electronic meters and registration, have generally caused our annual warranty claims rates to increase over time. While our warranty costs have historically been within calculated estimates, it is possible that future warranty costs could differ significantly from those estimates. At December 31, 2023 and 2022, our reserve for product warranties was $11.1 million and $9.6 million, respectively.

 

Income Taxes

 

The Company operates in numerous taxing jurisdictions and is subject to regular examinations by U.S. federal, state and non-U.S. taxing authorities. Our income tax provision for income taxes is based on the interpretation of applicable taxing laws in the jurisdictions in which we conduct business. Due to the ambiguity of tax laws within each jurisdiction, the judgment involved in evaluating and estimating certain tax positions, and how these estimates impact other taxing considerations, it is possible that our income tax positions could differ from actual payments made or benefits received. The Company annually reviews all uncertain tax positions, which represent tax positions taken that are subject to varied interpretations of applicable tax law. Interest is accrued on all unrecognized tax benefits and recorded as interest expense and penalties are recorded as operating expenses in the Consolidated Statements of Operations. Accrued interest was approximately $0.1 million at both December 31, 2023 and 2022 and there were no penalties accrued in either year.

 

The Company recognizes deferred tax assets and liabilities for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. The Company establishes valuation allowances against certain deferred tax assets that are not likely to be realized. The Company recorded valuation allowances of $2.7 million as of December 31, 2023 and 2022. The valuation allowance relates primarily to foreign net operating loss carryforwards.

 

Goodwill and Intangible Assets

 

Goodwill and intangible assets arise through business acquisitions. The allocation of purchase price includes the use of estimates in determining future cash flows, the allocation of future cash flows to identifiable intangibles, and their estimated useful lives. If actual results differ from those estimates, it could result in future impairment. The Company assesses goodwill and intangible assets for impairment on an annual basis, or more frequently if an event indicates potential impairment. Potential impairment is first assessed using a qualitative assessment to determine if the fair value is more likely than not less than its carrying value. If it is estimated through the qualitative analysis that fair value is less than carrying value, a quantitative assessment is completed. This assessment uses estimates, including the estimate of future useful life, the amount and timing of future cash flows, and the fair value of future operations. Any impairment charges are recorded in the period the impairment is determined. Multiple factors can have an impact on future cash flows of a reporting unit, as such, it is possible that our estimates in evaluating impairment could differ from future results.

 

24

 


 

We completed our impairment analysis for goodwill and intangible assets in the fourth quarter for the year ended December 31, 2023. No impairment was noted and no adjustments were recorded to goodwill or intangible assets as a result of this analysis.

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 2023, 2022 and 2021 were not material.

See the “Special Note Regarding Forward Looking Statements” at the front of this Annual Report on Form 10-K and Part I, Item 1A “Risk Factors” in this Annual Report on Form 10-K for the year ended December 31, 2023 for a discussion of risks and uncertainties that could impact the Company's financial performance and results of operations.

MARKET RISKS

In the ordinary course of business, the Company is exposed to various market risks. The Company operates in an environment where competition varies from moderate to strong. The Company believes it currently provides the leading technology in water meters and radio systems for water utilities. A number of the Company's competitors in certain markets have greater financial resources. As the global water metering market continues to adopt static metering technology, the number of competitors in the North American market may increase. We believe new static metering market entrants lack brand recognition and product breadth and do not have the appropriate utility sales channels to meaningfully compete in the North American market. In addition, the market's level of acceptance of the Company's newer product offerings, including real-time water quality monitoring and BEACON SaaS, may have a significant effect on the Company's results of operations. As a result of significant research and development activities, the Company enjoys favorable patent positions for several of its products.

The Company's ability to generate operating income and to increase profitability depends somewhat on the general conditions of the United States and foreign economies, including to some extent such things as the length and severity of global economic downturns; the timing and size of governmental programs such as annual federal funding and periodic stimulus fund programs, as well as the impact of government budget cuts or partial shutdowns of governmental operations; international or civil conflicts that affect international trade; the ability of municipal water utility customers to authorize and finance purchases of the Company's products; the Company's ability to obtain financing; housing starts in the United States; and overall industrial activity. In addition, changes in governmental laws and regulations, particularly laws dealing with the content or handling of materials, customs or trade practices, may impact the results of operations. These factors are largely beyond the Company's control and depend on the economic condition and regulatory environment of the geographic region of the Company's operations.

The Company relies on single suppliers for certain castings and components in several of its product lines. Although alternate sources of supply exist for these items, the loss of certain suppliers could temporarily disrupt operations in the short term. The Company attempts to mitigate these risks by working closely with key suppliers, purchasing minimal amounts from alternative suppliers and by purchasing business interruption insurance where appropriate.

Raw materials used in the manufacture of the Company's products include purchased castings made of metal or alloys (such as brass, which uses copper as its main component, aluminum, stainless steel and cast iron), plastic resins, glass, microprocessors and other electronic subassemblies, and components. The Company does not hold significant amounts of precious metals. The price and availability of raw materials is influenced by economic and industry conditions, including supply and demand factors that are difficult to anticipate and cannot be controlled by the Company. Commodity risk is managed by keeping abreast of economic conditions and locking in purchase prices for quantities that correspond to the Company's forecasted usage.

The Company's foreign currency risk relates to the sales of products to foreign customers and purchases of material from foreign vendors. The Company believes the effect of a change in foreign currency rates will not have a material adverse effect on the Company's financial position or results of operations, either from a cash flow perspective or on the financial statements as a whole.

The Company typically does not hold or issue derivative instruments and has a policy specifically prohibiting the use of such instruments for trading purposes.

25

 


 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information required by this Item is set forth in Part II, Item 7 “Management's Discussion and Analysis of Financial Condition and Results of Operations” under the heading “Market Risks” in this 2023 Annual Report on Form 10-K.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

BADGER METER, INC.

Management's Annual Report on Internal Control over Financial Reporting

The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.

Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The Company's management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2023 using the criteria set forth in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework). Based on this assessment, the Company's management believes that, as of December 31, 2023, the Company's internal control over financial reporting was effective based on those criteria.

Ernst & Young LLP, an independent registered public accounting firm, has audited the Consolidated Financial Statements included in this Annual Report on Form 10-K and, as part of its audit, has issued an attestation report, included herein, on the effectiveness of the Company's internal control over financial reporting.

26

 


 

BADGER METER, INC.

INDEX TO FINANCIAL STATEMENTS

 

Page

Report of Independent Registered Public Accounting Firm (PCAOB ID: 42)

28

Consolidated Financial Statements:

 

Consolidated Balance Sheets

31

Consolidated Statements of Operations

32

Consolidated Statements of Comprehensive Income

33

Consolidated Statements of Cash Flows

34

Consolidated Statements of Shareholders’ Equity

35

Notes to Consolidated Financial Statements

36

 

27

 


 

BADGER METER, INC.

 

Report of Independent Registered Public Accounting Firm

 

To the Shareholders and the Board of Directors of Badger Meter, Inc.

 

Opinion on Internal Control over Financial Reporting

 

We have audited Badger Meter, Inc.’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Badger Meter, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on the COSO criteria.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2023 and 2022, and the related consolidated statements of operations, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2023, and the related notes and our report dated February 16, 2024, expressed an unqualified opinion thereon.

 

Basis for Opinion

 

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

 

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

Definition and Limitations of Internal Control Over Financial Reporting

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

/s/ Ernst & Young LLP

 

Milwaukee, Wisconsin

February 16, 2024

28

 


 

BADGER METER, INC.

 

Report of Independent Registered Public Accounting Firm

 

To the Shareholders and the Board of Directors of Badger Meter, Inc.

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Badger Meter, Inc. (the Company) as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2023, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 16, 2024 expressed an unqualified opinion thereon.

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Warranty and After-Sale Costs Reserve

Description of the Matter

As described in Note 1 to the consolidated financial statements, the Company estimates and records provisions for warranties and other after-sale costs. Warranty provisions are recorded in the period of sale, using historical claims data revised for recent trending and expectations to estimate future warranty costs. After-sale costs represent costs expected to be incurred related to specifically identified product issues as well as activities outside the written warranty policy and are estimated by the Company based on the individual facts and circumstances. The Company’s accrued liability was $11.1 million as of December 31, 2023, representing its best estimate of the expected warranty and after-sale costs.

Auditing management's estimates for warranty and after-sale costs involved significant auditor judgment because the reserve for warranty and after-sale costs requires the Company to estimate future claims. The calculation to estimate future claims includes a number of inputs and assumptions, the most significant of which include the number and type of claims, an evaluation of warranty trends, consideration of product developments, and estimates of future costs to replace or repair specifically identified items.

29

 


 

How We Addressed the Matter in Our Audit

We evaluated the design and tested the operating effectiveness of internal controls over the Company's warranty and after-sale costs reserve process, including management's assessment of the assumptions and data underlying the projection of future warranty and after-sale costs.

Our substantive audit procedures included, among others, evaluating the significant assumptions discussed above and the accuracy and completeness of the underlying data used in management's warranty and after-sales costs reserve calculation. We evaluated the historical activity used to develop the lag calculation, including reviewing the data for any developing trends in the claims data, considered the impact of product developments on the calculation, and evaluated the cost build up for any specific reserve items, including procedures to support the completeness of the number and type of products impacted and the estimated future cost to repair or replace the products. We assessed the historical accuracy of management's estimates by comparing the warranty and after-sale costs reserve in prior years to the actual claims paid in the subsequent years. We also tested an analysis which utilized historical claim amounts as a percentage of sales and compared the results of this to the Company’s reserve calculation. We evaluated the completeness of the reserve estimate for known warranty claims or product issues based on our review of after-sales costs and through inquiries of operational and executive management and evaluated whether specific product issues were appropriately considered in the determination of the warranty and after-sale costs reserve.

/s/ Ernst & Young LLP

We have served as Badger Meter, Inc.’s auditor since 1927.

Milwaukee, Wisconsin

February 16, 2024

30

 


 

BADGER METER, INC.

Consolidated Balance Sheets

 

 

December 31,

 

 

 

2023

 

 

2022

 

 

 

(In thousands)

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

191,782

 

 

$

138,052

 

Receivables

 

 

83,507

 

 

 

76,651

 

Inventories:

 

 

 

 

 

 

Finished goods

 

 

34,764

 

 

 

31,350

 

Work in process

 

 

41,261

 

 

 

23,577

 

Raw materials

 

 

77,649

 

 

 

64,929

 

Total inventories

 

 

153,674

 

 

 

119,856

 

Prepaid expenses and other current assets

 

 

13,214

 

 

 

13,273

 

Total current assets

 

 

442,177

 

 

 

347,832

 

Property, plant and equipment, at cost

 

 

 

 

 

 

Land and improvements

 

 

9,257

 

 

 

8,947

 

Building and improvements

 

 

72,149

 

 

 

70,845

 

Machinery and equipment

 

 

144,582

 

 

 

141,153

 

 

 

 

225,988

 

 

 

220,945

 

Less accumulated depreciation

 

 

(152,110

)

 

 

(147,403

)

Net property, plant and equipment

 

 

73,878

 

 

 

73,542

 

Intangible assets, at cost less accumulated amortization

 

 

53,737

 

 

 

53,607

 

Other assets

 

 

11,249

 

 

 

14,048

 

Deferred income taxes

 

 

22,715

 

 

 

12,757

 

Goodwill

 

 

113,163

 

 

 

101,261

 

Total assets

 

$

716,919

 

 

$

603,047

 

Liabilities and Shareholders’ equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Payables

 

$

81,807

 

 

$

71,440

 

Accrued compensation and employee benefits

 

 

29,871

 

 

 

20,513

 

Warranty and after-sale costs

 

 

11,102

 

 

 

9,606

 

Other current liabilities

 

 

9,168

 

 

 

8,753

 

Total current liabilities

 

 

131,948

 

 

 

110,312

 

Long-term deferred revenue

 

 

49,763

 

 

 

32,240

 

Deferred income taxes

 

 

5,061

 

 

 

4,648

 

Accrued non-pension postretirement benefits

 

 

3,614

 

 

 

3,917

 

Other accrued employee benefits

 

 

5,293

 

 

 

3,940

 

Other long-term liabilities

 

 

4,758

 

 

 

5,568

 

Commitments and contingencies (Note 6)

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

Common stock, $1 par, authorized 80,000,000 and 40,000,000 shares in
2023 and 2022, respectively; issued
37,221,098 shares in 2023 and 2022

 

 

37,221

 

 

 

37,221

 

Capital in excess of par value

 

 

59,185

 

 

 

53,282

 

Reinvested earnings

 

 

458,719

 

 

 

395,155

 

Accumulated other comprehensive loss

 

 

(1,646

)

 

 

(5,983

)

Less: Treasury stock, at cost, 7,873,781 shares in 2023 and

 

 

 

 

 

 

7,928,071 shares in 2022

 

 

(36,997

)

 

 

(37,253

)

Total shareholders’ equity

 

 

516,482

 

 

 

442,422

 

Total liabilities and shareholders’ equity

 

$

716,919

 

 

$

603,047

 

 

See accompanying notes.

31

 


 

BADGER METER, INC.

Consolidated Statements of Operations

 

 

Years ended December 31,

 

 

 

2023

 

 

2022

 

 

2021

 

 

 

(In thousands except per share amounts)

 

Net sales

 

$

703,592

 

 

$

565,568

 

 

$

505,198

 

Cost of sales

 

 

427,154

 

 

 

345,598

 

 

 

299,714

 

Gross margin

 

 

276,438

 

 

 

219,970

 

 

 

205,484

 

Selling, engineering and administration

 

 

158,389

 

 

 

132,675

 

 

 

126,761

 

Operating earnings

 

 

118,049

 

 

 

87,295

 

 

 

78,723

 

Interest income, net

 

 

(4,047

)

 

 

(552

)

 

 

(20

)

Other pension and postretirement costs

 

 

130

 

 

 

130

 

 

 

120

 

Earnings before income taxes

 

 

121,966

 

 

 

87,717

 

 

 

78,623

 

Provision for income taxes

 

 

29,368

 

 

 

21,221

 

 

 

17,739

 

Net earnings

 

$

92,598

 

 

$

66,496

 

 

$

60,884

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

3.16

 

 

$

2.28

 

 

$

2.09

 

Diluted

 

$

3.14

 

 

$

2.26

 

 

$

2.08

 

Shares used in computation of earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

 

29,284

 

 

 

29,218

 

 

 

29,144

 

Impact of dilutive securities

 

 

172

 

 

 

158

 

 

 

194

 

Diluted

 

 

29,456

 

 

 

29,376

 

 

 

29,338

 

 

See accompanying notes.

32

 


 

BADGER METER, INC.

Consolidated Statements of Comprehensive Income

 

 

Years ended December 31,

 

 

 

2023

 

 

2022

 

 

2021

 

 

 

(In thousands)

 

Net earnings

 

$

92,598

 

 

$

66,496

 

 

$

60,884

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

4,411

 

 

 

(6,719

)

 

 

(1,516

)

Pension and postretirement benefits, net of tax

 

 

(74

)

 

 

600

 

 

 

339

 

Comprehensive income

 

$

96,935

 

 

$

60,377

 

 

$

59,707

 

 

See accompanying notes.

33

 


 

BADGER METER, INC.

Consolidated Statements of Cash Flows

 

 

Years ended December 31,

 

 

 

2023

 

 

2022

 

 

2021

 

 

 

(In thousands)

 

Operating activities:

 

 

 

 

 

 

 

 

 

Net earnings

 

$

92,598

 

 

$

66,496

 

 

$

60,884

 

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

 

 

 

 

 

 

 

 

 

Depreciation

 

 

10,937

 

 

 

11,090

 

 

 

11,291

 

Amortization

 

 

17,173

 

 

 

15,151

 

 

 

16,571

 

Deferred income taxes

 

 

(9,650

)

 

 

(5,619

)

 

 

(3,055

)

Noncurrent employee benefits

 

 

(338

)

 

 

(648

)

 

 

(234

)

Stock-based compensation expense

 

 

5,188

 

 

 

3,148

 

 

 

2,330

 

Changes in:

 

 

 

 

 

 

 

 

 

Receivables

 

 

(6,351

)

 

 

(11,328

)

 

 

(1,240

)

Inventories

 

 

(32,467

)

 

 

(21,021

)

 

 

(13,633

)

Payables

 

 

8,506

 

 

 

28,007

 

 

 

7,005

 

Prepaid expenses and other assets

 

 

(7,012

)

 

 

(10,557

)

 

 

(8,281

)

Other liabilities

 

 

31,533

 

 

 

7,732

 

 

 

15,872

 

Total adjustments

 

 

17,519

 

 

 

15,955

 

 

 

26,626

 

Net cash provided by operations

 

 

110,117

 

 

 

82,451

 

 

 

87,510

 

Investing activities:

 

 

 

 

 

 

 

 

 

Property, plant and equipment expenditures

 

 

(12,003

)

 

 

(5,891

)

 

 

(6,746

)

Acquisitions, net of cash acquired

 

 

(17,127

)

 

 

-

 

 

 

(45,273

)

Proceeds from company owned life insurance plans

 

 

-

 

 

 

-

 

 

 

596

 

Net cash used for investing activities

 

 

(29,130

)

 

 

(5,891

)

 

 

(51,423

)

Financing activities:

 

 

 

 

 

 

 

 

 

Dividends paid

 

 

(29,052

)

 

 

(24,881

)

 

 

(22,155

)

Proceeds from exercise of stock options

 

 

967

 

 

 

703

 

 

 

2,036

 

Repurchase of common stock for treasury stock

 

 

-

 

 

 

(427

)

 

 

(460

)

Issuance of treasury stock

 

 

-

 

 

 

-

 

 

 

72

 

Net cash used for financing activities

 

 

(28,085

)

 

 

(24,605

)

 

 

(20,507

)

Effect of foreign exchange rates on cash

 

 

828

 

 

 

(1,077

)

 

 

(679

)

Increase in cash and cash equivalents

 

 

53,730

 

 

 

50,878

 

 

 

14,901

 

Cash and cash equivalents – beginning of period

 

 

138,052

 

 

 

87,174

 

 

 

72,273

 

Cash and cash equivalents – end of period

 

$

191,782

 

 

$

138,052

 

 

$

87,174

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

 

Cash paid during the year for:

 

 

 

 

 

 

 

 

 

Income taxes

 

$

38,934

 

 

$

24,038

 

 

$

19,981

 

Interest

 

 

-

 

 

 

-

 

 

 

118

 

Property, plant and equipment acquired through operating lease

 

 

830

 

 

 

2,283

 

 

 

-

 

Property, plant and equipment accrued and unpaid

 

 

450

 

 

 

1,517

 

 

 

-

 

 

See accompanying notes.

34

 


 

BADGER METER, INC.

Consolidated Statements of Shareholders’ Equity

 

 

Years ended December 31,

 

 

 

Common
Stock at $1
par value*

 

 

Capital in
excess of
par value

 

 

Reinvested
earnings

 

 

Accumulated
other
comprehensive
income
(loss)

 

 

Treasury
stock (at cost)

 

 

Total

 

 

 

(In thousands except per share amounts)

 

Balance, December 31, 2020

 

$

37,221

 

 

$

44,964

 

 

$

314,850

 

 

$

1,313

 

 

$

(37,089

)

 

$

361,259

 

Net earnings

 

 

-

 

 

 

-

 

 

 

60,884

 

 

 

-

 

 

 

-

 

 

 

60,884

 

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

 

 

-

 

 

 

-

 

 

 

-

 

 

 

339

 

 

 

-

 

 

 

339

 

Foreign currency translation

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,516

)

 

 

-

 

 

 

(1,516

)

Cash dividends of $0.76 per share

 

 

-

 

 

 

-

 

 

 

(22,199

)

 

 

-

 

 

 

-

 

 

 

(22,199

)

Stock options exercised

 

 

-

 

 

 

1,622

 

 

 

-

 

 

 

-

 

 

 

414

 

 

 

2,036

 

Stock-based compensation

 

 

-

 

 

 

2,330

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,330

 

Purchase of common stock for treasury stock

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(460

)

 

 

(460

)

Issuance of treasury stock (19 shares)

 

 

-

 

 

 

308

 

 

 

-

 

 

 

-

 

 

 

89

 

 

 

397

 

Balance, December 31, 2021

 

$

37,221

 

 

$

49,224

 

 

$

353,535

 

 

$

136

 

 

$

(37,046

)

 

$

403,070

 

Net earnings

 

 

-

 

 

 

-

 

 

 

66,496

 

 

 

-

 

 

 

-

 

 

 

66,496

 

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

 

 

-

 

 

 

-

 

 

 

-

 

 

 

600

 

 

 

-

 

 

 

600

 

Foreign currency translation

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(6,719

)

 

 

-

 

 

 

(6,719

)

Cash dividends of $0.85 per share

 

 

-

 

 

 

-

 

 

 

(24,876

)

 

 

-

 

 

 

-

 

 

 

(24,876

)

Stock options exercised

 

 

-