Badger Meter, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise. Badger Meter supplies water flow measurement, metering, analytics and water-quality monitoring solutions.
Financial results and liquidity
| Metric | Q3 2021 | Q3 2020 | First 9 months 2021 | First 9 months 2020 |
|---|---|---|---|---|
| Net sales | $128.7 | $113.6 | $369.4 | $313.2 |
| Gross margin | $51.2 | $45.0 | $150.6 | $124.2 |
| Gross margin % | 39.8% | 39.6% | 40.8% | 39.7% |
| Operating earnings | $19.4 | $19.5 | $55.9 | $48.2 |
| Operating margin | 15.1% | 17.2% | 15.1% | 15.4% |
| Net earnings | $15.9 | $14.9 | $43.6 | $36.2 |
| Diluted EPS | $0.54 | $0.51 | $1.49 | $1.24 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $62.8 | $73.7 |
At September 30, cash and cash equivalents were $67.0 million, versus $72.3 million at year-end 2020. Current assets were $245.7 million and current liabilities $79.8 million. The filing reports no material legal proceedings and does not clearly state a total debt balance. The company had $158.1 million of unused credit lines and was in compliance with its credit covenants.
Material changes versus the prior comparable period
- Q3 sales rose 13.3%; nine-month sales rose 18.0%. Q3 net earnings increased 6.7%, while nine-month net earnings increased 20.3%.
- Q3 operating earnings were nearly flat despite higher revenue, and operating margin fell to 15.1% from 17.2%. Higher selling, engineering and administration expenses reflected acquisitions, acquired-intangible amortization and comparison with pandemic-related expense reductions in 2020.
- Nine-month gross margin improved to 40.8% from 39.7%, supported by pricing, favorable product and acquisition mix, and higher software-as-a-service revenue. Pricing partly offset inflationary costs.
- Operating cash flow declined by $10.9 million year over year, primarily due to working-capital needs, higher receivables and inventories, and shipment timing amid supply constraints.
- Investing cash use included $45.3 million for acquisitions and $8.2 million of capital expenditures. The company acquired water-quality monitoring provider ATi for $44 million, net of cash acquired, effective January 1, 2021; purchase accounting remained preliminary. The 2020 s::can acquisition also contributed to results.
Outlook, management commentary and risks
- The filing gives no quantified full-year earnings or sales guidance. Management reported record backlog, with orders exceeding sales as component shortages and logistics constraints limited production; it expected sales patterns to remain uneven through the rest of 2021 and into 2022.
- Management cited improving customer order rates and demand, but said shortages of electronics and other components constrained output and the ability to meet demand. Material, logistics and freight inflation were becoming more pervasive; pricing initiatives were intended to offset cost pressure where possible.
- Q3 results included a discrete tax benefit from stock-option exercises and restricted-stock vesting; the effective tax rate was 18.3%, versus 23.9% a year earlier. The nine-month rates were 21.8% and 24.6%, respectively.
- Key uncertainties include COVID-19 impacts, supply-chain and logistics disruption, inflation, competition, foreign currency, cybersecurity, regulatory and environmental matters, and the ability to develop and integrate products and acquisitions. The company relies on single suppliers for most brass castings and certain resin and electronic subassemblies. Environmental compliance spending was not material in 2020 or the first nine months of 2021, but future related costs could be material.
Important facts for investors to verify
- Whether component availability and logistics improve enough to convert the record backlog into sales, and how that affects margins and delivery timing.
- How effectively pricing offsets continuing material, labor, freight and other inflation.
- Cash conversion and working-capital trends, particularly receivables and inventories, alongside the acquisition-related investment.
- Integration and performance of ATi and s::can, including completion of their preliminary purchase-price allocations and the effect of acquired intangible amortization.
- Future tax rates, given the Q3 discrete tax benefit, and any developments in environmental contingencies or supplier concentration risk.