Badger Meter, Inc. — FY 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual filing; quarterly Q4 figures are noted below. The company makes water-flow measurement, metering, radio, analytics and water-quality monitoring products. It reports one operating segment, and estimates approximately 90% of products serve water-related applications.
Financial performance
| Metric | FY 2020 | FY 2019 | Change / context |
|---|---|---|---|
| Net sales | $425.5 million | $424.6 million | Up $0.9 million, less than 1% |
| Gross margin | $168.2 million; 39.5% | $163.5 million; 38.5% | Margin improved 1.0 percentage point |
| Operating earnings | $65.2 million; 15.3% of sales | $62.1 million; 14.6% of sales | Up approximately 5% |
| Net earnings | $49.3 million | $47.2 million | Up approximately 5% |
| Diluted EPS | $1.69 | $1.61 | Up approximately 5% |
| Cash provided by operations | $89.6 million | $80.7 million | Increased with stronger earnings and working-capital management |
| Capital expenditures | $9.1 million | $7.5 million | 2021 estimate: $10–12 million |
- Markets: Utility-water sales were $344.3 million, up 4%; growth in advanced meters, ORION Cellular, BEACON software and the s::can acquisition offset pandemic-related order delays. Flow-instrumentation sales were $81.2 million, down 13.6%, reflecting weak industrial activity and COVID-19 disruptions.
- Q4 comparison: Net sales were $112.3 million versus $107.6 million in Q4 2019; net earnings were $13.1 million versus $12.3 million; diluted EPS was $0.45 versus $0.42.
- Margins and costs: Higher volume, product mix and pricing supported gross-margin improvement. These benefits were partly offset by higher warranty provisions, including a $3.5 million provision for a cellular network sunset recorded in Q4. Year-end warranty and after-sale liabilities were $11.6 million, versus $5.6 million a year earlier.
- Liquidity and debt: Cash was $72.3 million at year-end, short-term debt was zero (versus $4.5 million in 2019), and the company reported a $72.3 million net-cash position. It had $133.5 million of unused credit lines and was compliant with covenants. The existing credit agreement expires in September 2021; management intended to enter a new facility before then.
- Capital returns: Dividends paid were $20.3 million. The company repurchased $3.1 million of shares during 2020. The board authorized repurchases of up to an additional 400,000 shares through February 2023.
Material changes and unusual items
- FY 2020 sales were broadly flat, but utility-water growth was offset by a substantial decline in flow instrumentation. In 2019, sales had declined 2% from 2018.
- Operating earnings increased despite COVID-19 disruption; pandemic-related cost measures included travel restrictions, a hiring freeze, reduced discretionary spending, temporary furloughs and executive salary reductions. Most temporary measures ended in mid-June, while management continued to monitor spending and hiring.
- On November 2, 2020, Badger Meter acquired s::can, a water-quality sensing business, for $30.6 million of total consideration. The preliminary allocation included $12.7 million of intangible assets and $17.4 million of goodwill; valuation work was not complete at year-end. s::can contributed approximately $2.5 million of 2020 sales.
- A $19.9 million pension-termination settlement charge affected 2018 results and did not recur in 2019 or 2020, limiting direct comparability with those years.
- On January 1, 2021, the company acquired water-quality monitoring provider Analytical Technology, LLC for approximately $44 million net of cash acquired. Management did not expect a material impact on consolidated financial statements.
Outlook, risks and contingencies
- No specific revenue or earnings guidance is provided. Management cited continuing uncertainty about the duration and economic effects of COVID-19; municipal-water demand was more resilient than flow instrumentation, which was expected to remain affected longer.
- Management expected 2021 capital expenditures of $10–12 million, subject to project timing and growth opportunities. It stated that operating cash flows, borrowing capacity and access to capital were adequate for operating needs, investment and product development.
- Key risks include COVID-19 effects on demand, operations and supply chains; reliance on some single-source suppliers; commodity and component cost or availability; stronger competitors and accelerating adoption of static meters; technology, network sunset and cybersecurity risks; and international, regulatory and economic uncertainty.
- Environmental matters could create future costs that may be material, although compliance expenditures were not material in 2018–2020. The filing reports no material legal proceedings pending.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Important facts for investors to verify
- Whether utility-water growth and advanced-product adoption can continue to offset weakness in flow instrumentation.
- The final fair-value allocation and subsequent performance of s::can, including the acquired goodwill and intangible-asset assumptions.
- The size, timing and financial effect of the $3.5 million cellular network sunset warranty provision, and the elevated year-end warranty reserve.
- Completion and terms of the replacement credit facility before the existing agreement expires in September 2021.
- The integration, purchase accounting and actual financial contribution of the approximately $44 million ATi acquisition completed in January 2021.