Business context and reporting period
Badger Meter, Inc. filed this Form 10-K for the fiscal year ended December 31, 2018. The company makes flow measurement, control and communications products, primarily for municipal water utilities, with additional flow-instrumentation sales to industrial markets. It estimates more than 85% of its products are used in water-related applications. The filing also reports unaudited fourth-quarter results.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Net sales | $433.7 million | $402.4 million |
| Gross profit / margin | $162.3 million / 37.4% | $155.7 million / 38.7% |
| Operating earnings / margin | $56.9 million / 13.1% | $56.6 million / 14.1% |
| Net earnings | $27.8 million | $34.6 million |
| Diluted EPS | $0.95 | $1.19 |
| Cash from operations | $60.4 million | $49.8 million |
| Capital expenditures | $8.6 million | $15.1 million |
| Cash / short-term debt at year-end | $13.1 million / $18.1 million | $11.2 million / $44.6 million |
Sales increased 8%. Municipal water sales rose 9% to $334.7 million; flow-instrumentation sales rose 4% to $99.0 million. Gross margin declined as first-half commodity-cost increases were not fully offset by pricing until later in the year. Net earnings fell despite higher sales and a lower effective tax rate, chiefly because of pension termination charges.
Fourth-quarter sales were $104.4 million versus $96.7 million in 2017; net earnings were $11.2 million versus $7.2 million, and diluted EPS was $0.39 versus $0.25. Fourth-quarter gross profit was $40.2 million versus $39.0 million.
Cash from operations funded capital expenditures, $16.3 million of dividends and $10.0 million of acquisitions, with remaining cash flow used to reduce borrowings. Primary working capital was $124.6 million, or 28.7% of sales, compared with $114.8 million, or 28.5%, in 2017. The company reported $111.5 million of unused credit lines and said it was in compliance with credit covenants. Shareholders’ equity was $303.5 million.
Outlook, management commentary, risks and unusual items
- No specific 2019 sales or earnings guidance is provided. Planned 2019 capital expenditures are $10–15 million. Management anticipated continued cash dividends and planned to launch next-generation D-Flow ultrasonic metering technology in 2019.
- Management cited growth from higher U.S. residential and commercial volumes, international sales—particularly in the Middle East—and favorable mix from radio-equipped and ultrasonic meters and software-as-a-service. Municipal water sales were also supported by ongoing conversion to radio metering and interest in more frequent usage data.
- The company recorded $19.9 million of pretax pension settlement costs in 2018 as it completed termination of its defined-benefit pension plan. It also incurred $2.6 million of executive-retirement charges in selling, engineering and administration expenses. The federal corporate tax rate reduction contributed to a 22.5% effective tax rate, versus 37.0% in 2017.
- Badger Meter acquired Florida distributor Innovative Metering Solutions for approximately $12.0 million; its purchase-price allocation remained preliminary at year-end. The company also adopted the new revenue-recognition standard in 2018; the reported revenue impact was not material.
- Key risks include strong price competition, adoption and performance of newer products and software, municipal customers’ ability to fund purchases, commodity and component availability and costs, reliance on certain single-source suppliers, cybersecurity and cloud-service disruptions, foreign-market and currency exposure, and execution of acquisitions and government projects. Environmental contingencies could result in material future costs, although compliance expenditures were not material and no material legal proceedings were pending.
- The company reported no off-balance-sheet arrangements. The auditor issued unqualified opinions on the financial statements and internal controls; management also assessed internal controls as effective.
Most important facts for investors to verify
- How much of the 2018 earnings decline reflects the one-time pension settlement, and how should the retrospective pension-expense presentation change be considered when comparing operating earnings?
- Whether sales growth and margin performance can be sustained as radio, ultrasonic and software offerings expand and commodity costs or competitive pricing change.
- Whether the higher receivables and working-capital balance convert to cash as expected, particularly given longer payment terms on international receivables.
- Final fair-value allocation for the IMS acquisition, along with integration results and the remaining acquisition-related payments.
- Progress on the 2019 D-Flow launch, planned capital spending, and customer adoption of BEACON and other advanced metering solutions.