Business context and reporting period
Badger Meter, Inc. designs and sells flow measurement, control and communications products. Its business includes municipal water meters and related technologies (about 77% of sales) and flow instrumentation for industrial applications. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2017; comparisons are with the corresponding 2016 periods.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $104.2 million | $103.8 million | $205.8 million | $204.4 million |
| Gross margin | $41.1 million; 39.4% | $39.4 million; 37.9% | $79.7 million; 38.7% | $78.4 million; 38.4% |
| Operating earnings | $16.6 million | $14.9 million | $30.1 million | $27.7 million |
| Net earnings | $10.6 million | $9.4 million | $19.4 million | $17.4 million |
| Diluted EPS | $0.36 | $0.32 | $0.67 | $0.60 |
Six-month operating cash flow was $37.3 million, versus $27.7 million a year earlier. Capital expenditures were $6.8 million; acquisitions used $18.4 million of cash, and dividends paid were $6.7 million. Cash at June 30 was $13.9 million. Short-term debt was $45.6 million, compared with $38.0 million at year-end 2016. The company reported $87.4 million of unused credit lines under its $125 million credit facility and compliance with its financial covenants.
Total assets were $378.7 million and shareholders’ equity was $269.4 million at June 30, 2017. Inventories were $73.9 million, down from $77.7 million at year-end; receivables were $64.4 million, up from $59.8 million.
Changes versus prior periods
- Q2 sales rose 0.4%; operating earnings rose 11.4% and net earnings rose 12.9%. For the first half, sales increased 0.7%, operating earnings 8.7%, and net earnings 11.3%.
- Management attributed improved gross margin mainly to pricing discipline, favorable foreign exchange on purchased products and product mix; higher brass costs partly offset those benefits. First-half margin also reflected higher volume and plant utilization, partly offset by increased obsolescence charges.
- Municipal water sales increased modestly; higher radio volumes and prices/mix partly offset slightly lower meter volumes in Q2. Flow instrumentation sales also edged higher, with domestic improvement offset by weaker international sales.
- Selling, engineering and administration costs were nearly flat in Q2 and 2.2% lower for the first half. First-half expenses included a $0.5 million write-down of an investment in an emerging technology company.
- The company acquired D-Flow Technology AB on May 1 for approximately $23.2 million in cash plus a working-capital adjustment. D-Flow contributed about $0.7 million of Q2 sales; purchase-price allocation remained preliminary at quarter-end.
Outlook, risks and contingencies
The filing gives no specific revenue, earnings or margin guidance. Management said operating cash flows, borrowing capacity and access to capital were adequate for operating needs, capital spending and product development. It expects no additional pension-plan contribution in 2017 and considered its estimated $0.4 million of 2017 postretirement benefit payments reasonable.
Key risks identified include competitive pricing, the pace of transition to AMR/AMI/AMA and ultrasonic products, product and technology execution, municipal customers’ ability to fund purchases, international economic and currency conditions, raw-material and supplier availability, and performance obligations when acting as a prime contractor. The company also relies on single suppliers for most brass castings and certain electronic subassemblies. It reported landfill-related environmental proceedings and asbestos-related lawsuits, but did not expect their resolution to materially adversely affect financial position or results; outcomes remain uncertain. Warranty and after-sale reserves were $3.1 million at June 30. No material subsequent events were reported.
Important facts for investors to verify
- Whether improved margins and earnings persist despite nearly flat sales and ongoing brass-cost, obsolescence and pricing pressures.
- How D-Flow performs and whether the final purchase-price allocation or integration changes the acquisition’s reported impact.
- Whether cash generation, debt and available credit remain sufficient as the company funds acquisitions, capital spending and shareholder returns.
- Whether international demand, currency movements, supplier concentration and legal or environmental contingencies develop differently from management’s current assessments.
- The expected effects of adopting the new revenue-recognition and lease accounting standards; the filing says revenue-standard assessment was substantially complete but did not identify a significant financial-statement impact beyond expanded disclosures.