Business Context and Reporting Period
Badger Meter, Inc. designs and manufactures flow measurement, control and communications products for municipal water utilities and industrial customers. This Form 10-K covers the fiscal year ended December 31, 2015; it also reports fourth-quarter results. Municipal water accounted for 75% of annual sales, and the company estimates more than 75% of its products serve water applications.
Financial Results and Position
| Metric | 2015 | 2014 |
|---|---|---|
| Net sales | $377.7 million | $364.8 million |
| Gross margin | $135.8 million; 35.9% | $131.1 million; 36.0% |
| Operating earnings | $42.4 million | $46.0 million |
| Net earnings | $25.9 million | $29.7 million |
| Diluted earnings per share | $1.80 | $2.06 |
| Cash provided by operations | $35.8 million | $35.7 million |
| Capital expenditures | $19.8 million | $12.3 million |
| Cash at year-end | $8.2 million | $6.7 million |
| Short-term debt | $71.4 million | $75.9 million |
Annual sales rose 3.5%. Net earnings declined 12.6%, and diluted EPS declined 12.6%. Gross margin was nearly unchanged, while operating earnings fell 7.8%. The effective tax rate increased to 37.0% from 33.9%. Cash flow from operations less capital expenditures was $16.1 million in 2015, compared with $23.4 million in 2014.
At year-end, working capital was $44.8 million and the current ratio was 1.4:1. Shareholders’ equity was $232.3 million; debt was 23.5% of total capitalization. The company had $41.2 million of unused short-term credit lines under its $105 million facility and reported compliance with its financial covenants. It declared dividends of $0.78 per share for the year, versus $0.74 in 2014.
Material Changes and Fourth-Quarter Results
- Municipal water sales increased 8.8% to $283.1 million. Residential meter and technology sales rose 12.5%, supported by ORION products and E-Series ultrasonic meters; commercial meter sales declined 6.7%.
- Flow instrumentation sales decreased 9.6% to $94.6 million, reflecting currency translation, weaker oil and gas demand, weather effects and broader economic softness.
- Municipal sales included $12.8 million of incremental sales associated with the National Meter acquisition and the United Utilities asset purchase.
- Fourth-quarter 2015 sales were $95.8 million, versus $89.3 million in fourth-quarter 2014; net earnings were $5.5 million versus $6.0 million, and diluted EPS was $0.38 versus $0.42.
- Capital spending increased, including spending on converting headquarters factory space to offices. Inventory increased to $78.6 million from $71.8 million, partly due to stocking expanded company-owned distribution facilities.
Outlook, Management Commentary, Risks and Unusual Items
The filing gives no quantified earnings or revenue guidance. Management said operating cash flow, borrowing capacity and access to capital should adequately fund operations, capital expenditures and product development; it also anticipated continuing cash dividends. Management cited the ongoing shift from manually read meters to radio-enabled systems and the growth of BEACON AMA, whose sales had increased more than eight-fold over two years. BEACON software-as-a-service revenue remained insignificant in 2015.
Key risks include intense pricing competition, municipal customers’ ability to fund purchases, acceptance and performance of newer products, competition as ultrasonic meters gain adoption, dependence on certain single-source suppliers, material costs, foreign exchange and economic conditions. The company also identified risks from subcontracted installation projects, cybersecurity and technology disruptions, product quality and warranty claims, and regulatory changes.
In 2015, the company acquired United Utilities’ assets for $3.3 million, including settlement of $2.9 million in pre-existing receivables; purchase-price allocation remained preliminary at year-end. Gross margin was affected by product mix, lower brass costs, and higher warranty, obsolete-inventory and healthcare expenses. Warranty and after-sale cost reserves rose to $3.1 million from $1.7 million. During the fourth quarter, the company revised its nine-month cash flow presentation for the United Utilities acquisition: operating cash flow and investing cash outflow each decreased by $2.9 million, with no change to the purchase price.
The company reported no material pending legal proceedings, but disclosed asbestos-related lawsuits and two landfill-related environmental matters. It did not expect these matters to materially affect results, while noting outcomes are uncertain and future environmental costs could be material. Ernst & Young issued unqualified opinions on the financial statements and internal controls.
Important Facts for Investors to Verify
- Whether municipal meter growth and radio/ultrasonic adoption can offset continuing weakness in flow instrumentation and commercial meters.
- How much of 2015 municipal sales growth reflected acquisitions versus underlying organic demand; the filing identifies $12.8 million of acquisition-related incremental sales.
- Whether higher operating expenses, warranty provisions and inventory levels persist, and how they affect margins and cash conversion.
- The company’s ability to refinance or repay $71.4 million of short-term debt, and continued access to its credit facilities and compliance with covenants.
- Final fair-value allocation for United Utilities, and any subsequent changes to acquisition-related estimates or cash flow disclosures.
- Developments in environmental and asbestos matters, supplier continuity, product performance and BEACON AMA’s commercial traction.