Badger Meter, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Unaudited consolidated financial statements. Badger Meter makes flow measurement products for water and specialty applications, including manually read meters and AMR, AMI, and AMA technologies. Amounts below are in millions except per-share data.
Financial results
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $75.1 | $74.3 | $132.5 | $136.1 |
| Gross margin | $27.2; 36.2% | $27.0; 36.4% | $47.7; 36.0% | $50.2; 36.9% |
| Operating earnings | $12.3 | $13.0 | $17.5 | $21.7 |
| Net earnings | $7.8 | $8.0 | $11.1 | $13.4 |
| Diluted EPS | $0.52 | $0.53 | $0.74 | $0.89 |
Second-quarter operating margin was approximately 16.3% versus 17.5%; first-half operating margin was approximately 13.2% versus 16.0%. First-half net sales declined 2.6%, operating earnings declined 19.4%, and net earnings declined 17.1%. Q2 sales rose 1.2%, but operating earnings fell 5.4%.
- Sales mix: Q2 water-application sales fell 9.4% to $58.7 million; specialty sales rose 72.6% to $16.4 million. For the first half, water sales fell 14.4% to $100.7 million, while specialty sales rose 72.8% to $31.8 million.
- Cash flow: First-half operating cash flow was $18.0 million versus $10.5 million in 2010. Investing used $6.5 million and financing used $10.6 million. Cash increased $1.2 million to $4.3 million.
- Liquidity and debt: Current assets were $104.3 million and current liabilities $30.8 million at June 30. Short-term debt was $6.1 million, down from $12.9 million at year-end 2010. The company reported $56.4 million of available short-term credit lines.
- Dividends: Declared dividends were $0.14 per share in Q2 and $0.28 for the first half, compared with $0.12 and $0.24 in the respective 2010 periods.
Drivers and material changes
- Lower water-meter volumes, particularly AMR/AMI products and commercial meters, weighed on first-half results. ORION AMR sales fell 25.9% and Itron-related sales fell 15.2% year over year in the first half; commercial meter sales declined 26.3%.
- Management attributed weaker water sales to municipal budget and spending concerns, slower housing starts, poor weather in the Midwest and Northeast, and customers taking time to evaluate the next-generation ORION product.
- Specialty sales benefited from natural-gas radio technology, valves, and acquisitions. Remag, acquired January 26 for $4.9 million, contributed $1.6 million of first-half sales; Cox contributed $4.3 million versus $1.4 million in the first half of 2010.
- First-half gross margin fell to 36.0% from 36.9%, reflecting higher material costs, especially castings, partly offset by price increases, manufacturing-cost reduction efforts, and a more favorable specialty mix. Selling, engineering and administration costs increased 5.8% for the first half, including acquisition-related costs, higher amortization and technical support costs.
- Q2 2010 and first-half 2010 included a one-time $0.7 million credit for land received in a contractor settlement, affecting year-over-year expense comparisons.
Outlook, risks and contingencies
- No quantified earnings or sales guidance is provided. Management expected AMA products—Readcenter Analytics software with ORION SE two-way fixed-network technology—to be fully available in Q3 2011 after a limited first-half rollout. Management expected AMR to remain the primary choice for many utilities for several years.
- Management said operating cash flow, borrowing capacity and access to capital were adequate for operations, capital expenditures and product development. It reported no required pension contribution for 2011, though voluntary payments remained possible.
- Key risks include municipal utility budgets and project timing, competition and pricing, adoption and success of new products, raw-material costs and availability, foreign exchange, single-source supplier disruption, and performance, timing, warranty and subcontractor risks when serving as prime contractor. The filing also cites dependence on alliance partners and regulatory changes affecting lead and radio frequencies.
- The company disclosed environmental matters involving two landfill lawsuits and a claim concerning adjoining property, as well as asbestos-related lawsuits. Management did not expect these matters to have a material adverse effect, but stated outcomes are uncertain and future costs could be material.
Important facts for investors to verify
- Whether water-meter and AMR/AMI demand recovers, and whether delayed utility purchasing reflects timing or a more persistent weakness.
- Whether AMA launches as expected and gains customer adoption, and whether its sales and margins offset declines in legacy water products.
- Whether specialty growth is sustainable and how much reflects acquired businesses versus organic demand.
- Whether input-cost inflation, working-capital needs and supplier lead times affect margins and cash generation in subsequent quarters.
- Developments in environmental and asbestos proceedings, and any changes to related exposure or reserves.