Badger Meter, Inc. — FY2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing is an annual report, not a standalone Q4 filing; quarterly figures below identify the quarter ended December 31.
Business context
Badger Meter manufactures flow measurement and control products for water and gas utilities, municipalities, and industrial customers. Water applications accounted for 78.3% of 2011 sales; specialty applications accounted for 21.7%. The company operates as one reportable segment. Its strategy centers on moving customers from manually read meters toward automated meter reading (AMR), advanced metering infrastructure (AMI), and its newly introduced advanced metering analytics (AMA) solutions.
Financial performance and liquidity
| Metric | FY2011 | FY2010 |
|---|---|---|
| Net sales | $262.9 million | $276.6 million |
| Gross margin | $89.8 million; 34.2% | $102.8 million; 37.2% |
| Operating earnings | $27.5 million | $44.8 million |
| Earnings from continuing operations | $19.2 million | $28.7 million |
| Diluted EPS from continuing operations | $1.27 | $1.91 |
| Net cash provided by operations | $31.3 million | $18.4 million |
| Capital expenditures | $5.3 million | $9.2 million |
- Sales fell 5.0%; continuing earnings declined 33.2%. Gross margin contracted 3.0 percentage points, reflecting lower production volumes and higher commodity costs, particularly copper.
- Water-application sales decreased 11.7% to $205.9 million; specialty sales increased 31.6% to $57.0 million. International sales rose 2.5% to $31.6 million.
- Cash from operations improved mainly because the substantial inventory buildup seen in 2010 did not recur and there was no pension contribution in 2011. Cash less capital expenditures was approximately $26.0 million.
- At year-end, cash was $5.0 million, working capital $78.8 million, and the current ratio 4.5. Short-term debt was $1.8 million, down from $12.9 million; debt was less than 1% of total capitalization. Shareholders’ equity was $179.3 million.
- Backlog was $33.4 million at year-end, versus $36.9 million a year earlier.
- In Q4 2011, sales were $60.7 million and net earnings were $1.2 million, compared with $64.8 million and $6.3 million in Q4 2010.
Changes, outlook, and notable items
- Management cited municipal spending concerns, slower housing starts, customer evaluation of the next-generation ORION product, and poor Midwest and Northeast weather as factors weighing on water sales. GALAXY/AMI sales increased nearly 77%, but ORION sales declined nearly 17% and Itron-related sales nearly 33%.
- Management said AMR was expected to remain the most common utility choice for several years, while AMA was intended to address future utility needs. The filing gives no quantified financial guidance.
- FY2011 included approximately $1.3 million of tax benefits from the conclusion of an IRS audit; without those benefits, the effective tax rate would have been 34.8%, versus 29.9% reported. FY2010 included a $0.7 million one-time land-settlement credit.
- FY2011 selling, engineering, and administration expense included approximately $1.1 million of Racine Federated acquisition costs and a non-cash pension curtailment charge. The company froze its defined benefit pension plan for union participants at year-end 2011, following the 2010 freeze for non-union participants.
- On February 1, 2012, after year-end, Badger Meter acquired Racine Federated for approximately $57 million in cash. The filing reports Racine Federated’s 2010 sales as $33.4 million; purchase-price allocation was incomplete. The company temporarily increased its principal credit line from $65 million to $90 million to support potential cash needs, including the acquisition and a $30 million repurchase program begun in Q1 2012.
- Risks include intense competition and pricing pressure; uncertain adoption and success of new products; municipal customers’ ability to fund purchases; copper and other input-cost volatility; reliance on certain single-source suppliers; execution, warranty, and subcontractor exposure from systems projects; foreign currency and economic conditions; and regulatory changes involving lead and radio frequencies.
- The company disclosed asbestos-related claims, two patent infringement suits, and two landfill matters. It believes resolution will not materially harm results or financial position, but outcomes are uncertain. A specific product issue contributed $0.6 million to the 2011 warranty reserve, which reached $1.6 million.
- Ernst & Young issued unqualified opinions on the financial statements and internal controls; management and the auditor concluded internal control over financial reporting was effective.
Investor verification priorities
- Check whether water-market demand and margins recovered after the 2011 volume decline and commodity-cost pressure.
- Track adoption, economics, and customer deployments for ORION, GALAXY, and AMA, including the effect of ORION/Itron product mix.
- Review Racine Federated’s final purchase-price allocation, financing, integration costs, and contribution to sales and earnings.
- Confirm the scale and timing of the planned share repurchases and the company’s post-acquisition debt and liquidity position.
- Assess the specific warranty issue and developments in asbestos, patent, and environmental contingencies.
- Monitor pension funding and expense following the plan freezes, including the estimated $1.9 million 2012 pension contribution.