Badger Meter, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Badger Meter supplies flow measurement, control and communications products, primarily for water utilities and industrial customers.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Net sales | $104.9 million | $105.0 million; essentially flat |
| Gross profit / margin | $40.5 million / 38.6% | $36.7 million / 35.0% |
| Operating earnings / margin | $14.3 million / 13.7% | $10.0 million / 9.5% |
| Net earnings | $10.8 million | $7.5 million; up about 43% |
| Diluted EPS | $0.37 | $0.26 |
| Operating cash flow | $17.8 million | $6.8 million |
| Capital expenditures | $2.2 million | $3.0 million |
| Cash / short-term debt at March 31 | $15.0 million / $11.0 million | Net cash position of about $4.1 million |
Cash from operations improved mainly because of higher earnings and working-capital changes. Cash and short-term debt were $15.0 million and $11.0 million, respectively, at quarter-end. The company reported $121.8 million of unused credit lines under its $125 million facility and compliance with its financial covenants. Total assets were $403.2 million and shareholders’ equity was $308.6 million.
Changes versus the prior-year quarter
- Municipal water sales rose about 1% to $81.2 million, supported by higher U.S. commercial sales; lower residential volumes partly offset that increase. Flow instrumentation sales fell about 3% to $23.7 million, primarily reflecting unfavorable foreign exchange and lower oil and gas sales.
- Gross margin improved 3.6 percentage points. Management attributed the improvement mainly to the nonrecurrence of prior-year facility relocation charges, favorable municipal product mix, pricing and lower commodity costs, including brass.
- Selling, engineering and administration expense decreased $0.6 million, as spending controls more than offset wage and salary inflation. The effective tax rate increased to 23.5% from 22.2%.
- Dividends declared per share increased to $0.15 from $0.13. The company repurchased $1.9 million of treasury stock during the quarter.
Outlook, commentary and risks
- No specific full-year financial guidance is provided. Management said the next generation of ultrasonic metering using D-Flow technology was expected to launch in 2019 and believed it could strengthen competitive differentiation.
- Management highlighted continued customer migration toward radio-enabled meters, AMI and analytics software. SaaS revenue was increasing from a small base and was described as margin-accretive. The filing estimates that about 60% of U.S. installed water meters have converted to radio solutions.
- Risks include intense pricing competition, changes in municipal customer funding and economic conditions, commodity and component costs, foreign exchange, product performance and technology execution, cybersecurity, and reliance on single-source suppliers for certain brass castings, resins and electronic subassemblies. Supplier disruption could raise costs and delay deliveries.
- Environmental matters could create future costs that may be material if circumstances change, although compliance expenditures in 2018 and Q1 2019 were not material. The company reported no material pending legal proceedings.
- The company paid $1.0 million of contingent consideration related to the D-Flow acquisition in Q1 and anticipated another $2.0 million payment in 2019; that amount was recorded in payables. It adopted the new lease standard on January 1, 2019, recording $10.4 million of lease liabilities at March 31.
Important facts for investors to verify
- Whether the improved gross margin is sustainable, given the cited benefit from lower commodity costs, pricing and prior-year relocation charges.
- Municipal water and flow instrumentation demand trends, product mix, and the pace of adoption of ultrasonic meters, AMI and SaaS.
- Working-capital and cash-flow movements, including receivables, payables and inventory, and continued access to the credit facility.
- Progress and costs associated with the 2019 D-Flow product launch and the remaining contingent acquisition payment.
- Potential financial exposure from environmental matters and the company’s single-source suppliers.