Badger Meter, Inc. — Q1 2016 Form 10-Q
Business and period: The unaudited report covers the three months ended March 31, 2016, compared with Q1 2015. Badger Meter sells water meters, meter-reading and analytics technology, and industrial flow-instrumentation products. Municipal water accounted for 76.9% of quarterly sales.
Financial results
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $100.6 million | $83.6 million | +20.3% |
| Gross profit / margin | $39.0 million / 38.8% | $30.1 million / 36.0% | Margin +2.8 points |
| Operating earnings | $12.8 million | $7.1 million | +80.3% |
| Net earnings | $8.0 million | $4.2 million | +89.1% |
| Diluted EPS | $0.55 | $0.29 | +$0.26 |
| Operating cash flow | $18.2 million | $6.8 million | +$11.4 million |
Cash capital expenditures were $3.2 million and dividends paid were $2.9 million. Cash ended the quarter at $9.9 million, up from $8.2 million at December 31, 2015. Short-term debt fell to $61.2 million from $71.4 million. The company reported $51.8 million of unused credit lines under its $105 million facility and compliance with its financial covenants. Current assets were $150.8 million and current liabilities $98.8 million.
Drivers and changes
- Municipal water sales rose 32.3% to $77.4 million, primarily on higher residential and commercial meter volumes, modestly higher prices, and incremental United Utilities revenue. Management said milder winter weather prompted some utilities to order earlier than usual.
- Flow-instrumentation sales declined 7.6% to $23.2 million amid weak oil and gas demand, a curtailed customer meter program, and broader market softness.
- Gross-margin expansion reflected higher municipal-water volumes, United Utilities contribution, and lower brass costs; it was partly offset by product mix and higher warranty and after-sale costs. Selling, engineering and administration expense increased 13.9% to $26.2 million, including higher incentive compensation, software amortization, and United Utilities costs.
- Receivables increased to $59.2 million from $56.6 million at year-end, attributed to higher sales. Inventory declined to $76.2 million from $78.6 million.
Outlook, risks and contingencies
The filing gives no specific earnings or revenue guidance. Management described the financial condition as strong and said operating cash flow, borrowing capacity, and access to capital were expected to support operations, capital expenditures, and product development. It highlighted continued conversion from manually read meters to radio-based AMR, AMI and analytics solutions, while noting the opportunity and competitive uncertainty in ultrasonic meters and newer products. Interim results are not necessarily indicative of full-year results.
- Risks include intense pricing competition, product and technology execution, municipal customers’ ability to fund purchases, economic and foreign-exchange conditions, input-cost and supply availability, and reliance on single suppliers for most brass castings and certain electronic subassemblies.
- The company is named in two landfill-related environmental lawsuits and numerous asbestos-related personal-injury lawsuits. It does not expect these matters to have a material adverse effect, but states outcomes are uncertain and future environmental costs could be material.
- Warranty and after-sale reserve increased to $3.6 million from $3.1 million at year-end; Q1 net additions charged to earnings were $1.1 million, versus $0.3 million in Q1 2015.
- The Q1 effective tax rate was 36.3%, versus 37.2%; Q1 2015 included a $75,000 discrete tax charge and Q1 2016 a $17,000 discrete credit.
Investor verification points
- Assess how much of municipal-water growth reflects sustainable demand versus weather-related order timing, acquisition contribution, and higher volumes.
- Track the recovery or further weakness in flow instrumentation, particularly oil-and-gas-related demand and the large customer program.
- Monitor whether higher warranty and after-sale costs persist and their effect on gross margin and reserves.
- Review cash conversion, receivables, short-term borrowing, and available credit capacity as business conditions change.
- Follow developments in environmental and asbestos litigation, supplier concentration, and the company’s assessment of revenue-recognition standard adoption, expected January 1, 2018.