Badger Meter, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; financial statements are unaudited. Badger Meter supplies water meters and related technologies, flow instrumentation, and specialty products. Municipal water products represented 69.1% of quarterly sales.
Financial results and liquidity
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net sales | $83.5 million | $71.8 million |
| Gross margin | $29.0 million; 34.7% | $25.0 million; 34.9% |
| Operating earnings | $7.7 million | $4.7 million |
| Net earnings | $4.6 million | $2.9 million |
| Diluted EPS | $0.32 | $0.20 |
| Operating cash flow | $0.6 million | $4.3 million |
Sales rose 16.3%; operating earnings increased 63.8%. Net margin was approximately 5.5%, compared with 4.0% a year earlier. The effective tax rate was 37.4%, versus 35.1%.
Cash was $6.4 million at quarter-end. Short-term debt was $73.9 million, up from $70.0 million at December 31, 2013; unused credit lines were $44.1 million. Current assets were $133.3 million and current liabilities $102.8 million. Capital expenditures were $3.3 million and dividends paid were $2.6 million. The company reported compliance with its credit facility covenants and said available cash flows and borrowing capacity were adequate for operating needs, capital expenditures, and product development.
Changes and operating drivers
- Municipal water sales increased 23.3% to $57.7 million, driven by higher residential and commercial meter volumes. Management noted that the prior-year quarter was affected by weather for its customer mix, and that some regions had milder-than-normal winter weather in Q1 2014.
- Flow instrumentation sales rose 7.7% to $23.7 million. Specialty product sales fell 30.0% to $2.1 million, mainly on lower gas-radio sales.
- Gross margin edged down from 34.9% to 34.7%, reflecting a mix shift toward lower-margin manually read meters; higher volumes and capacity utilization partly offset the impact.
- Selling, engineering and administration expense included $1.7 million of due diligence and other costs for a potential acquisition that was not pursued, equal to approximately $0.07 per diluted share.
- Operating cash flow declined despite higher earnings, primarily because receivables and inventories increased. Receivables rose to $54.7 million and inventories to $64.0 million from year-end.
Outlook, risks and contingencies
The filing gives no specific numerical earnings or sales guidance. Management highlighted its January 2014 launch of BEACON AMA, a managed water-meter analytics solution using fixed and cellular networks, and stated that it believes the product positions the company to address customer needs. Management expects AMR to remain the primary choice for many utilities for a number of years, while interest in AMI and AMA grows.
Risks discussed include competitive pricing, adoption and performance of newer products, customer funding and economic conditions, weather, raw-material and component availability and costs, currency movements, reliance on certain suppliers and technology partners, and obligations when acting as a prime contractor. The company reported no material pending legal proceedings. It is named in two landfill-related environmental matters and asbestos lawsuits; management did not expect their resolution to have a material adverse effect, while noting outcomes are uncertain and future environmental costs could be material.
The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It also said no minimum pension contribution was required for 2014 and that it continued to expect none.
Important facts for investors to verify
- Whether sales growth and improved earnings persist after considering the prior-year weather comparison and the Q1 customer and product mix.
- Whether working-capital growth, particularly receivables and inventories, reverses and supports stronger operating cash flow.
- How short-term borrowing and available credit capacity change, including the scheduled May 2014 credit-line reduction disclosed in the filing.
- Whether BEACON AMA and other proprietary radio and analytics products gain adoption and support margins.
- Whether warranty and after-sale costs, which increased to a $1.2 million reserve from $0.9 million at year-end, or the disclosed legal and environmental contingencies change materially.