Badger Meter, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; filed April 29, 2020. Badger Meter makes flow measurement, control and communications products, primarily for water utilities and industrial customers. Nearly 90% of its products are used in water-related applications. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 / prior year-end |
|---|---|---|
| Net sales | $108.5 | $104.9 |
| Gross margin | $43.3; 39.9% of sales | $40.5; 38.6% of sales |
| Operating earnings | $16.0; 14.8% of sales | $14.3; 13.7% of sales |
| Net earnings | $11.9 | $10.8 |
| Diluted EPS | $0.41 | $0.37 |
| Cash provided by operations | $30.5 | $17.8 |
| Capital expenditures | $1.9 | $2.2 |
| Cash and cash equivalents | $70.4 | $48.9 at Dec. 31, 2019 |
| Short-term debt | $4.4 | $4.5 at Dec. 31, 2019 |
| Shareholders’ equity | $335.7 | $331.1 at Dec. 31, 2019 |
The company reported a $66.0 million net cash position at quarter-end. It said it had $128.2 million of unused credit lines and separately described a $125.0 million revolving facility; the filing does not reconcile these figures. The facility supports commercial paper of up to $70.0 million, and the company was in compliance with its financial covenants. Current assets were $211.4 million and current liabilities $60.5 million.
Changes versus the comparable period
- Sales rose 3.5%, net earnings rose 9.5%, and diluted EPS increased from $0.37 to $0.41.
- Municipal water sales increased 5.6% to $85.7 million, supported by ORION Cellular endpoints, E-Series ultrasonic meters and SaaS revenue. Flow instrumentation sales declined 3.9% to $22.8 million, as lower oil and gas activity more than offset HVAC growth.
- Gross margin improved with higher volume, stronger municipal water product mix and lower commodity costs, including brass. Selling, engineering and administration expense increased to $27.3 million from $26.1 million, primarily due to personnel and R&D costs.
- Cash from operations increased substantially, mainly reflecting working-capital management and modestly higher earnings. Primary working capital fell $14.1 million from year-end, to $97.7 million, or 22.8% of trailing-twelve-month sales versus 26.4% at year-end.
- The effective tax rate increased to 25.6% from 23.5%. Dividends declared were $0.17 per share versus $0.15.
Outlook, commentary and risks
- COVID-19: The company said operations had continued, but facilities were operating below normal production capacity due to furloughs and government restrictions. It implemented travel restrictions, a hiring freeze, reduced discretionary spending, short-term furloughs and executive salary reductions. It reported a decline in orders during April and said the pandemic’s duration and financial impact were difficult to estimate. No numerical earnings or sales guidance was provided.
- Management said cash, operating cash flow and available borrowing capacity were adequate for foreseeable needs, including the quarterly dividend. It expected product availability to meet customer orders based on information available when the report was prepared.
- Key risks include pandemic-related demand, operating, shipping and supply-chain disruptions; reliance on single suppliers for many brass castings, certain resins and electronic subassemblies; and potentially material environmental costs. The company reported no material pending legal proceedings and no material environmental compliance expenditures in 2019 or Q1 2020.
- Warranty and after-sale reserves increased to $6.0 million from $5.6 million at year-end; net additions charged to earnings were $1.2 million versus $0.5 million in Q1 2019. The company reported no material subsequent events through the filing date.
Important facts for investors to verify
- How April’s order decline and below-normal production capacity developed after the report, including resulting effects on sales, margins and cash flow.
- Whether the stated $128.2 million of unused credit lines and $125.0 million revolving facility represent different measures, and the company’s subsequent liquidity and borrowing position.
- Whether the municipal water technology and SaaS growth continued to offset weakness in flow instrumentation, particularly oil and gas.
- Developments in supplier availability, environmental exposures and warranty claims, including the increase in warranty reserve additions.