Badger Meter, Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports quarterly results; it is an annual report, not a standalone Q4 filing. Amounts are U.S. dollars.
Business context
Badger Meter develops and sells flow measurement, control and communication products. Its two principal sales categories are municipal water meters, radios and related software, and flow instrumentation for industrial applications. The company estimates nearly 90% of its products are used in water-related applications. It operates as one reportable segment.
Financial performance and position
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Net sales | $424.6 million | $433.7 million |
| Gross margin | $163.5 million; 38.5% of sales | $162.3 million; 37.4% of sales |
| Operating earnings | $62.1 million; 14.6% of sales | $56.9 million; 13.1% of sales |
| Net earnings | $47.2 million; 11.1% of sales | $27.8 million; 6.4% of sales |
| Diluted EPS | $1.61 | $0.95 |
| Operating cash flow | $80.7 million | $60.4 million |
| Capital expenditures | $7.5 million | $8.6 million |
Cash was $48.9 million at year-end, versus $13.1 million a year earlier. Short-term debt was $4.5 million, down from $18.1 million; management reported a $44.4 million net cash position. Shareholders’ equity was $331.1 million. Primary working capital was $111.8 million, or 26.4% of sales, compared with $124.6 million, or 28.7%, in 2018. The company had $128.3 million of unused credit lines and was in compliance with its credit covenants.
FY 2019 dividends paid were $18.6 million, and share repurchases were $5.2 million. The declared dividend was $0.64 per share for the year. Q4 2019 sales were $107.6 million and net earnings were $12.3 million, compared with $104.4 million and $11.2 million in Q4 2018; diluted EPS was $0.42 versus $0.39.
Material changes versus 2018
- Sales declined 2%. Municipal water sales fell 1% to $330.7 million; flow instrumentation sales declined 5% to $93.9 million.
- North American municipal water sales increased 1%, while international municipal sales declined, including because a $5.5 million Middle East sale in 2018 did not recur. Management also cited a mid-year pause in some orders associated with new product launches.
- Flow instrumentation sales weakened amid sluggish global industrial activity.
- Despite lower sales, gross margin improved, supported by product and regional mix, higher sales of meters with radios and SaaS, and lower commodity costs, particularly brass. Selling, engineering and administration expense fell $4.1 million, including because $2.6 million of executive retirement charges recorded in 2018 did not recur.
- Net earnings increased partly because 2018 included $19.9 million of pension settlement costs related to termination of the defined benefit plan. The termination was completed in 2018; 2019 other pension and postretirement costs were $0.3 million.
- Operating cash flow rose to $80.7 million, with management citing improved working-capital management and higher operating earnings. Receivables declined and payables increased; inventories rose modestly.
Outlook, risks and contingencies
- Management expected 2020 capital expenditures of $10–12 million, subject to project timing and growth opportunities. The filing provides no specific earnings or revenue guidance. The company said it anticipated continuing cash dividends.
- Management identified continued adoption of radio and ultrasonic meters, analytics and SaaS, and Smart Water solutions as opportunities. SaaS revenue had increased significantly from a small base and was described as margin-accretive. The company also cited international expansion opportunities.
- Key risks include competitive pressure and technology shifts, municipal customers’ ability to fund purchases, industrial-market weakness, supplier concentration for certain castings, resins and electronic components, commodity and foreign-exchange exposure, cybersecurity and cloud-service risks, product quality and warranty claims, and geopolitical, regulatory and environmental uncertainties.
- The company disclosed no material legal proceedings and no off-balance-sheet arrangements. Environmental matters remain contingencies that could generate future costs, potentially material; compliance expenditures in 2017–2019 were not material.
- Auditors issued unqualified opinions on the financial statements and internal controls. Warranty and after-sale cost estimation was identified as a critical audit matter; the recorded reserve was $5.6 million at year-end.
Important facts for investors to verify
- Whether the 2019 margin and earnings improvement is sustainable, given that lower brass costs and nonrecurrence of 2018 pension and executive charges contributed.
- Whether municipal water demand and new product adoption recover from the order pause, and whether Middle East sales rebound after the prior-year large sale did not repeat.
- Whether weakness in flow instrumentation tracks continuing industrial conditions and affects full-year growth.
- Whether SaaS, radio and ultrasonic product growth continues to improve mix and margins, while monitoring the $5.6 million warranty and after-sale reserve.
- Whether working-capital improvements and strong operating cash flow persist, alongside planned capital spending, dividends and repurchases.
- Potential effects of supplier disruptions, cybersecurity incidents, environmental matters and other disclosed contingencies.