Badger Meter, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited. Badger Meter makes flow measurement and control products, primarily for water utilities, industrial customers, and specialty markets. The filing’s index contains an apparent period-label error, but the report and financial statements cover the quarter ended March 31, 2013.
Financial results
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net sales | $71.8 million | $76.2 million |
| Gross margin | $25.0 million (34.9%) | $28.9 million (37.9%) |
| Operating earnings | $4.7 million | $10.2 million |
| Net earnings | $2.9 million | $6.2 million |
| Diluted EPS | $0.20 | $0.42 |
| Cash provided by operations | $4.3 million | $10.2 million |
| Capital expenditures | $2.8 million | $1.3 million |
| Dividends declared per share | $0.17 | $0.16 |
Net sales declined 5.8%; operating earnings fell 53.9% and net earnings fell 53.5%. Lower sales and factory utilization reduced gross margin, while selling, engineering and administration expense rose 8.8% to $20.3 million. The tax rate was 35.1%, versus 37.4%, reflecting recognition of 2012 research and development credits; management said the rates would otherwise have been similar.
Liquidity and balance sheet
- Cash was $3.8 million at March 31, down from $6.6 million at year-end. Operating cash flow was $4.3 million; financing activities used $4.0 million, including $2.4 million in dividends. Cash declined $2.8 million during the quarter.
- Short-term debt was $63.9 million, down from $66.7 million. The filing reports no long-term debt balance on the balance sheet.
- Current assets were $117.5 million and current liabilities $89.4 million. The company reported $70.0 million of unused credit lines under its $125 million facility and said it complied with its financial covenants.
- Receivables were $47.3 million; inventory was $58.5 million, down from $61.0 million at December 31, 2012. Shareholders’ equity was $172.5 million.
Operating trends and material developments
- Municipal water sales fell 10.5% to $46.8 million, primarily from lower residential and commercial meter volumes; the segment represented 65.1% of sales. Management cited a colder, snowier winter, Hurricane Sandy, municipal spending concerns, slower housing starts, and customer evaluation of newer ORION technology.
- Industrial flow sales increased 2.3% to $22.0 million, but comparable sales declined slightly; the reported increase included a third month of Racine Federated sales in 2013 versus two months in 2012. Specialty sales rose 25.0% to $3.0 million, but were slightly lower on a comparable basis.
- On April 1, 2013, the company acquired Aquacue for approximately $14.0 million, including $3.0 million deferred. The acquisition adds analytics software and was completed after quarter-end; its sales were described as immaterial. Approximately $0.1 million of transaction costs was recorded in Q1 expense.
- The $4.6 million final payment for the 2012 Racine Federated acquisition was included in payables and was due July 31, 2013.
Outlook, risks and contingencies
The filing provides no specific revenue or earnings guidance. Management said operating cash flow, borrowing capacity and access to capital should fund operations, capital spending and product development. It expected no minimum pension contribution in 2013 and continued to consider estimated full-year postretirement benefit payments of $0.5 million reasonable; $0.1 million had been paid through March 31.
Risks highlighted include competitive pricing and bids, adoption and performance of newer products, municipal customers’ ability to authorize and finance purchases, weather and economic conditions, raw-material and foreign-sourced component costs, currency movements, reliance on certain single-source suppliers, alliance relationships, and added performance and warranty exposure from serving as a prime contractor. The company disclosed environmental landfill matters, asbestos-related lawsuits and one patent infringement suit; it did not believe their resolution would materially affect its financial position or results, while noting outcomes are uncertain. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Investor verification points
- Assess whether municipal water sales recover as weather and installation conditions normalize, and whether municipal spending delays persist.
- Track gross margin, factory utilization, and operating expenses, including acquired-business and software amortization costs.
- Monitor debt, cash generation, credit-line availability and covenant compliance, as well as the upcoming Racine Federated payment.
- Review Aquacue purchase accounting and integration, and evaluate the company’s stated litigation and environmental exposures as developments occur.