Badger Meter, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; comparative periods ended September 30, 2022. Badger Meter supplies water and flow measurement, monitoring, and software solutions. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $186.2 | $148.0 | $521.2 | $418.2 |
| Gross margin | $72.7; 39.1% | $57.5; 38.9% | $205.0; 39.3% | $163.0; 39.0% |
| Operating earnings | $31.4; 16.9% of sales | $23.9; 16.1% | $86.0; 16.5% | $64.8; 15.5% |
| Net earnings | $26.0 | $17.9 | $67.9 | $49.0 |
| Diluted EPS | $0.88 | $0.61 | $2.30 | $1.67 |
| Operating cash flow | Not presented separately | Not presented separately | $72.2 | $52.7 |
Q3 sales rose 25.8% year over year; nine-month sales increased 24.6%. Utility water sales were $160.8 million in Q3, up 30.6%, and $443.9 million for nine months, up 27.7%. Flow instrumentation sales were $25.4 million in Q3, up 1.8%, and $77.3 million for nine months, up 9.3%.
At September 30, cash and cash equivalents were $162.9 million, versus $138.1 million at December 31, 2022. Current assets were $423.0 million and current liabilities $128.8 million. Primary working capital was $151.9 million, or 22.7% of trailing-twelve-month sales, compared with $125.1 million, or 22.1%, at year-end. The balance sheet does not present a debt balance. The company reported a $150 million multi-currency credit facility, supporting commercial paper up to $100 million, with $154.2 million of unused credit lines; it was in compliance with covenants.
Nine-month investing cash outflow was $27.1 million, including $9.9 million of capital expenditures and $17.1 million for the Syrinix acquisition, net of cash acquired. Financing cash outflow was $20.2 million, principally $21.1 million of dividends. Dividends declared were $0.27 per share in Q3 and $0.72 per share for nine months.
Changes versus prior periods
- Higher sales of ORION Cellular endpoints, BEACON SaaS, and ultrasonic meters drove utility water growth. Management also cited value-based pricing for nine-month growth.
- Gross margin improved modestly in both comparison periods. Management attributed the nine-month improvement to favorable mix, easing supply-chain constraints and production efficiencies, and pricing.
- Selling, engineering and administration expense increased to $41.3 million in Q3 and $119.0 million for nine months, mainly due to personnel-related investments. Expense as a share of sales declined year over year in both periods.
- Operating cash flow increased year over year, though working capital remained a use of cash. Inventory rose $27.9 million from year-end, attributed to component inflation, higher safety stocks, and increased activity.
- The effective tax rate fell to 20.3% in Q3 from 25.1%, including a discrete tax benefit related to stock option exercises and restricted stock vesting. The nine-month rate was 23.3%, versus 24.5%.
Outlook, risks and notable items
- The filing provides no specific quantitative revenue or earnings guidance. Management said operating cash flow, borrowing capacity, and access to capital provide adequate resources for operations, capital expenditures, and product development.
- Longer-term demand drivers cited include utility conversion to AMI and static meters, aging infrastructure, water conservation, and demand for water quality and leak-monitoring data. The company estimated approximately 70% of U.S. installed water meters had converted to some radio solution.
- Badger Meter acquired Syrinix Ltd., a UK pressure-monitoring and leak-detection provider, effective January 1, 2023, for $17.1 million net of cash acquired. Purchase-price allocation remained preliminary at September 30; the fair-value analysis was incomplete.
- Supplier concentration is a risk: the company relies on single suppliers for most brass castings and certain resin and electronic subassemblies. A supplier loss could increase costs, delay deliveries, and require short-term inventory or quality-control measures.
- Environmental contingencies could lead to material future costs if circumstances change, although compliance expenditures in 2022 and the first nine months of 2023 were not material. No material legal proceedings were pending, and no material subsequent events were reported.
- Warranty and after-sale reserve additions were $8.4 million for the first nine months of 2023, compared with $3.6 million in 2022; the closing reserve was $10.8 million. The filing describes the reserve as based on historical claims and estimates.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. The filing reported no material changes to previously disclosed risk factors.
Key facts for investors to verify
- Whether sales growth and margin gains persist, particularly in cellular AMI, BEACON SaaS, and ultrasonic meters.
- Inventory growth, working-capital efficiency, and the conversion of earnings into operating cash flow.
- Final Syrinix purchase-price allocation and the acquisition’s subsequent contribution to results.
- Warranty and after-sale reserve adequacy, supplier concentration exposure, and any developments in environmental contingencies.
- Availability and terms of borrowing capacity, and whether any debt or commercial paper is outstanding; the filing text does not provide a clear outstanding borrowing balance.