Badger Meter, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; filing dated October 28, 2020. Dollar amounts below are in millions unless otherwise stated. Badger Meter sells municipal water meters, radios and software, and flow instrumentation products.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $113.6 | $108.6 | $313.2 | $317.1 |
| Gross margin | $45.0; 39.6% | $41.7; 38.4% | $124.2; 39.7% | $122.4; 38.6% |
| Operating earnings | $19.5; 17.2% | $16.4; 15.1% | $48.2; 15.4% | $45.8; 14.4% |
| Net earnings | $14.9 | $12.7 | $36.2 | $34.9 |
| Diluted EPS | $0.51 | $0.44 | $1.24 | $1.19 |
| Effective tax rate | 23.9% | 22.1% | 24.6% | 23.1% |
Q3 sales rose approximately 4.5% year over year and net earnings approximately 16.8%. For the first nine months, sales declined approximately 1.2%, while net earnings increased approximately 3.9%. Management attributed the improved margins to higher volume and manufacturing absorption, favorable mix, cost actions, and a non-recurring warranty provision in the 2019 comparison period.
Cash flow, liquidity and balance sheet
- Cash from operations was $73.7 for the first nine months, versus $61.1 in 2019; capital expenditures were $5.9 versus $5.6.
- Cash and cash equivalents were $93.9 at September 30, 2020, up from $48.9 at year-end 2019. Operating cash flow was partly offset by dividends and repayment of short-term borrowing.
- Short-term debt was zero at quarter-end, compared with $4.5 at December 31, 2019. The company reported $133.1 of unused credit lines and compliance with its financial covenants.
- Current assets were $232.8 and current liabilities $60.2. Shareholders’ equity was $351.5. Dividends declared were $0.18 per share for the quarter and $0.52 per share year to date.
- Primary working capital declined to $96.9, or 23.0% of trailing-twelve-month sales, from $111.8, or 26.4%, at year-end. Management cited improved collections, inventory planning, and payment timing.
Material changes and management commentary
- Q3 municipal water sales increased 11.0% to $93.6; flow instrumentation sales fell 17.9% to $20.0. Year-to-date municipal water sales rose 2.7% to $251.7, while flow instrumentation declined 14.6% to $61.5.
- Management said municipal water demand was relatively resilient; growth included advanced technology products, ORION Cellular, ultrasonic meters and software-as-a-service. Industrial end-market weakness weighed on flow instrumentation.
- COVID-19 caused order delays and intermittent production interruptions during lockdowns. Output normalized as restrictions eased, and demand improved sequentially. Temporary cost measures—including travel restrictions, a hiring freeze, reduced discretionary spending, furloughs and executive salary reductions—generally ended in mid-June; hiring and discretionary spending remained under review.
- The company gave no specific financial guidance. Management said the pandemic’s duration and effects remained difficult to estimate, and that contingency plans were in place with further cost actions possible if warranted.
Risks, contingencies and unusual items
- The company added COVID-19 as a risk factor, citing possible operating shutdowns, supply or shipping disruption, weaker or volatile demand, recession, financing constraints and impacts on customers, suppliers and employees.
- Badger Meter relies on single suppliers for most brass castings and certain resins and electronic subassemblies. Replacement sources may entail higher costs, delays, added inventory and quality-control costs.
- No material legal proceedings were pending. Environmental matters could result in future costs that may be material, although compliance expenditures in 2019 and the first three quarters of 2020 were not material.
- A $1.0 million contingent payment related to the D-Flow acquisition was recorded in payables and expected in Q4 2020. The warranty and after-sale reserve was $7.6 at quarter-end, versus $5.6 at year-end.
- The company reported no material subsequent events and no material changes to its other previously disclosed risk factors.
Important facts for investors to verify
- Whether municipal water growth and advanced-metering/software adoption continue to offset weakness in flow instrumentation.
- How COVID-19 affects customer orders, industrial activity, production, suppliers and costs in subsequent periods.
- Whether margin improvements persist, particularly given the effect of the prior-year non-recurring warranty charge on comparisons.
- Whether operating cash flow, working-capital efficiency and available credit remain adequate as conditions evolve.
- The timing and amount of the D-Flow contingent payment, and developments in warranty, supplier and environmental exposures.