Badger Meter, Inc. — FY 2017 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2017. Badger Meter manufactures flow measurement, control and communication products, principally for municipal water utilities, with additional sales into industrial markets. Municipal water represented 76.3% of sales; flow instrumentation represented 23.7%. More than 85% of products are used in water applications. The company reports one operating segment.
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 | Change / context |
|---|---|---|---|
| Net sales | $402.4 million | $393.8 million | Up 2.2% |
| Gross margin | $155.7 million; 38.7% | $150.6 million; 38.2% | Margin improved 0.5 percentage points |
| Operating earnings | $55.6 million | $50.8 million | Up 9.6%; operating margin approximately 13.8% |
| Net earnings | $34.6 million | $32.3 million | Up 7.0% |
| Diluted EPS | $1.19 | $1.11 | Up 7.2% |
| Cash from operations | $49.8 million | $56.2 million | Down; higher inventory was a principal factor |
| Capital expenditures | $15.1 million | $10.6 million | Increased $4.5 million |
| Cash and short-term debt at year-end | $11.2 million cash; $44.6 million debt | $7.3 million cash; $38.0 million debt | 2017 debt was short-term; no long-term debt balance reported |
| Working capital / current ratio | $65.5 million / 1.7 | $75.2 million / 2.0 | Liquidity measures declined |
The company had $88.8 million of unused credit lines at year-end and reported compliance with its credit covenants. Debt was unsecured. The 2017 effective tax rate was 37.0%, versus 35.2% in 2016. Total assets were $391.7 million and shareholders’ equity was $277.5 million.
Fourth-quarter snapshot
Fourth-quarter 2017 sales were $96.7 million, compared with $93.1 million in the prior-year quarter; net earnings were $7.2 million versus $6.1 million, and diluted EPS was $0.25 versus $0.21. Fourth-quarter gross margin was $39.0 million, or approximately 40.4% of sales, compared with $33.5 million, or approximately 36.0%, in fourth-quarter 2016.
Material changes versus the prior comparable period
- Municipal water sales rose 0.8% to $306.9 million, supported by higher commercial meter sales and contributions from acquisitions; residential-related sales were affected by delays in anticipated municipal projects.
- Flow instrumentation sales increased 6.9% to $95.5 million, reflecting a rebound in oil and gas and stronger industrial markets. This reversed part of the 2016 decline.
- Gross margin improved with better pricing and product mix, partly offset by higher commodity costs, particularly brass. Operating expenses were nearly flat year over year.
- Operating cash flow fell to $49.8 million, in part because inventories increased to $85.2 million from $77.7 million. Acquisitions and higher capital spending also contributed to investing cash outflows.
- Backlog declined to $28.9 million at year-end from $40.5 million, although the filing notes that backlog can fluctuate with large-project timing.
- Dividend declared per share increased to $0.49 for 2017 from $0.43 in 2016.
Outlook, management commentary, risks and unusual items
- Outlook: No quantified revenue or earnings guidance is provided. Management expects the reduction in the U.S. federal corporate tax rate from 35% to 21% to benefit future results. It views the migration from manually read meters to radio solutions, and the adoption of ultrasonic meters and analytics, as market opportunities. Management stated that approximately 55%–60% of U.S. water meters had converted to radio technology.
- Acquisitions: The company acquired D-Flow Technology AB for approximately $23.2 million and Carolina Meter & Supply assets for $6.2 million in 2017. Purchase-price allocations were preliminary at year-end. Goodwill rose to $67.4 million from $49.3 million.
- Tax Act: The company recorded provisional, offsetting $0.8 million tax expense for transition tax and $0.8 million benefit from remeasuring deferred taxes. The tax accounting was not complete and remained subject to refinement.
- Pension: Management decided to terminate the frozen pension plan, subject to regulatory approval. Estimated lump-sum and annuity payments associated with the anticipated 2018 termination totaled $43.3 million; no accounting recognition was recorded pending approval. The filing says no minimum 2018 pension contribution was then required.
- Key risks: Competition and pricing, including potential changes as electronic meters gain adoption; municipal customers’ ability to fund projects; raw-material cost and availability, especially brass; reliance on certain single-source suppliers; product quality and technology performance; cybersecurity and cloud-service disruption; foreign currency and regulatory exposure; and execution, warranty and subcontractor risks when acting as prime contractor.
- Contingencies and controls: No material legal proceedings were pending. Environmental matters could result in future costs that might be material, though compliance expenditures in 2015–2017 were not material. Management and the auditor reported effective internal control over financial reporting; the auditor issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- Whether the lower U.S. tax rate translates into the expected ongoing effective-tax-rate and earnings benefit, and how final Tax Act accounting differs from the provisional estimates.
- Whether the pension termination receives regulatory approval, and the final cost, timing and cash-funding requirements.
- Whether D-Flow and Carolina Meter deliver expected growth and integration benefits, and how final purchase accounting affects goodwill and intangible assets.
- Whether inventory converts to sales and operating cash flow recovers, given the year-over-year cash-flow decline and lower backlog.
- Whether brass and other input costs, competition, and adoption of ultrasonic meters affect margins and market position.
- Whether credit availability, covenant compliance and liquidity remain adequate as short-term debt and acquisition-related obligations are managed.