Badger Meter, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Badger Meter supplies flow measurement, control and communications products, with municipal water meters and related technologies its largest business. Financial statements are unaudited.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $96.3 million | $99.4 million | $300.7 million | $281.9 million |
| Gross margin | $38.6 million; 40.1% | $36.1 million; 36.3% | $117.1 million; 38.9% | $101.3 million; 35.9% |
| Operating earnings | $13.9 million | $13.6 million | $41.7 million | $32.9 million |
| Net earnings | $8.8 million | $8.3 million | $26.2 million | $20.5 million |
| Diluted EPS | $0.30 | $0.29 | $0.90 | $0.71 |
- Cash flow: Nine-month operating cash flow was $40.2 million, up from $24.8 million. Investing used $7.8 million, primarily for capital expenditures; financing used $29.8 million, including $21.7 million of net debt reduction and $9.1 million of dividends. Cash increased $2.5 million to $10.7 million.
- Liquidity and debt: At September 30, cash was $10.7 million, current assets $156.7 million and current liabilities $87.7 million. Short-term debt was $49.7 million, down from $71.4 million at year-end 2015. The company reported $83.1 million of unused credit lines and compliance with its financial covenants.
- Shareholder returns: Dividends declared were $0.115 per share for Q3 and $0.315 for the nine-month period. Per-share amounts and share counts were retrospectively adjusted for a September 2016 2-for-1 stock split.
Material changes and drivers
- Q3 sales declined 3.1%. Municipal water sales fell 2.5%, partly due to lower Middle East sales and delayed customer purchases related to BEACON software billing-system interfaces; domestic municipal meter sales were flat, with lower volume offset by better pricing. Flow instrumentation sales fell 5.2% amid weak markets.
- Nine-month sales rose 6.7%, driven by 10.7% growth in municipal water sales, including higher residential and commercial volumes. Flow instrumentation sales fell 5.1%, reflecting weak markets, lower oil and gas sales and the loss of two significant customers.
- Gross margin improved in both periods. Management cited lower material costs, including brass, product mix and, for Q3, lower-than-usual inventory obsolescence expense versus the prior-year quarter. Nine-month margin also benefited from higher volume.
- Selling, engineering and administration expense increased 9.8% in Q3 and 10.1% year to date, primarily due to employee incentive and benefit costs and, year to date, higher software amortization. Nine-month expense included about $1.0 million for shareholder-value options exploration and an early retirement program for certain flow-instrumentation employees.
Outlook, risks and unusual items
- The filing provides no specific numerical earnings or sales guidance. Management said operating cash flows, borrowing capacity and access to capital should be adequate for operating needs, capital spending and product development.
- Management sees continued opportunity in conversion from manually read meters to radio solutions; it estimated that fewer than 53% of U.S. water meters had converted. BEACON AMA adoption is growing, although customer billing-system interface delays affected Q3 purchases. The filing cautions that growth potential for newer services, including software-as-a-service, remains uncertain.
- Q3 and nine-month results included a $740,000 non-cash pension settlement charge. The company also made a voluntary $1.0 million pension contribution in September; it expected no additional 2016 contribution to be required.
- Key stated risks include competitive pricing, product and technology execution, municipal customers’ ability to fund purchases, economic and foreign-exchange conditions, input availability and costs, reliance on single suppliers, cybersecurity, and obligations as a prime contractor. The company cited environmental landfill matters and asbestos-related lawsuits, but did not expect their resolution to materially affect financial position or results; outcomes remain uncertain.
- The September 2016 credit amendment provides a three-year $125 million facility supporting commercial paper (up to $70 million) and a $5 million Euro line. The company reported no material subsequent events and no material change in market-risk disclosures.
Important facts for investors to verify
- Whether delayed BEACON billing-system integrations convert into orders and how municipal water sales perform in coming quarters.
- Whether flow-instrumentation weakness, including the effects of lost customers and lower oil and gas demand, persists.
- How much of the margin improvement reflects durable cost and product-mix benefits versus unusually low Q3 obsolescence expense.
- Use of available credit capacity, working-capital trends—particularly the inventory increase to $82.4 million—and future cash generation.
- Potential costs from environmental and asbestos claims, supplier concentration, and the company’s evaluation of new accounting standards, including leases and revenue recognition.