Badger Meter, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. The company makes flow measurement and control products, principally for water utilities, as well as industrial flow instrumentation and specialty products. Financial statements are unaudited; amounts below are in millions except per-share data.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $99.4 | $96.3 | $281.9 | $275.4 |
| Gross margin | $36.1 | $36.5 | $101.3 | $100.2 |
| Gross margin % | 36.3% | 37.9% | 35.9% | 36.4% |
| Operating earnings | $13.6 | $16.0 | $32.9 | $37.9 |
| Net earnings | $8.3 | $10.2 | $20.5 | $23.7 |
| Diluted EPS | $0.58 | $0.71 | $1.42 | $1.66 |
- Revenue mix: Municipal water sales were $76.4 million in Q3, up 10.2%, and $209.5 million for the nine months, up 7.5%. Flow instrumentation sales fell 15.4% in Q3 to $20.3 million and 11.5% year to date to $64.4 million. Specialty sales were $2.7 million in Q3, down 10.0%, and $8.0 million year to date, up 3.9%.
- Cash flow: Nine-month operating cash flow was $27.7 million versus $28.2 million. Capital expenditures were $12.9 million; acquisitions used $3.3 million. Cash dividends paid were $8.4 million. Cash declined to $4.1 million from $6.7 million at year-end 2014.
- Debt and liquidity: Short-term debt was $67.4 million, down from $75.9 million at December 31, 2014. The company reported $45.4 million of unused credit lines under a $105 million facility, which expires in May 2017; it was in compliance with financial covenants.
- Balance sheet: Current assets were $149.4 million and current liabilities $100.6 million. Receivables were $59.7 million; inventory was $75.7 million. Shareholders’ equity was $229.4 million, versus $214.3 million at year-end 2014.
Changes and management commentary
- Q3 sales increased 3.2%, but operating earnings fell 15.0% and net earnings fell 18.6%. For the first nine months, sales rose 2.4%, while operating earnings declined 13.2% and net earnings declined 13.6%.
- Management attributed municipal-water growth mainly to the October 2014 National Meter acquisition, with additional strength in residential products and some international markets. An alliance partner’s product issues delayed sales in Q2 and Q3.
- Flow instrumentation weakness reflected the stronger U.S. dollar on euro-denominated sales, lower oil-and-gas demand for Blancett turbine meters, and broader economic softness. The company also cited lower commercial meter volumes.
- Lower gross margin percentages reflected product mix shifting toward municipal water from generally higher-margin flow instrumentation, as well as foreign-exchange effects. Lower raw-material costs, favorable exchange rates on European-sourced parts, and National Meter’s contribution partly offset the pressure.
- Selling, engineering and administration expense increased 9.8% in both the quarter and nine-month period. Nine-month expense included $7.4 million of National Meter charges; higher software licensing and healthcare costs were also cited. Prior-year nine-month expense included $1.7 million of costs for an acquisition that was not pursued.
- The company acquired United Utilities’ assets for $3.3 million in August 2015; its preliminary purchase-price allocation was incomplete at quarter-end. National Meter, acquired in October 2014, was estimated to add about $15 million in annual incremental revenue.
Outlook, risks and contingencies
The filing gives no specific earnings or revenue guidance. Management said operating cash flows, borrowing capacity and access to capital should support operating needs, capital spending and product development. It expects AMR to remain the primary water-utility technology choice for a number of years, while positioning its ORION, GALAXY and BEACON offerings for evolving customer requirements. BEACON sales were growing but remained not significant through the first three quarters of 2015; management said the future growth potential of newer services and products was uncertain.
- Key exposures include product and technology execution, intense pricing competition, municipal customers’ ability to fund purchases, alliance-partner relationships and performance, foreign-exchange movements, economic weakness, raw-material availability and costs, and reliance on single-source suppliers for many brass castings and certain electronic subassemblies.
- The company reported no material pending legal proceedings. It is named in two landfill-related environmental lawsuits and in asbestos personal-injury lawsuits involving products that incorporated or were sold with third-party-manufactured asbestos. Management did not expect these matters to have a material adverse effect, but noted outcomes are uncertain and future environmental costs could be material.
- The Q3 effective tax rate was 37.5%, versus 34.9% a year earlier; the company cited additional expense from adjustments to filed tax returns. Nine-month rates were 35.9% and 36.0%, respectively.
- The new revenue-recognition standard was expected to become effective for the company on January 1, 2018; the company was evaluating its impact.
Important facts for investors to verify
- Whether municipal-water growth excluding National Meter is sustained, and whether delayed sales tied to the alliance partner’s product issues recover.
- Whether flow-instrumentation demand, especially oil-and-gas-related sales, stabilizes and how currency movements affect reported sales and margins.
- Whether acquisition-related expenses and integration costs persist, and the final valuation of United Utilities’ acquired assets.
- Cash conversion, inventory levels, and the company’s ability to reduce short-term borrowing while funding investment and dividends.
- Developments in environmental and asbestos litigation, supplier concentration, and compliance with credit-facility covenants.