Business context and reporting period
Badger Meter, Inc. designs and sells flow measurement and control products, with a focus on water meters and metering technologies for utilities. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2015; comparisons are with the corresponding 2014 periods. Municipal water accounted for 75.4% of second-quarter sales and 72.9% of first-half sales.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $98.9 million | $95.7 million | $182.5 million | $179.2 million |
| Gross margin | $35.1 million; 35.5% | $34.8 million; 36.4% | $65.2 million; 35.7% | $63.8 million; 35.6% |
| Operating earnings | $12.2 million | $14.2 million | $19.2 million | $21.9 million |
| Net earnings | $7.9 million | $8.8 million | $12.1 million | $13.4 million |
| Diluted EPS | $0.55 | $0.61 | $0.84 | $0.94 |
First-half operating cash flow was $19.2 million, up from $12.0 million; capital expenditures were $7.6 million, dividends paid were $5.5 million, and cash increased by $6.0 million to $12.7 million. At June 30, 2015, short-term debt was $73.0 million, down from $75.9 million at year-end 2014. The company reported $39.7 million of unused credit lines under its $105.0 million facility. Total assets were $357.1 million and shareholders’ equity was $223.6 million.
Material changes versus prior comparable periods
- Q2 sales rose 3.3%; first-half sales rose 1.8%. Municipal water sales increased, while flow instrumentation sales declined.
- Municipal water sales grew 8.9% in Q2 and 6.0% in the first half, including $3.8 million and $7.7 million, respectively, of incremental National Meter revenue. Specialty-product sales also increased.
- Flow instrumentation sales fell 13.0% in Q2 and 9.8% in the first half, reflecting the stronger U.S. dollar on euro-denominated sales and weaker oil and gas customer demand, with weather also cited in Q2.
- Q2 gross margin declined to 35.5%, primarily due to product mix. First-half gross margin edged up to 35.7%.
- Selling, engineering and administration expense increased 11.7% in Q2 and 9.8% in the first half. These 2015 amounts included National Meter-related charges of $1.8 million and $4.0 million, respectively.
- Net earnings declined 10.4% in Q2 and 9.8% in the first half. Lower operating earnings were partly offset by lower effective tax rates; 2015 tax provisions included reversals of reserves related to settled tax audits.
Outlook, risks and unusual items
The filing provides no specific quantitative earnings or revenue guidance. Management said operating cash flows, borrowing capacity and access to capital should adequately fund operations, capital expenditures and product development. It noted that BEACON AMA sales were growing but remained insignificant in 2014 and the first half of 2015, and that the growth potential of newer services and products remained uncertain.
Key disclosed risks include competitive pricing, adoption and execution of newer metering technologies, currency movements, economic and weather-related effects on customers and demand, raw-material availability and costs, dependence on single-source suppliers, and subcontractor, warranty and performance obligations on system projects. The company also identified environmental landfill proceedings and asbestos-related claims; it did not expect either to have a material adverse effect, but stated outcomes were uncertain and future environmental costs could be material. No material legal proceedings were otherwise reported.
National Meter, acquired in October 2014 for total consideration of $22.9 million, included deferred payments; the purchase-price allocation was still being finalized, with completion expected in the third quarter of 2015. The Itron product agreement was in effect until early 2016. The company reported compliance with its credit-facility covenants. It is evaluating the new revenue-recognition standard, expected to be effective for it beginning January 1, 2018 following the announced deferral.
Important facts for investors to verify
- Whether municipal-water growth and technology-product sales can continue to offset weakness in flow instrumentation.
- The persistence and composition of National Meter-related expenses, acquisition contributions and final purchase accounting.
- Whether margins and earnings recover as acquisition costs, product mix and flow-instrumentation demand change.
- Debt, available credit and covenant headroom, particularly given short-term borrowings and planned capital needs.
- Developments in the Itron agreement, supplier concentration, environmental matters and asbestos litigation.