Badger Meter, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Badger Meter designs and sells flow measurement and control products, with municipal water meters and related technologies as its largest business. The unaudited interim results are not necessarily indicative of full-year results.
Financial performance
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Net sales | $95.7 million | $88.3 million | $179.2 million | $160.1 million |
| Gross margin | $34.8 million; 36.4% | $29.8 million; 33.8% | $63.8 million; 35.6% | $54.9 million; 34.3% |
| Operating earnings | $14.2 million | $10.2 million | $21.9 million | $14.9 million |
| Net earnings | $8.8 million | $6.3 million | $13.4 million | $9.2 million |
| Diluted EPS | $0.61 | $0.44 | $0.94 | $0.64 |
- Q2 sales rose 8.4% and net earnings rose about 40%; first-half sales rose 11.9% and net earnings about 46%. Higher municipal water sales drove growth. Better unit volumes and capacity utilization lifted gross margins.
- Q2 municipal water sales increased 15.9% to $69.1 million; flow instrumentation fell 5.9% to $24.0 million and specialty products fell 18.8% to $2.6 million. First-half municipal water sales increased 19.3% to $126.8 million; flow instrumentation was up 0.6% to $47.8 million, while specialty products declined 27.0% to $4.6 million.
- First-half operating cash flow was $12.0 million, down from $15.2 million. Receivables and inventory increases were key uses of cash. Capital expenditures were $5.6 million; dividends paid were $5.2 million. Cash decreased $0.5 million to $6.8 million.
- At June 30, cash was $6.8 million, short-term debt $68.7 million, and total current assets and liabilities were $139.7 million and $100.7 million, respectively. The amended three-year credit facility is $105 million; $45.8 million of credit lines remained unused. The company reported compliance with its financial covenants.
- Dividends declared were $0.18 per share in Q2 and $0.36 for the first half, versus $0.17 and $0.34, respectively, in 2013.
Changes, outlook and risks
- Management attributed municipal water growth to stronger residential and commercial meter volumes, utility customers returning to more normal buying patterns, sales outside the U.S., and sales to customers of a competitor that stopped North American mechanical-meter production in June 2013. Prices were relatively consistent.
- First-half selling, engineering and administration expense included $1.7 million of due diligence and other costs for a potential acquisition that was not pursued. The comparable 2013 period included a $0.7 million non-cash pension charge that did not recur in 2014.
- The BEACON advanced metering analytics system launched in January 2014; sales were not significant in the first half. The filing provides no specific financial guidance. Management said operating cash flow, borrowing capacity and access to capital were adequate for ongoing needs, capital expenditures and product development.
- Key disclosed risks include intense pricing competition, adoption and performance of newer products, municipal customers’ ability to fund purchases, supplier concentration for brass castings and electronic subassemblies, raw-material and currency changes, and performance and warranty obligations on projects where the company acts as prime contractor.
- Warranty and after-sale reserve increased to $1.4 million from $0.9 million at year-end; first-half additions charged to earnings were $1.2 million versus $0.3 million in 2013. The filing reports no material pending legal proceedings, but identifies landfill-related environmental matters and asbestos claims; management does not expect these to have a material adverse effect, while noting outcomes are uncertain.
- The company began evaluating the potential impact of the new revenue-recognition standard, effective for it beginning January 1, 2017; impact was not yet determined.
Important facts for investors to verify
- Whether elevated municipal water demand and margin improvement continue, and how much growth reflects unusual weather or competitor-related customer gains.
- Receivables rose to $60.8 million from $50.1 million at year-end; assess collections and working-capital conversion alongside the decline in operating cash flow.
- Progress in BEACON and other higher-value technology offerings, including whether they generate meaningful recurring software or service revenue.
- Use of the amended credit facility, debt levels and covenant headroom, as well as the timing and cash effect of the remaining $1.5 million Aquacue purchase payment due in October 2014.
- Developments in warranty claims, supplier availability, and environmental and asbestos matters.