Badger Meter, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Financial statements are unaudited. Badger Meter makes flow measurement and control products, with municipal water meters and related technologies its largest business.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $96.3 million | $93.0 million | $275.4 million | $253.1 million |
| Gross margin | $36.5 million; 37.9% | $33.1 million; 35.6% | $100.2 million; 36.4% | $88.0 million; 34.8% |
| Operating earnings | $16.0 million | $13.9 million | $37.9 million | $28.8 million |
| Net earnings | $10.2 million | $9.0 million | $23.7 million | $18.2 million |
| Diluted EPS | $0.71 | $0.63 | $1.66 | $1.26 |
For Q3, sales rose 3.5%, while net earnings increased about 13%. For the nine-month period, sales rose 8.8% and net earnings about 30%. Municipal water and flow instrumentation drove growth; specialty products declined. Management attributed margin improvement to higher volumes and capacity utilization, lower costs and commodity costs, favorable European exchange rates in Q3, and product mix.
Cash flow and balance sheet: Nine-month operating cash flow was $28.2 million versus $28.7 million a year earlier. Capital expenditures were $8.8 million; net investing cash use was $10.3 million, including a $1.5 million acquisition-related outflow. Cash increased to $10.4 million from $7.3 million at year-end 2013. Short-term debt was $61.7 million, down from $70.0 million; current assets were $141.9 million and current liabilities $95.2 million. The company reported $52.1 million of unused credit lines under its $105 million facility and compliance with financial covenants. Dividends declared were $0.19 per share for Q3 and $0.55 for nine months.
Material changes and business developments
- Q3 municipal water sales increased 4.0% to $69.9 million, led by residential meters; commercial meter sales fell 5.6%, partly against an unusually strong prior-year quarter. Nine-month municipal water sales grew 13.3% to $196.6 million, reflecting higher residential and commercial volumes, a return toward normal utility buying patterns, mild winter conditions for some customers, and sales to former customers of a competitor.
- Flow instrumentation sales grew 5.4% in Q3 and 2.0% year to date. Specialty sales fell 16.7% in Q3 and 22.2% year to date, mainly because of lower gas-radio sales.
- BEACON advanced metering analytics launched in January 2014; results were not significant during the first nine months. Management said AMR remains the primary choice for many years, while growing utility interest in AMI and AMA creates opportunities.
- On October 1, 2014, after quarter-end, the company acquired distributor National Meter and Automation for $20.7 million in cash, including estimated earn-out consideration. Purchase-price allocations were preliminary; the company expected no material impact on 2014 financial statements.
Outlook, risks and unusual items
The filing provides no specific quantified earnings or sales guidance. Management said operating cash flows, borrowing capacity and access to capital should provide adequate resources for operations, capital spending and product development. It expects no 2014 minimum pension-plan contribution. The shift in pension assets toward fixed income is expected to increase pension expense in 2015 and beyond.
Q3 included a $0.7 million non-cash pension charge related to faster-than-assumed pension payouts. Nine-month selling, engineering and administration expenses included $1.7 million of due-diligence and transaction costs for a potential acquisition that was not pursued. The nine-month effective tax rate increased to 36.0% from 34.7%.
Disclosed risks include competitive pricing, product adoption and technology performance, municipal customer funding, supplier concentration, commodity and foreign-exchange movements, alliance-partner relationships, and risks from prime-contractor and warranty obligations. The company reported landfill environmental proceedings and asbestos-related lawsuits; it did not expect these matters to have a material adverse effect but noted outcomes are uncertain. No material legal proceedings were otherwise reported.
Investor verification points
- Assess whether municipal water sales growth and higher gross margins continue, including the effects of volume, pricing, product mix and weather.
- Track specialty-product weakness and the adoption, revenues and economics of BEACON and other AMI/AMA offerings.
- Review cash conversion and working-capital movements: receivables and inventories rose during the period despite higher earnings.
- Monitor debt, credit availability and the effects of the NMA acquisition, including final purchase accounting and any earn-out.
- Evaluate the future expense effects of pension asset allocation changes and the increased tax rate, and follow developments in environmental and asbestos matters.