Badger Meter, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. The company makes flow measurement and control products, primarily for water utilities, as well as industrial and specialty markets. Financial statements are unaudited.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $88.3 million | $82.0 million | $160.1 million | $158.2 million |
| Gross margin | $29.8 million; 33.8% | $30.2 million; 36.8% | $54.9 million; 34.3% | $59.1 million; 37.3% |
| Operating earnings | $10.2 million | $11.4 million | $14.9 million | $21.5 million |
| Net earnings | $6.3 million | $7.4 million | $9.2 million | $13.7 million |
| Diluted EPS | $0.44 | $0.52 | $0.64 | $0.94 |
Q2 sales rose 7.7%, led by municipal water sales, up 12.5%, and industrial flow sales, up 2.4%; specialty sales fell 21.8%. For the first half, sales increased 1.2%, while operating earnings fell 30.7% and net earnings fell 32.9%. First-half diluted EPS was down from $0.94 to $0.64. The filing attributes weaker profitability mainly to lower gross margins and higher selling, engineering and administration costs. Gross margin pressure reflected product mix, lower prices in certain lines, and lower factory utilization earlier in the year.
Cash flow and capital: First-half operating cash flow was $15.2 million, versus $14.1 million a year earlier. Capital expenditures were $5.5 million. Cash declined to $2.7 million from $6.6 million at year-end 2012. Short-term debt was $66.2 million, slightly below $66.7 million at year-end; unused credit lines were $51.1 million. Total assets were $301.8 million and shareholders’ equity was $177.9 million at June 30. The company declared dividends of $0.17 per share in Q2.
Business changes, outlook and risks
- Q2 municipal water growth followed a return to more normal purchasing after weather-related delays earlier in the year. First-half demand was affected by cold, snowy weather, lingering Hurricane Sandy impacts, municipal spending concerns, slower housing starts and customer evaluations of newer technology.
- On April 1, 2013, Badger Meter acquired Aquacue for approximately $14.0 million, adding water-management analytics software. Aquacue sales in Q2 were immaterial. The purchase-price allocation remains preliminary; $10.7 million of goodwill and $5.6 million of intangible assets were recorded. A further $3.0 million payment is due in installments through October 2014.
- Q2 and first-half expenses included a $0.7 million non-cash pension settlement charge, as plan payouts occurred faster than assumed. Selling, engineering and administration costs also included higher acquired-intangible amortization and legal-settlement costs; the filing does not quantify the latter.
- Management said financial condition remained strong and expected operating cash flow, available borrowing capacity and access to capital to support operations, capital spending and product development. It reported compliance with credit covenants. No specific earnings or sales guidance was provided.
- Key risks include competitive pricing, acceptance of newer products, municipal customers’ ability to fund purchases, supplier concentration for brass castings and electronic subassemblies, commodity and foreign-exchange movements, and execution and warranty exposure on connectivity-system contracts. Environmental landfill matters and asbestos-related lawsuits are pending; management does not expect them to have a material adverse effect, but outcomes are uncertain.
Important facts for investors to verify
- Whether municipal water demand and factory utilization continued to recover after the weather-related first-half weakness.
- Whether margins stabilize given lower reported gross margins, pricing pressure and product mix.
- Aquacue’s integration, commercial traction and final purchase-price allocation, along with scheduled acquisition payments.
- Debt, borrowing availability and covenant compliance as the credit facility steps down; the filing reports $51.1 million of unused lines at June 30.
- Developments in environmental and asbestos litigation, supplier availability, and costs or timing associated with customer connectivity projects.