Badger Meter, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Financial statements are unaudited. Badger Meter makes flow measurement and control products, primarily for water utilities and industrial customers.
Financial results
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $87.1 million | $69.7 million | $245.3 million | $202.2 million |
| Gross margin | $34.3 million; 39.4% | $22.8 million; 32.7% | $93.4 million; 38.1% | $70.4 million; 34.8% |
| Operating earnings | $14.1 million | $8.0 million | $35.7 million | $25.5 million |
| Net earnings | $8.9 million | $6.9 million | $22.5 million | $18.0 million |
| Diluted EPS | $0.62 | $0.46 | $1.56 | $1.19 |
For the first nine months, operating cash flow was $24.0 million, versus $26.5 million a year earlier. Capital expenditures were $4.5 million; acquisition spending, net of acquired cash and future payments, was $51.5 million. Cash ended at $6.1 million.
At September 30, 2012, short-term debt was $71.2 million, compared with $1.8 million at December 31, 2011. The company reported $62.8 million of unused credit lines under its $125 million credit facility and said it was complying with financial covenants. Current assets were $127.0 million and current liabilities $104.3 million.
Changes and drivers
- Q3 sales rose 25.0%; nine-month sales rose 21.3%. Growth reflected the Racine Federated acquisition, higher municipal water sales and, for the nine-month period, higher industrial flow sales.
- Racine Federated, acquired January 31 for approximately $57.3 million in cash plus an estimated working-capital adjustment, contributed $11.8 million of Q3 sales and $31.2 million since acquisition. Purchase-price allocations remained preliminary.
- Municipal water sales increased 10.8% in Q3 and 12.0% for nine months, led by technology-equipped residential meters and commercial meters. Industrial flow sales increased 97.1% in Q3 and 85.7% for nine months, substantially reflecting the acquisition.
- Specialty sales increased 25.4% in Q3, including acquired sales, but declined 8.9% for nine months. Lower natural-gas radio sales, including the absence of a large customer’s prior-year purchases, weighed on the category.
- Gross margin improved in both periods, supported by Racine Federated’s higher-margin products, lower casting costs and higher volume/factory utilization. Selling, engineering and administration expense increased 36.7% in Q3 and 28.5% for nine months, largely due to the acquisition, acquired-intangible amortization and higher employee incentives.
Liquidity, outlook and risks
The company said operating cash flow, borrowing capacity and access to capital were adequate for operating needs, capital expenditures and product development. Operating cash flow was lower year over year because increases in receivables and inventories more than offset higher earnings and payables. The $30 million share repurchase program was completed in Q2 2012 and was partly financed with borrowings.
No quantified revenue or earnings guidance was provided. Management cited continuing municipal spending constraints and delayed ordering decisions, slower housing starts and customer evaluation of the newer ORION technology as market factors. It expected AMR to remain the primary choice for many utilities for a number of years, while positioning AMA and AMI offerings for evolving customer needs.
Q3 included a $1.0 million charge to write down an investment in an emerging technology company. The Q3 effective tax rate was 35.9%, versus 14.8% in Q3 2011; the prior-year period included $1.5 million of tax benefits. The nine-month 2012 rate was 35.4%, versus 29.2% (35.0% excluding those prior-year benefits); 2012 included favorable state tax audit outcomes.
Disclosed risks include competitive pricing, adoption and success of newer products, municipal customers’ ability to fund purchases, raw-material and foreign-exchange volatility, supplier concentration, acquisition integration, alliance relationships, and performance and warranty obligations on system projects. The company reported environmental landfill matters, asbestos-related lawsuits and one patent-infringement case, but did not expect their resolution to materially harm results or financial position; outcomes remain uncertain.
Important facts for investors to verify
- How much of reported sales and profit growth is attributable to Racine Federated versus organic demand, and whether preliminary acquisition valuations change.
- Whether improved gross margins persist as product mix, metals costs and factory utilization change.
- Debt reduction, borrowing availability and cash conversion, particularly given higher receivables and inventories.
- Municipal water purchasing trends and adoption of ORION, AMI and AMA products, as well as continued weakness in natural-gas radio sales.
- Potential financial effects of the disclosed litigation, environmental contingencies and the company’s acquisition-related obligations.