Badger Meter, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. The company manufactures flow measurement products, with water meters and related technologies its largest business. It is shifting toward higher-value AMR, AMI and newly introduced AMA solutions.
Financial performance
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Net sales | $69.7M | $75.7M | $202.2M | $211.8M |
| Gross margin | $22.8M; 32.7% | $28.0M; 36.9% | $70.4M; 34.8% | $78.2M; 36.9% |
| Operating earnings | $8.0M | $13.4M | $25.5M | $35.2M |
| Net earnings | $6.9M | $9.0M | $18.0M | $22.4M |
| Diluted EPS | $0.46 | $0.60 | $1.19 | $1.49 |
- Cash flow: Nine-month operating cash flow was $26.3M, versus $13.7M in 2010. Capital expenditures were $3.7M; acquisition spending was $4.0M. Cash increased to $5.8M from $3.1M at year-end 2010.
- Liquidity and debt: Short-term debt was $2.7M, down from $12.9M at December 31, 2010. Current assets were $103.2M and current liabilities $25.9M. The company reported $58.9M of unused credit lines at quarter-end.
- Shareholder returns: Dividends declared were $0.16 per share in Q3 and $0.44 per share for the first nine months, compared with $0.14 and $0.38 in the respective 2010 periods.
Changes and management commentary
- Q3 sales fell 7.9%; nine-month sales fell 4.5%. Lower water-application sales drove the declines, partly offset by growth in specialty products and higher pricing.
- Nine-month water-application sales declined 13.0%, amid lower AMR/AMI volumes, weaker commercial and manual residential meter sales, municipal spending concerns, slower housing starts, adverse weather early in the year and customer evaluation of the next-generation ORION product.
- Nine-month specialty sales rose 45.3%, including contributions from Remag, acquired in January 2011, and Cox Flow Measurement, along with higher natural-gas radio technology and valve sales. Remag’s reported Q3 sales contribution was about $0.9M; the acquisition was not material to consolidated results.
- Gross margin pressure reflected lower volumes, material and casting costs, foreign-exchange effects on European-sourced products, and fixed-cost absorption. Higher prices and manufacturing cost reductions partly offset these factors.
- Management said operating cash flow improved mainly because working-capital effects were more favorable than in 2010, more than offsetting lower earnings. It considered cash flows and borrowing capacity adequate for operations, capital spending and product development.
Outlook, risks and unusual items
- No specific financial guidance or quantified full-year outlook is provided. AMA products became fully available in Q3 2011 after a limited first-half rollout. Management expects AMR to remain the primary choice for many utilities for a number of years, while positioning AMA to address future customer needs.
- The Q3 tax provision included $1.5M of previously unrecognized tax benefits following the conclusion of an IRS audit of the 2009 federal return. Without the benefit, the effective tax rate would have been 33.1% for Q3 and 35.0% year to date.
- In October 2011, the company renewed its principal credit line for one year and increased it from $50M to $65M. Also in October, Milwaukee union employees approved a contract change effective November 1, freezing their defined-benefit pension and replacing it with a defined-contribution plan; the estimated curtailment charge was approximately $1.0M.
- Risks include municipal utility funding and purchasing delays, competitive pricing, product adoption and execution, raw-material and component costs and availability, foreign-exchange movements, reliance on certain suppliers, and expanded warranty and subcontractor obligations on systems projects.
- The company disclosed environmental matters, asbestos claims and two pending patent-infringement lawsuits. It did not expect these matters to have a material adverse effect, but noted outcomes are uncertain and future environmental costs could be material.
Important facts for investors to verify
- Whether water-meter demand and municipal purchasing recover, and whether ORION/AMA adoption offsets continued weakness in manual meters and licensed Itron products.
- Whether gross margins stabilize as volumes, metal costs, foreign exchange and manufacturing savings evolve.
- The sustainability of operating cash flow and the company’s liquidity following the credit-facility renewal.
- The final amount and timing of the estimated pension curtailment charge, and the effects of pension changes on future benefit costs.
- Subsequent developments in the environmental, asbestos and patent matters, including any material financial exposure.
- Tax results excluding the one-time $1.5M benefit; the reported Q3 and year-to-date earnings include that benefit.