Business context and reporting period
Badger Meter, Inc. manufactures flow measurement, control and communication products. Its business is reported as one segment, with municipal water meters and related technologies the largest category and flow instrumentation serving industrial markets. This Form 10-K covers the fiscal year ended December 31, 2016; quarterly figures below identify the fourth quarter separately.
Financial performance and liquidity
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Net sales | $393.8 million | $377.7 million |
| Gross margin | $150.6 million; 38.2% | $135.8 million; 35.9% |
| Operating earnings | $50.8 million | $42.4 million |
| Net earnings | $32.3 million | $25.9 million |
| Diluted earnings per share | $1.11 | $0.90 |
| Cash from operations | $56.2 million | $35.8 million |
| Capital expenditures | $10.6 million | $19.8 million |
Revenue grew 4.3%; net earnings increased 24.5%. Gross margin improved, and operating margin was approximately 12.9% versus 11.2% in 2015. Cash and cash equivalents were $7.3 million at year-end. Short-term debt fell to $38.0 million from $71.4 million; the company reported $94.3 million of unused credit lines and compliance with credit covenants. Working capital was $75.2 million and the current ratio was 2.0. Dividends declared rose to $0.43 per share from $0.39.
Fourth-quarter 2016 sales were $93.1 million versus $95.8 million in fourth-quarter 2015; net earnings were $6.1 million versus $5.5 million, and diluted EPS was $0.21 versus $0.19.
Material changes versus the prior comparable period
- Municipal water sales rose 7.6% to $304.5 million, driven by residential and commercial meter volumes; commercial sales increased 21.0%.
- Flow instrumentation sales declined 5.6% to $89.3 million, reflecting weaker oil and gas demand, the loss of two significant customers, and broader market softness.
- International sales fell 16.8% to $45.9 million, primarily due to lower sales in Mexico and the Middle East.
- Gross-margin expansion reflected improved product mix, higher volume and capacity utilization, and lower brass costs. Selling, engineering and administration expense rose 6.9% to $99.8 million.
- Operating cash flow increased, while lower capital spending and cash generation enabled a substantial reduction in short-term borrowings.
Outlook, management commentary, risks and unusual items
Management provided no specific financial guidance in the supplied filing. It described the company as having a strong financial condition and said operating cash flow, borrowing capacity and access to capital were adequate for operations, capital expenditures and product development. Strategic opportunities include continued conversion from manually read meters to radio solutions, ultrasonic meters, and BEACON advanced metering analytics; the company estimated that about 55% of U.S. installed water meters had converted to radio technology.
Key risks include intense competition and pricing pressure; customer and municipal funding constraints; uncertain adoption and execution of newer products and cloud software; supplier concentration and commodity/component costs; foreign exchange and economic conditions; and cybersecurity, product quality, regulatory and prime-contractor exposures. The company relies on single suppliers for certain brass castings, resins and electronic subassemblies. It disclosed two landfill-related environmental matters and asbestos lawsuits, but did not expect their resolution to materially adversely affect results; outcomes remain uncertain.
Unusual items included $1.5 million of non-cash pension settlement expense in 2016, compared with $0.8 million in 2015. The October 2016 Nice Instruments asset acquisition cost $2.0 million; the purchase-price allocation was preliminary at year-end and included $1.3 million of goodwill. The company also completed a 2-for-1 stock split in 2016; per-share data in the filing reflects the split.
Important facts for investors to verify
- Whether municipal water growth and meter-technology adoption can offset continued weakness in flow instrumentation and international markets.
- How much of the 2016 earnings and margin improvement is sustainable versus driven by mix, volume, capacity utilization and lower brass costs.
- Whether cash generation and reduced borrowings continue, and the terms and covenant headroom of the amended $120 million credit facility.
- The final valuation and subsequent performance of the Nice Instruments acquisition, plus warranty, environmental and asbestos exposures.
- Future adoption costs and financial effects of new lease and revenue-recognition accounting standards; the filing stated impacts were still being evaluated for leases and no significant revenue-standard impact had been identified to date.