Badger Meter, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited consolidated results. Comparisons are with Q1 2014 unless otherwise stated. Amounts are in millions of dollars except per-share data.
Business context
Badger Meter sells flow measurement and control products, with municipal water meters and related technology its largest business. Its products also serve industrial flow-instrumentation and specialty markets. The company is shifting toward higher-value radio-enabled metering and analytics solutions; management says radio technology generally carries higher margins than manually read meters.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change / context |
|---|---|---|---|
| Net sales | $83.6 | $83.5 | Up 0.1% |
| Gross profit / margin | $30.1 / 36.0% | $29.0 / 34.7% | Margin up 1.3 percentage points |
| Operating earnings / margin | $7.1 / 8.4% | $7.7 / 9.2% | Operating earnings down 7.8% |
| Net earnings | $4.2 | $4.6 | Down 8.7% |
| Diluted earnings per share | $0.29 | $0.32 | Down $0.03 |
| Cash from operations | $6.8 | $0.6 | Improved mainly because 2014 had larger increases in receivables and inventory |
| Capital expenditures | $3.2 | $3.3 | — |
| Dividends declared per share | $0.19 | $0.18 | Up $0.01 |
Gross-margin improvement reflected National Meter’s incremental gross profit, favorable capacity utilization, lower-cost raw materials and favorable exchange rates on parts sourced from Europe. Lower selling prices, currency effects on sales and product mix were offsets. Selling, engineering and administration expense rose 8.0% to $23.0 million, including $2.3 million associated with National Meter; Q1 2014 included $1.7 million of costs for an acquisition not pursued.
Sales mix and material changes
- Municipal water: $58.5 million, up 2.5%, or 70.0% of sales versus 68.4%. Residential meter and related-technology sales increased more than 11%; Q1 2015 included $3.9 million of National Meter revenue, most of it residential. Commercial meter sales fell more than 30%, partly against an unusually strong Q1 2014 comparison.
- Flow instrumentation: $22.8 million, down 6.2%, or 27.3% of sales versus 29.1%. A major oil-and-gas customer bought fewer Blancett turbine products; stronger U.S. dollar translation also reduced reported sales in some markets.
- Specialty products: $2.3 million, up 9.5%, or 2.7% of sales, reflecting higher gas-radio and concrete-vibrator sales.
National Meter, acquired in October 2014 for total consideration of $22.9 million, was expected to add approximately $15 million in annual incremental revenue. Its purchase-price allocation remained subject to final valuation.
Cash, debt and liquidity
- Cash was $8.4 million at March 31, 2015, versus $6.7 million at year-end 2014. Cash increased $1.7 million in the quarter.
- Short-term debt was $75.9 million, essentially unchanged from $75.9 million at December 31, 2014. The company reported $36.5 million of unused credit lines.
- The company has a $105 million three-year credit facility expiring May 2017, supporting commercial paper of up to $70 million and including a $5 million Euro line. Management said it was in compliance with financial covenants and considered liquidity adequate for operations, capital expenditures and product development.
- Current assets were $141.9 million and current liabilities $106.8 million. Inventories were $72.0 million, approximately unchanged from year-end.
- Operating cash flow was $6.8 million; investing cash outflow was $3.2 million, and financing cash outflow was $1.9 million, including $2.7 million of dividends paid.
Outlook, risks and other items
The filing provides no specific quarterly or full-year financial guidance. Management expects AMR to remain the primary choice for many water utilities for a number of years, while positioning its ORION, GALAXY and BEACON offerings for customer demand for AMI and analytics. BEACON sales continued to grow but were not significant in Q1 2015. Management described the company’s financial condition as strong.
- Risks include price competition, adoption and performance of new products, municipal customers’ ability to fund purchases, foreign-exchange movements, raw-material availability and costs, and reliance on single suppliers for most brass castings and certain electronic subassemblies.
- The company is a potentially responsible party in two landfill lawsuits and is defending asbestos-related personal-injury claims. Management does not expect these matters to have a material adverse effect, but notes outcomes are uncertain and future costs could be material.
- Foreign-currency translation reduced Q1 comprehensive income: foreign-currency translation adjustment was a loss of $0.7 million, and comprehensive income was $3.7 million versus $4.9 million.
- Adoption of the new revenue-recognition standard was scheduled for January 1, 2017; the company had not determined its impact.
Important facts for investors to verify
- Whether municipal residential growth and the National Meter contribution can offset weaker commercial meters and Blancett sales.
- Whether the gross-margin improvement is sustainable after acquisition-related effects, currency movements and product-mix changes.
- How short-term borrowing, commercial-paper usage and covenant headroom evolve, given $75.9 million of short-term debt.
- Whether BEACON and other analytics offerings grow materially, and how the company’s technology transition affects sales and margins.
- Updates on National Meter’s final purchase-price allocation, environmental and asbestos contingencies, and the expected effects of the 2017 revenue standard.