Badger Meter, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013; financial statements are unaudited. Badger Meter makes flow measurement and control products, with municipal water meters and related technology its largest business. Its strategy includes expanding radio-enabled AMR/AMI and analytics offerings.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $93.0 million | $87.1 million | $253.1 million | $245.3 million |
| Gross margin | $33.1 million; 35.6% | $34.3 million; 39.4% | $88.0 million; 34.8% | $93.4 million; 38.1% |
| Operating earnings | $13.9 million | $14.1 million | $28.8 million | $35.7 million |
| Net earnings | $9.0 million | $8.9 million | $18.2 million | $22.5 million |
| Diluted EPS | $0.63 | $0.62 | $1.26 | $1.56 |
Q3 sales rose 6.8%, while net earnings increased modestly. Nine-month sales rose 3.2%, but operating earnings fell 19.3% and net earnings fell 19.1%. Q3 municipal water sales grew 14.3% to $67.2 million; industrial flow sales declined 7.5% to $22.2 million and specialty sales declined 16.3% to $3.6 million. Municipal water sales benefited partly from customers of a competitor that ceased North American mechanical-meter production; the company estimated sales to those customers at approximately $2.5 million in Q3.
Gross margin pressure reflected product mix, lower prices to former competitor customers, higher obsolete-inventory charges, metal-alloy costs, and, for the first nine months, lower production volumes and factory utilization early in the year. Q3 operating earnings were down slightly as lower gross margin was partly offset by lower selling, engineering and administration expense. Nine-month expenses increased 2.6%, including a $0.8 million non-cash pension settlement charge, higher amortization and legal-settlement costs; Q3 2012 expenses included a $1.0 million investment write-down.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $28.7 million, versus $24.0 million in 2012. Investing used $23.8 million, including $9.3 million of capital expenditures and $14.5 million for acquisitions. Financing used $7.0 million; dividends paid were $7.4 million.
- At September 30, cash was $4.6 million, receivables $56.1 million, and inventory $54.4 million. Inventory decreased $6.6 million from year-end 2012; receivables increased $10.5 million.
- Short-term debt was $65.2 million, down from $66.7 million at December 31, 2012. Shareholders’ equity was $185.8 million; total assets were $308.9 million.
- The company reported $52.5 million of unused credit lines and said operating cash flow, borrowing capacity and access to capital were adequate for operations, investment and product development. Its unsecured credit facility had a $125.0 million principal line, reduced by $16.7 million in May 2013, with another similar reduction scheduled for May 2014; the company reported covenant compliance.
Acquisition, outlook and risks
Badger Meter acquired Aquacue on April 1, 2013 for approximately $14.0 million in cash plus a working-capital adjustment. The acquisition adds water-management analytics software; product sales were immaterial through September. The preliminary allocation included $10.7 million of goodwill and $5.6 million of intangible assets. A total of $3.0 million of purchase-price payments remained due, split between January and October 2014.
No specific earnings or revenue guidance was provided. Management said AMR remained the primary choice for many utilities, while it believed the company was positioned for future AMI/AMA demand. It cited earlier-year weather, lingering Hurricane Sandy effects, municipal spending concerns, slower housing starts and softer industrial orders as market factors. The company also noted competitive pricing, supplier concentration, raw-material costs, foreign exchange, product adoption, partner relationships and government purchasing as risks.
Contingencies include two landfill-related environmental lawsuits and numerous asbestos personal-injury claims involving third-party asbestos in a limited number of products. Management did not expect these matters to have a material adverse effect, while noting outcomes are uncertain and future environmental costs could be material. Pension plan payouts occurring faster than assumed caused the $0.8 million nine-month settlement expense; management continued to expect no required 2013 pension contribution.
Important facts for investors to verify
- Whether municipal-water growth and former competitor customer sales continue, and whether industrial-flow weakness persists.
- Whether gross-margin pressures—especially mix, pricing, inventory charges and material costs—moderate.
- Aquacue’s integration, commercial traction and final purchase-price allocation, including the remaining payments.
- Cash conversion, receivables growth, debt usage, credit-facility reductions and ongoing covenant compliance.
- Developments in environmental and asbestos claims, supplier availability, and the expected timing and adoption of AMI/AMA products.