Badger Meter, Inc. — FY 2014 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2014; it also reports fourth-quarter results. Badger Meter makes flow measurement and control products, primarily for water utilities, with additional industrial flow and specialty businesses. Municipal water generated 71.3% of 2014 sales. More than 75% of products are used in water applications.
Financial performance
| Metric | FY 2014 | FY 2013 | Change |
|---|---|---|---|
| Net sales | $364.8 million | $334.1 million | +9.2% |
| Gross margin | $131.1 million; 36.0% | $117.0 million; 35.0% | Margin +1.0 percentage point |
| Operating earnings | $46.0 million | $39.1 million | +17.6% |
| Net earnings | $29.7 million | $24.6 million | +20.6% |
| Diluted EPS | $2.06 | $1.70 | +21.2% |
| Cash from operations | $35.7 million | $34.8 million | +$0.9 million |
| Capital expenditures | $12.3 million | $14.3 million | -$2.0 million |
Net margin was 8.1%, compared with 7.4% in 2013. The effective tax rate declined to 33.9% from 35.2%. Dividends declared were $0.74 per share, up from $0.70.
Fourth quarter: Sales were $89.3 million versus $81.0 million in Q4 2013; net earnings were $6.0 million versus $6.4 million, and diluted EPS was $0.42 versus $0.44.
Revenue mix and material changes
- Municipal water sales rose 12.5% to $260.1 million, reflecting higher residential and commercial meter volumes, plus $6.2 million in National Meter sales after its October acquisition.
- Industrial flow sales increased 4.3% to $95.1 million, with higher volumes across most product lines.
- Specialty sales fell 18.6% to $9.6 million, mainly due to lower natural-gas radio sales.
- International sales increased 24.9% to $55.1 million, helped by static-meter sales in the Middle East, broader international growth, and slightly favorable currency translation.
- Gross margin improved from 2013 on higher volumes, lower obsolescence expense, lower raw-material costs, and favorable exchange rates. Benefits were partly offset by a greater mix of lower-margin municipal water products, higher warranty costs, and National Meter integration.
Liquidity, debt, and capital resources
At year-end, cash was $6.7 million, working capital was $34.0 million, and the current ratio was 1.3. Short-term debt totaled $75.9 million, up from $70.0 million, primarily reflecting acquisition financing. Debt was 26.2% of total debt and equity. The company reported $37.5 million of unused credit lines and compliance with its financial covenants. Management said operating cash flow, borrowing capacity, and access to capital were adequate for operating needs, capital expenditures, and product development.
Receivables were $54.0 million and inventory was $71.8 million, up from $50.1 million and $60.9 million, respectively. Inventory growth included acquired stock and a planned production-line move. The company reported no off-balance-sheet arrangements.
Outlook, management commentary, and risks
- No specific earnings or revenue guidance was provided. The company anticipated continuing cash dividends.
- Management sees opportunity in the shift from manually read meters to radio-enabled AMR, AMI, and analytics solutions. It estimated that fewer than 43% of U.S. water meters had converted to radio technology. AMR remained the most commonly selected technology among utilities deploying radio solutions.
- BEACON AMA launched in 2014, but results were not significant; utilities had purchased starter kits for field testing. Related software-as-a-service revenue was also insignificant.
- National Meter was acquired for total consideration of $22.9 million; the company estimated approximately $15 million in incremental annual revenue after eliminating intercompany sales. The purchase-price allocation was preliminary at year-end.
- Selling, engineering, and administration expense included $1.7 million of due-diligence and other costs for a potential acquisition that was not pursued, approximately $0.07 per diluted share.
- Key risks include intense competition and pricing pressure, slower municipal purchasing or constrained utility budgets, adoption and performance of new technology, raw-material and single-source supplier disruptions, foreign exchange, cybersecurity, product quality and warranty exposure, and regulatory changes affecting lead and radio frequencies.
- The company is involved in two landfill environmental matters and numerous asbestos-related lawsuits involving third-party materials in a limited number of products. Management did not expect these matters to materially affect results, but noted the outcomes are uncertain and future environmental costs could be material.
- Management and the auditor concluded internal control over financial reporting was effective. National Meter was excluded from the control assessment and represented 2.8% of revenue and 3.1% of net income for 2014.
Important facts for investors to verify
- How much of 2014 sales growth reflects underlying volume and pricing versus National Meter and other acquisition effects.
- Whether improved gross margin persists as municipal water products account for a larger share of sales and warranty costs evolve.
- Progress in BEACON AMA adoption and the potential for recurring software-service revenue, which remained immaterial in 2014.
- Inventory conversion and cash generation following the year-end inventory build and the National Meter acquisition.
- Debt capacity, refinancing terms, and interest-rate sensitivity; management estimated a 1% rate change would affect annual interest costs by approximately $0.8 million at year-end debt levels.
- Developments in environmental and asbestos matters, and the integration and final purchase accounting for National Meter.