Badger Meter, Inc. — 2013 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2013; quarterly figures below identify the fourth quarter. Badger Meter manufactures flow measurement and control products, primarily for water utilities, with additional industrial flow and specialty businesses. Municipal water accounted for 69.2% of annual sales. More than 75% of its products are used in water applications.
Key financial metrics
| Metric | 2013 | 2012 |
|---|---|---|
| Net sales | $334.1 million | $319.7 million |
| Gross margin | $117.0 million; 35.0% of sales | $122.2 million; 38.2% of sales |
| Operating earnings | $39.1 million | $44.5 million |
| Net earnings | $24.6 million | $28.0 million |
| Diluted earnings per share | $1.70 | $1.95 |
| Cash provided by operations | $34.8 million | $34.8 million |
| Capital expenditures | $14.3 million | $8.2 million |
| Cash at year-end | $7.3 million | $6.6 million |
| Short-term debt | $70.0 million | $66.7 million |
| Working capital / current ratio | $29.1 million / 1.3 | $27.3 million / 1.3 |
At December 31, 2013, shareholders’ equity was $196.6 million and debt was 26.3% of total debt and equity. The company reported $47.8 million of unused credit lines and stated it was in compliance with its credit-facility covenants. The $125 million credit facility is unsecured and subject to scheduled annual reductions.
Fourth-quarter 2013 sales were $81.0 million versus $74.3 million in the prior-year quarter; net earnings were $6.4 million versus $5.5 million, and diluted EPS was $0.44 versus $0.39.
Material changes versus the prior comparable period
- Annual sales rose 4.5%, led by municipal water sales, up 8.4% to $231.1 million. Industrial flow sales fell 1.7% to $91.2 million; specialty sales fell 13.9% to $11.8 million.
- International sales decreased 9.3% to $44.1 million, primarily because of project timing and general economic conditions.
- Operating earnings declined 12.1% and net earnings declined from 2012, despite higher revenue. Gross margin fell to 35.0% from 38.2%.
- Management attributed weaker margins to a higher municipal-water sales mix, lower pricing for customers of a competitor that exited North American mechanical-meter production, increased obsolete-inventory charges, higher electronics costs related to foreign exchange, and higher alloy costs as the transition to lead-free brass was completed.
- Receivables increased to $50.1 million from $45.6 million; inventory was essentially flat at $60.9 million. Capital expenditures rose to $14.3 million.
- Backlog declined to $31.7 million at year-end from $34.8 million a year earlier.
Outlook, management commentary, risks and unusual items
- The company acquired Aquacue in April 2013 for $13.8 million in cash. The acquisition added software and analytics capabilities; Aquacue sales were immaterial in 2013. Goodwill increased to $44.7 million from $35.9 million, including $8.8 million associated with Aquacue.
- In January 2014, Badger Meter launched BEACON AMA, a managed analytics offering using ORION technology and fixed and cellular networks. Management believes it positions the company for changing utility needs, but provides no quantified sales or earnings guidance. It expects AMR to remain the primary utility choice for several years, while noting growing interest in AMI and AMA.
- The company said it anticipates continuing cash dividends. Dividends declared were $0.70 per share in 2013 versus $0.66 in 2012.
- Key risks include competitive pricing, faster adoption of electronic meters by new competitors, acceptance and reliable operation of newer software and metering products, municipal customers’ ability to fund purchases, economic weakness, raw-material and component costs, reliance on certain single-source suppliers, foreign currency and regulatory changes, and acquisition integration.
- Contingencies include asbestos-related lawsuits and participation in two landfill matters. Management does not expect these matters to materially adversely affect the company, but notes outcomes are uncertain and future environmental costs could be material. No material legal proceedings were reported as pending.
- Other notable items: the 2013 cash-flow statement includes $15.4 million of acquisition spending; the company recorded higher obsolete-inventory provisions of $2.3 million. Management reported effective disclosure and financial-reporting controls; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether municipal water growth and adoption of proprietary radio and analytics solutions can offset weaker industrial and specialty sales.
- Whether gross margins recover after the 2013 decline, including the effects of pricing, product mix, inventory obsolescence, and material costs.
- Debt levels, credit availability and covenant compliance, particularly given $70.0 million of short-term debt and scheduled facility reductions.
- BEACON AMA’s customer adoption, revenue contribution and implementation performance after launch; the filing provides no quantified outlook.
- Potential exposure from asbestos and environmental matters, supplier concentration, and other disclosed contingencies.
- The company’s quarterly results and the distinction between this annual filing and the fourth-quarter figures summarized above.