Badger Meter, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; financial statements are unaudited. Badger Meter supplies flow measurement, control and communication products, with municipal water products representing the majority of sales.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $101.6 million | $100.6 million |
| Gross profit; gross margin | $38.7 million; 38.0% | $39.0 million; 38.8% |
| Operating earnings | $13.5 million | $12.8 million |
| Net earnings | $8.7 million | $8.0 million |
| Diluted EPS | $0.30 | $0.28 |
| Cash from operations | $12.4 million | $18.2 million |
| Capital expenditures | $3.8 million | $3.2 million |
Sales increased 1.0%; operating earnings rose 5.5% and net earnings rose about 9.5%. Gross margin declined 0.8 percentage points, mainly because of higher brass costs and obsolescence charges, partly offset by improved capacity utilization. Lower selling, engineering and administration expenses supported operating earnings.
Municipal water sales were $78.5 million, up 1.4%, or 77.3% of total sales. Higher commercial meter volumes, including several large city projects, more than offset lower Middle East residential sales. Flow instrumentation sales were $23.1 million, down 0.4%; nonrecurring large projects from the prior-year quarter were partly offset by modest oil-and-gas growth.
Cash, debt and liquidity
Cash was $11.3 million at quarter-end, versus $7.3 million at December 31, 2016. Short-term debt was $38.2 million, compared with $38.0 million at year-end. Current assets were $152.2 million and current liabilities were $75.5 million. The company reported $94.7 million of unused credit lines under its $125 million credit facility and said it was in compliance with its financial covenants.
Operating cash flow fell by $5.7 million year over year, partly because employee incentive payments were made in Q1 2017 but not Q1 2016. Receivables rose to $66.0 million from $59.8 million at year-end, while inventories fell to $70.3 million from $77.7 million. Financing uses included $3.3 million of dividends and $2.2 million of treasury-stock repurchases.
Management commentary, outlook and risks
- Management characterized the company’s financial condition as strong and said operating cash flow, borrowing capacity and access to capital were adequate for operating needs, capital spending and product development. The filing gives no specific earnings or revenue guidance.
- Q1’s effective tax rate was 34.2%, versus 36.3% a year earlier; discrete tax credits contributed, and management said the rate would have been 35.6% without them.
- Selling, engineering and administration expense included a $0.5 million write-down of an investment in an emerging technology company.
- The company cited continued migration toward radio-enabled metering and growth potential for ultrasonic meters and its BEACON AMA managed solution. It also noted competitive pressure, especially on manually read meters, and uncertainty around the growth of newer services and software-as-a-service revenue.
- Risks include commodity and component costs, supplier concentration, foreign exchange, customer project timing and funding, competition, product performance, cybersecurity, and the company’s responsibilities on projects where it acts as general contractor.
- The company reported no material pending legal proceedings. It is involved in two landfill-related environmental lawsuits and numerous asbestos-related claims; management did not expect these matters to have a material adverse effect, but noted outcomes are uncertain and future environmental costs could be material.
- The 2016 Nice Instrumentation asset acquisition, for $2.0 million, added steam-measurement technology to the HVAC product line; purchase-price allocation was finalized without further adjustment, and the acquisition was not material to the financial statements.
Most important facts for investors to verify
- Whether municipal water growth and radio-enabled product adoption continue, particularly as residential sales and project timing vary by region.
- Whether gross-margin pressure from brass costs and obsolescence persists or reverses.
- Whether operating cash generation improves after the timing-related working-capital and incentive-payment effects.
- How short-term borrowing, available credit capacity and covenant compliance evolve.
- Whether the tax rate remains affected by discrete credits and whether legal or environmental contingencies change materially.