BADGER METER INC annual report, FY2012

Badger Meter, Inc. — FY 2012 Form 10-K

Reporting period: Fiscal year ended December 31, 2012. The filing also reports unaudited quarterly results, including Q4. Badger Meter designs and manufactures flow measurement and control products; municipal water is its largest business. More than 75% of products are used in water applications.

Key financial results

MetricFY 2012FY 2011
Net sales$319.7 million$262.9 million
Gross margin$122.2 million; 38.2% of sales$89.8 million; 34.2% of sales
Operating earnings$44.5 million$27.5 million
Net earnings$28.0 million$19.2 million
Diluted EPS$1.95$1.27
Cash from operations$34.8 million$31.3 million
Capital expenditures$8.2 million$5.3 million

Q4 2012 (unaudited): Sales were $74.3 million versus $60.7 million in Q4 2011; net earnings were $5.5 million versus $1.2 million; diluted EPS was $0.39 versus $0.08. Q4 gross margin was $28.9 million versus $19.4 million.

Year-end financial position: Cash was $6.6 million and short-term debt was $66.7 million, compared with $5.0 million and $1.8 million, respectively, at year-end 2011. Working capital was $27.3 million and the current ratio was 1.3, down from $78.8 million and 4.5. Shareholders’ equity was $171.2 million, versus $179.3 million.

Changes versus prior periods

  • FY sales rose 21.6%; management attributed the increase to the Racine Federated acquisition, higher municipal-water sales, and growth in most remaining industrial-flow product lines.
  • Municipal-water sales increased 12.0% to $213.2 million. Industrial-flow sales rose 64.0% to $92.8 million, including $32.6 million from Racine Federated. Specialty-product sales fell 14.4% to $13.7 million, mainly reflecting lower gas-radio sales after a large 2011 customer order did not recur.
  • Racine Federated was acquired in January 2012 for approximately $57.3 million plus a $0.3 million working-capital adjustment; its sales contributed $41.3 million for eleven months. The company sold subsidiary PCT in Q4 for a nominal amount.
  • Gross margin improved from 2011, which had been pressured by higher commodity costs. The 2012 improvement reflected acquired products’ margins, lower casting costs, and higher factory utilization.
  • Operating cash flow increased 11%. Higher earnings were partly offset by higher inventories and a pension contribution.
  • Debt increased substantially to fund the acquisition and a $30.0 million share-repurchase program; the company repurchased and retired 888,056 shares. Dividends declared rose to $0.66 per share from $0.60.

Liquidity, outlook, risks, and unusual items

  • The company reported $67.4 million of unused credit lines at year-end and stated that operating cash flow, borrowing capacity, and access to capital should provide adequate resources for operations, capital spending, and product development. Its $125 million unsecured credit facility is subject to financial covenants, which the company said it met; the facility is scheduled to step down by $16.7 million annually beginning in 2013.
  • No specific earnings or revenue guidance was provided. Management described continued interest in AMI and AMA water-meter systems, while expecting AMR to remain the primary choice for many utilities for several years. It sees opportunity in the shift from manually read meters to radio-enabled systems; it estimated that fewer than 30% of U.S. water meters had converted to radio solutions.
  • Management cited municipal budget constraints, delayed utility purchases, slower housing starts, competitive pricing, acceptance of newer products, commodity and component availability/costs, reliance on certain single-source suppliers, foreign exchange, and execution and warranty obligations on turnkey connectivity projects as risks.
  • FY 2012 selling, engineering and administration expenses included a $1.0 million write-down of an investment in an emerging-technology company and an approximately $1.1 million non-cash pension settlement charge. The 2011 tax rate benefited by approximately $1.3 million from recognition of previously unrecognized tax benefits; without that benefit, the stated 2011 effective tax rate would have been 34.8%, versus 35.5% in 2012.
  • Contingencies include asbestos-related claims, one patent-infringement lawsuit, and two landfill matters. The company said it did not expect these matters to have a material adverse effect, but noted that environmental outcomes are uncertain and future costs could be material. No material legal proceedings were otherwise reported.
  • Ernst & Young issued unqualified opinions on the financial statements and internal controls. Management’s controls assessment excluded Racine Federated, which represented 13.0% of consolidated sales and 26.9% of net income in 2012.

Important facts for investors to verify

  • How much of 2012’s sales and earnings growth came from Racine Federated versus organic growth, and whether acquired operations deliver expected results.
  • Debt repayment capacity and liquidity after the acquisition and share repurchase, including the facility’s scheduled reductions and covenant terms.
  • Whether improved gross margins persist if commodity costs rise or product and geographic mix changes.
  • Adoption, margins, and sales-cycle trends for ORION, GALAXY, and AMA products, and the continuing role of the Itron distribution agreement.
  • Potential financial exposure from the disclosed litigation and environmental contingencies, and the integration and control environment for the acquired business.