Badger Meter, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Badger Meter sells municipal water-metering and related technology and flow-instrumentation products and services. Results are unaudited; interim results are not necessarily indicative of the full year.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $105.0 million | $101.6 million | Up 3.3% |
| Gross margin | $36.7 million; 35.0% | $38.7 million; 38.0% | Margin down 3.0 percentage points |
| Operating earnings | $10.0 million | $13.6 million | Down 26.5% |
| Net earnings | $7.5 million | $8.7 million | Down 13.7% |
| Diluted EPS | $0.26 | $0.30 | Down $0.04 |
| Operating cash flow | $6.8 million | $12.4 million | Down $5.6 million |
Gross-margin compression reflected lower volume and capacity utilization, higher brass costs, and expenses from relocating Scottsdale operations to Racine; higher pricing partially offset these pressures. Selling, engineering and administration costs rose 6.8% to $26.8 million, principally due to staff from recent acquisitions and inflation. The effective tax rate fell to 22.2% from 34.2%, primarily following the federal rate reduction from 35% to 21% under 2017 tax reform.
Business trends and material changes
- Municipal water sales rose 2.5% to $80.5 million. Higher pricing, Middle East sales, BEACON-related service revenue and acquired businesses offset lower domestic meter and radio volumes; management cited order timing, a slower start to the year and possible weather effects.
- Flow-instrumentation sales increased 6.1% to $24.5 million, supported by an oil-and-gas market rebound and broader industrial distribution.
- Management describes ongoing customer conversion from manually read meters to radio-enabled AMR, AMI and analytics solutions. It estimates 55%–60% of U.S. meters have converted to radio technology. BEACON AMA and ultrasonic meters are strategic offerings, but the filing gives no quantified growth forecast.
- Revenue recognition Topic 606 was adopted January 1, 2018 using the modified retrospective method. Adoption reduced opening retained earnings by $0.1 million; the reported-quarter revenue effect was a decrease of $41,000. Prior-year figures were not restated.
Cash, debt and liquidity
Cash was $13.5 million at March 31, 2018, versus $11.2 million at year-end 2017. Short-term debt increased to $48.2 million from $44.6 million; cash less short-term debt was approximately $34.6 million. Current assets were $166.8 million and current liabilities $88.6 million. Operating cash flow fell from $12.4 million, mainly because the prior-year period benefited from an inventory reduction that did not recur and 2018 earnings were lower. Capital expenditures were $3.0 million; dividends paid were $3.8 million.
The company reported $85.4 million of unused credit lines under its $125 million facility, which supports commercial paper, and said it was in compliance with its financial covenants. Management believes operating cash flow, borrowing capacity and access to capital are adequate for operating needs, capital expenditures and product development.
Outlook, risks and other matters
- No specific revenue or earnings guidance was provided. Management noted the possibility that order timing and weather affected domestic volumes and said the full-year results cannot be inferred from the quarter.
- Risks include intense competitive pricing, adoption and performance of newer products, customer financing and economic conditions, commodity and component availability and cost, foreign-exchange movements, supplier concentration, cybersecurity, and execution and warranty obligations on complete systems.
- The company relies on single suppliers for most brass castings and certain resin and electronic subassemblies; a supplier loss could increase costs, delay deliveries and raise inventory and quality-control costs.
- Environmental contingencies could result in material future costs if circumstances change, though compliance expenditures in 2017 and Q1 2018 were not material. The company reported no material pending legal proceedings.
- The frozen U.S. pension plan was expected to be terminated in 2018; management expected no minimum pension contribution that year. The company also disclosed a planned $0.4 million of 2018 postretirement benefit payments.
- After quarter-end, the company acquired Innovative Metering Solutions on April 2, 2018 for approximately $8.5 million; management did not expect a material financial-statement impact.
Important facts for investors to verify
- Whether domestic meter and radio volumes recovered after the slower start and whether the cited order-timing and weather effects persisted.
- Whether gross margins improved as relocation costs abated and brass costs or capacity utilization changed.
- Cash generation, receivables collection, short-term borrowing and continued covenant compliance.
- Progress integrating acquisitions and the final purchase-price allocation for Carolina Meter.
- Any subsequent updates to tax-reform accounting, pension-plan termination, environmental exposures or the expected effects of adopting lease accounting in 2019.