Badger Meter, Inc. — Q1 2012 Form 10-Q
Unaudited results for the three months ended March 31, 2012; balance-sheet comparisons are with December 31, 2011. Dollar figures are in millions except per-share amounts.
Business context and results
Badger Meter develops flow measurement and control products for municipal water, industrial flow and specialty markets. The company is shifting toward higher-value automatic meter reading (AMR), advanced metering infrastructure (AMI) and analytics (AMA) solutions. It acquired Racine Federated on January 31, 2012, expanding its water and industrial metering and specialty product lines.
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Net sales | $76.2 | $57.4 |
| Gross profit / gross margin | $28.9 / 37.9% | $20.4 / 35.6% |
| Operating earnings | $10.2 | $5.2 |
| Net earnings | $6.2 | $3.3 |
| Diluted EPS | $0.42 | $0.22 |
| Operating cash flow | $10.2 | $5.2 |
Performance and material changes
- Sales rose 32.8%. Racine Federated contributed $7.4 million for the two months included after acquisition; the remaining increase was primarily higher municipal water sales.
- Municipal water sales increased 34.4% to $52.3 million, driven by higher residential meters with technology and commercial meter volumes. Industrial flow sales increased 84.4% to $17.7 million, including $5.9 million from Racine Federated. Specialty sales declined 30.3% to $6.2 million, mainly because natural-gas radio sales fell 83% from an unusually strong prior-year quarter.
- Gross margin improved 2.3 percentage points, reflecting the acquired business’s higher margins, greater volume and lower material costs, particularly for castings. Selling, engineering and administration expense increased 22.9% to $18.7 million, mainly due to the acquisition, acquired-intangible amortization and sales-related costs.
- Income tax expense was $3.7 million; the effective rate rose to 37.4% from 36.4%, mainly due to slightly higher state tax estimates. Interest expense increased to $0.2 million from $0.1 million as borrowing rose.
- Operating cash flow increased to $10.2 million. Working capital included higher receivables and inventories, partly offset by increased liabilities. Investing cash outflow was $51.6 million, including $50.3 million for acquisitions. Financing cash inflow was $43.3 million, including $62.4 million of net short-term borrowing and $17.0 million of share repurchases.
Financial position, outlook and risks
- At March 31, cash was $6.7 million; current assets were $123.4 million and current liabilities were $96.1 million. Short-term debt rose to $64.0 million from $1.8 million at year-end. The company reported $40.1 million of unused credit lines.
- The Racine Federated purchase price was approximately $57.4 million in cash plus an estimated $0.6 million working-capital adjustment; $5.6 million is due in July 2013. Purchase-price allocation remained preliminary, including acquired goodwill of $25.0 million and intangible assets of $30.0 million.
- The company temporarily expanded its principal credit line to $90 million through June 16, 2012 and expected to have new financing in place by then. Management said operating cash flows, borrowing capacity and access to capital were adequate for operating needs, capital expenditures and product development. No specific earnings or revenue guidance was provided.
- Management cited improving customer stability and a return toward more normal buying patterns, while noting ongoing economic and municipal-spending concerns. Risks include competition and pricing, acceptance of newer products, commodity and component availability and costs, foreign-exchange movements, supplier disruptions, and performance obligations on complete systems and installation projects.
- Contingencies include landfill environmental matters, asbestos-related claims and two patent-infringement lawsuits. The company stated it did not expect these matters to have a material adverse effect, but outcomes are uncertain. The company also noted reliance on single-source suppliers for some components. Interim results may not indicate full-year results.
Important facts for investors to verify
- Whether the temporary credit facility was replaced or extended by its June 16, 2012 expiration, and the resulting borrowing terms and covenant headroom.
- Final Racine Federated purchase-price allocation, integration performance and contribution to ongoing earnings and cash flow.
- Whether municipal water demand and technology-product adoption continued, and whether specialty radio sales normalized after the prior-year comparison.
- Cash conversion and working-capital trends, particularly receivables and inventory, alongside continued acquisition-related debt and share repurchases.
- Developments in the environmental, asbestos and patent matters, and any changes to supplier, commodity-cost or product-performance risks.