Badger Meter, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Unaudited consolidated results; dollar amounts below are in millions except per-share data.
Business context
Badger Meter makes flow measurement and control products for municipal water utilities, industrial customers and specialty markets. Its strategy includes proprietary automatic meter reading (AMR), advanced metering infrastructure (AMI) and advanced metering analytics (AMA) technologies. The January 31 acquisition of Racine Federated expanded its water, industrial metering and specialty product lines.
Financial highlights
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $82.0 | $75.1 | $158.2 | $132.5 |
| Gross margin | $30.2 | $27.2 | $59.1 | $47.7 |
| Gross margin % | 36.8% | 36.2% | 37.3% | 36.0% |
| Operating earnings | $11.4 | $12.3 | $21.5 | $17.5 |
| Net earnings | $7.4 | $7.8 | $13.7 | $11.1 |
| Diluted EPS | $0.52 | $0.52 | $0.94 | $0.74 |
- Q2 sales grew 9.2%, with $11.9 million from Racine Federated. Industrial flow sales rose 77.0%; municipal water sales fell 2.6% and specialty sales fell 11.8%.
- For the first half, sales increased 19.4%; municipal water sales rose 12.9% and industrial flow sales rose 80.1%, while specialty sales declined 21.8%. Racine Federated contributed $19.3 million in sales after acquisition.
- Q2 operating earnings declined 7.5%, as higher selling, engineering and administration expense more than offset improved gross margin and acquired earnings. First-half operating earnings rose 23.0%.
- Q2 net earnings declined despite flat diluted EPS, partly because the completed share repurchase reduced shares outstanding. First-half diluted EPS increased from $0.74 to $0.94.
- Cash from operations was $14.1 million for the first half, versus $17.8 million a year earlier. Investing used $53.9 million, including $51.5 million for acquisitions. Financing provided $42.4 million, including $76.3 million of net short-term borrowing and $30.0 million of share repurchases.
- Cash was $6.5 million at June 30, 2012. Short-term debt was $77.8 million, versus $1.8 million at year-end 2011; the company reported $56.0 million of unused credit lines. The May credit agreement increased the line from $90 million to $125 million, subject to scheduled annual reductions and covenants, which the company said it was meeting.
- Total assets were $297.9 million and shareholders’ equity was $159.8 million. Receivables were $51.7 million and inventories were $61.1 million. The acquisition’s purchase-price allocation remained preliminary; acquired goodwill was estimated at $26.3 million and acquired intangible assets at $29.5 million.
Changes, outlook and risks
- Management attributed higher gross margins to Racine Federated’s product mix, lower casting costs and, for the first half, higher volumes; lower municipal technology mix and reduced natural-gas radio sales partly offset these factors. Acquisition-related costs and intangible amortization increased operating expenses.
- Q2 municipal sales were affected by lower residential meters with technology, municipal spending concerns, slower housing starts and customer evaluation of newer ORION technology. Management described first-half municipal volume increases as a return to more normal buying patterns, while noting continuing economic uncertainty.
- No specific earnings or sales guidance was provided. Management said operating cash flow, borrowing capacity and access to capital were adequate for operating needs, capital expenditures and product development. It expects AMR to remain a leading utility choice for a number of years, while positioning for growing AMI/AMA interest.
- Principal disclosed risks include competitive pricing, customer purchasing and municipal financing conditions, product adoption, alliance-partner relationships, raw-material and component availability and costs, foreign exchange, and execution and performance obligations on complete-system projects.
- The company reported environmental landfill matters, asbestos-related lawsuits and two patent infringement suits. It said it did not expect their resolution to materially affect financial position or results, but noted outcomes are uncertain and environmental circumstances could lead to material future costs. Certain products also rely on single-source suppliers, whose disruption could temporarily affect operations.
- The Q2 effective tax rate was 33.1%, down from 35.7%, reflecting favorable state tax audit outcomes for prior periods. First-half rates were 35.1% versus 35.9%.
Important facts for investors to verify
- How much future sales and earnings growth is attributable to Racine Federated versus underlying organic demand, especially in industrial flow and municipal water.
- Whether municipal water technology sales recover after Q2 declines, and whether customer adoption of ORION, AMI and AMA translates into sustained growth and margins.
- Debt reduction, available borrowing capacity and covenant compliance following the acquisition and $30 million share repurchase; confirm the timing and impact of scheduled credit-line reductions.
- Final purchase-price allocation and any resulting changes to goodwill, intangible assets, deferred taxes and amortization expense.
- Developments in environmental, asbestos and patent litigation, and any resulting costs, indemnification obligations or operational effects.