BADGER METER, INC. BUSINESS DESCRIPTION AND OVERVIEW
With more than a century of water technology innovation,
Utility water, the largest sales category, is comprised of either mechanical or
static (ultrasonic) water meters along with the related radio and software
technologies and services used by water utilities as the basis for generating
their water and wastewater revenues. It further comprises other sensor
technology used in the water distribution system to ensure the safe and
efficient delivery of clean water. These sensors are used to detect leaks in the
distribution piping system and to monitor various water quality parameters
throughout the distribution system. The largest geographic market for the
Company's utility water products is
The flow instrumentation product line primarily serves water applications throughout the broader industrial markets. This product line includes meters, valves and other sensing instruments sold worldwide to measure and control the quantity of fluids going through a pipe or pipeline including water, air, steam, oil, and other liquids and gases. These products are used in a variety of industries and applications, with the Company's primary market focus being water/wastewater, heating, ventilating and air conditioning (HVAC) and corporate sustainability. Flow instrumentation products are generally sold to original equipment manufacturers as the primary flow measurement device within a product or system, as well as through manufacturers' representatives.
Utility water meters (both residential and commercial) are generally classified as either manually read meters or remotely read meters via radio technology. A manually read meter consists of a water meter and a register that provides a visual totalized meter reading. Meters equipped with radio technology (endpoints) receive flow measurement data from battery-powered encoder registers attached to the water meter, which is encrypted and transmitted via radio frequency to a receiver that collects and formats the data appropriately for water utility usage and billing systems. These remotely read systems are classified as either automatic meter reading (AMR) systems, where a vehicle equipped for meter reading purposes, including a radio receiver, computer and reading software, collects the data from the utilities' meters; or advanced metering infrastructure (AMI) systems, where data is gathered utilizing a network (either fixed or cellular) of data collectors or gateway receivers that are able to receive radio data transmission from the utilities' meters. AMI systems eliminate the need for utility personnel to drive through service territories to collect data from the meters. These systems provide utilities with more frequent and diverse data from their meters at specified intervals.
The ORION® branded family of radio endpoints provides water utilities with a
range of industry-leading options for meter reading. These include ORION (ME)
for migratable AMR meter reading,
Information and analytics are critical to the water metering ecosystem. The Company's BEACON® Advanced Metering Analytics (AMA) software suite improves utility visibility to their water and water usage. BEACON AMA is a secure, cloud-hosted software suite that includes a customizable dashboard, and has the ability to establish alerts for specific conditions. It also allows for consumer engagement tools that permit end water users (such as homeowners) to view and manage their water usage activity. Benefits to the utility include improved customer service, increased visibility through faster leak detection, the ability to promote and quantify the effects of its water conservation efforts, and easier compliance reporting.
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Water meter replacement and the adoption and deployment of new technology
comprise the majority of water meter product sales, including radio products. To
a much lesser extent, housing starts also contribute to the new product sales
base. Over the last decade, there has been a growing trend in the conversion
from manually read water meters to meters with radio technology. This conversion
rate is accelerating, with the Company estimating that approximately 70% of
water meters installed in
In addition to our water utility flow measurement solutions, the Company provides various water quality monitoring solutions utilizing optical sensors and electrochemical instruments that measure a variety of parameters including turbidity, pH, chlorine, nitrates and approximately 40 others. Utilizing these solutions, water quality can be monitored continually or periodically throughout the network from its original source to the point in which it is recycled and returned. The addition of real-time water quality parameters to core flow measurement, pressure and temperature sensing capabilities enhances the scope of actionable data for water utilities to improve operational security, awareness and efficiency.
The Company's net sales and corresponding net earnings depend on unit volume and
product mix, with the Company generally earning higher average selling prices
and margins on meters equipped with radio technology, and higher margins on
ultrasonic compared to mechanical meters. The Company's proprietary radio
products generally result in higher margins than remarketed, non-proprietary
technology products. The Company also sells registers and endpoints separately
to customers
Flow instrumentation products are used in flow measurement and control applications across a broad industrial spectrum, occasionally leveraging the same technologies used in the municipal water category. Specialized communication protocols that control the entire flow measurement process and mandatory certifications drive these markets. The Company provides both standard and customized flow instrumentation solutions.
The industries served by the Company's flow instrumentation products face accelerating demands to contain costs, reduce product variability, and meet ever-changing safety, regulatory and sustainability requirements. To address these challenges, customers must reap more value from every component in their systems. This system-wide scrutiny has heightened the focus on flow instrumentation in industrial process, manufacturing, commercial fluid, building automation and precision engineering applications where flow measurement and control are critical.
A leader in both mechanical and static (ultrasonic) flow metering technologies for industrial markets, the Company offers one of the broadest flow measurement, control and communication portfolios in the market. This portfolio carries respected brand names including Recordall®, Hedland®, Dynasonics®, Blancett®, and Research Control®, and includes eight of the ten major flow meter technologies. Customers rely on the Company for application-specific solutions that deliver accurate, timely and dependable flow data and control essential for product quality, cost control, safer operations, regulatory compliance and more sustainable operations.
In addition, the Company provides various water quality monitoring solutions utilizing optical sensors and electrochemical instruments that measure a variety of parameters providing industrial customers with both process and discharge water quality monitoring capabilities. The Company's products are sold throughout the world through employees, resellers and representatives. Depending on the customer mix, there can be a moderate seasonal impact on sales, primarily relating to higher sales of certain utility water products during the spring and summer months. No single customer accounts for more than 10% of the Company's sales.
Long-Term Business Trends
Across the globe, increasing regulations and a focus on sustainability are driving companies and utilities to better manage critical resources like water, monitor their use of hazardous materials and reduce exhaust gases. Some customers measure fluids to identify leaks and/or misappropriation for cost control or add measurement points to help automate manufacturing. Other customers employ measurement to comply with government mandates and laws including those associated with process and discharge water quality monitoring. The Company provides flow measurement technology to primarily measure water, but also oil, chemicals and other fluids, gases and steams. This technology is critical to provide baseline usage data and to quantify reductions as customers attempt to reduce consumption. For example, once water usage metrics are better understood, a strategy for water-use reduction can be developed with specific water-reduction initiatives targeted to those areas where it is most viable. With the Company's technology, customers have found costly leaks, pinpointed equipment in need of repair, and identified areas for process improvements.
Increasingly, customers in the utility water market are interested in more
frequent and diverse data collection and the use of water metering and quality
analytics to evaluate water distribution activity. Specifically, AMI technology
enables water utilities to capture readings from each meter at more frequent and
variable intervals. There are more than 50,000 water utilities in
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In addition, certain water utilities are converting from mechanical to static
meters. Ultrasonic water metering maintains a high level of measurement accuracy
over the life of the meter, reducing a utility's non-revenue water. The Company
has over a decade of proven reliability in the market with its ultrasonic meters
and has recently launched its next generation of ultrasonic metering with its
D-Flow technology, which the Company believes increases its competitive
differentiation. While the introduction of ultrasonic technology into
For over 116 years, the Company has offered innovative flow metering and control
solutions for smart water management, smart buildings and smart industrial
processes. The acquisition of s::can and ATi, leading providers of water quality
monitoring solutions, adds real-time water quality parameters to our
capabilities and enhances the scope of actionable data for our customers to help
measure and protect natural resources. The combined solutions from
Finally, the concept of "Smart Cities" is one avenue to affect efficient city
operations, conserve resources and improve service and delivery. Smart water
solutions ("Smart Water") are those that provide actionable information through
data analytics from an interconnected and interoperable network of sensors and
devices that help people and organizations efficiently use and conserve
water.
Current Business Trends
In
Beginning in the second quarter of 2020, the Company implemented remote work arrangements for non-production personnel, adopted robust safety, social distancing and temperature screening protocols throughout its manufacturing sites and enacted other measures to be able to deliver products to meet customer orders on a timely basis. While the pandemic has had varying levels of impact to demand trends since its inception, to date it has not materially affected our ability to maintain business operations, including the operation of financial reporting systems, internal control over financial reporting, and disclosure controls and procedures.
Thus far in 2021, the Company continued to operate under various return-to-work
protocols for non-production personnel and our manufacturing operations
continued to follow safety and COVID-19 protocols. The introduction of vaccines
in the Company's primary geographic markets have aided its utility water and
flow instrumentation customers in returning to more normal operations. On
It remains difficult to estimate the severity and duration of the impact of the COVID-19 pandemic on the Company's business, financial position or results of operations. The magnitude of the impact will be determined by the duration and span of the pandemic, operational disruptions including those resulting from government actions, delivery interruptions due to component supply availability or global logistics constraints, the timeline for broadly available vaccines and the overall impact on the economy. The Company is monitoring the ongoing situation and keeps the Board of Directors informed of developments.
Acquisitions
Effective
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The total purchase consideration, net of cash acquired, was
As of
Effective
The total purchase consideration for s::can was
As of
Revenue and Product Mix
As the industry continues to evolve, the Company has been at the forefront of innovation across metering, radio and software technologies in order to meet its customers' increasing expectations for accurate and actionable data. As technologies such as ORION Cellular and BEACON AMA managed solutions have become more readily adopted, the Company's revenue from Software as a Service (SaaS) has increased significantly, albeit from a small base, and is margin accretive.
In addition, the Company has expanded its smart water offering with the addition of online water quality monitoring solutions, adding real-time water quality parameters to augment the scope of actionable data for water utility and industrial customers to optimize their operations.
The Company also seeks opportunities for additional revenue enhancement. For
instance, the Company has made inroads into the
Results of Operations - Three Months Ended
The Company's net sales for the three months ended
Earnings
Total operating earnings for the three months ended
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million, and gross margin as a percent of sales increased from 39.6% to
39.8%. The third quarter of 2021 benefitted from pricing realization, which
partially offset inflationary cost pressures across the supply chain including
raw materials, logistics and freight as well as production volatility caused by
restricted component availability. Gross margins also benefitted from favorable
product and acquisition mix, including higher SaaS revenues. Selling,
engineering and administration ("SEA") expenses were
The provision for income taxes as a percentage of earnings before income taxes
for the third quarter ended
As a result of the above-mentioned items, net earnings for the three months
ended
Results of Operations - Nine Months Ended
The Company's net sales for the nine months ended
Earnings
Total operating earnings for the nine months ended
The provision for income taxes as a percentage of earnings before income taxes
for the nine months ended
As a result of the above-mentioned items, net earnings for the nine months ended
LIQUIDITY AND CAPITAL RESOURCES
The main sources of liquidity for the Company are cash from operations and borrowing capacity. In addition, depending on market conditions, the Company may access the capital markets to strengthen its capital position and to provide additional liquidity for general corporate purposes.
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The Company uses primary working capital ("PWC") as a percentage of sales as a
key metric for working capital efficiency. The Company defines this metric as
the sum of Receivables and Inventories less Payables, divided by trailing twelve
month net sales. The following table shows the components of our
September 30, 2021 December 31, 2020
(In thousands) $ PWC% $ PWC%
Receivables $ 73,747 15.3% $ 61,689 14.5%
Inventories 91,824 19.1% 81,586 19.2%
Payables (42,408 ) -8.8% (34,923 ) -8.2%
Primary Working Capital $ 123,163 25.6% $ 108,352 25.5%
Overall,
Cash Provided by Operations
Cash provided by operations in the first nine months of 2021 was
Capital expenditures for the first nine months of 2021 were
Cash and cash equivalents declined to
On
Other Matters
The Company is subject to contingencies related to environmental laws and regulations. A future change in circumstances with respect to these specific matters or with respect to sites formerly or currently owned or operated by the Company, off-site disposal locations used by the Company, and property owned by third parties that is near such sites, could result in future costs to the Company and such amounts could be material. Expenditures for compliance with environmental control provisions and regulations during 2020 and the first three quarters of 2021 were not material.
See the "Special Note Regarding Forward Looking Statements" at the front of this
Quarterly Report on Form 10-Q and Part I, Item 1A "Risk Factors" in the
Company's Annual Report on Form 10-K for the year ended
Off-Balance Sheet Arrangements and Contractual Obligations
The Company's off-balance sheet arrangements and contractual obligations are
discussed in Part II, Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations" under the headings "Off-Balance Sheet
Arrangements" and "Contractual Obligations" in the Company's Annual Report on
Form 10-K for the year ended
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