Badger Meter, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Unaudited results; financial amounts below are in U.S. dollars. Badger Meter supplies water and flow measurement instruments, monitoring solutions, and related software.
Financial performance
| Metric | Q2 2023 | Q2 2022 | First six months 2023 | First six months 2022 |
|---|---|---|---|---|
| Net sales | $175.9m | $137.8m | $335.0m | $270.2m |
| Gross margin | $69.4m; 39.5% | $54.8m; 39.7% | $132.3m; 39.5% | $105.5m; 39.0% |
| Operating earnings | $29.5m; 16.8% of sales | $22.1m; 16.0% | $54.5m; 16.3% | $41.0m; 15.2% |
| Net earnings | $22.5m | $16.7m | $41.9m | $31.0m |
| Diluted EPS | $0.76 | $0.57 | $1.42 | $1.06 |
| Operating cash flow | Not provided for quarter | $40.7m | $28.9m |
- Q2 sales increased 27.6%. Utility water sales rose 32.1% to $150.9m; flow instrumentation sales grew 5.6% to $25.0m.
- First-half sales increased 24.0%. Utility water sales grew 26.1% to $283.1m; flow instrumentation sales grew 13.4% to $51.9m.
- Q2 gross margin percentage edged down 0.2 percentage points year over year; first-half gross margin improved 0.5 points. Management cited higher volume, favorable product mix, value-based pricing, and improved supply-chain conditions, partly offset by product mix in the quarter.
- Cash and cash equivalents were $141.8m at June 30, versus $138.1m at year-end 2022. First-half investing cash use was $24.1m, including $17.1m for the Syrinix acquisition and $6.9m of capital expenditures. Dividends paid were $13.2m.
- Inventory was $144.7m, up $24.9m from year-end; receivables were $84.0m and payables $81.1m. Primary working capital rose to $147.7m, or 23.4% of trailing sales, from $125.1m, or 22.1%.
- The filing does not provide a clear debt balance. It describes a $150m multi-currency credit facility supporting up to $100m of commercial paper, and $156.8m of unused credit lines at June 30. The company said it was covenant-compliant and had adequate resources for operations, investment, and product development.
Material changes and notable items
- Growth reflected increased adoption of cellular AMI solutions, BEACON software-as-a-service, higher ultrasonic meter volumes, and pricing. Management also cited steady or strong demand in flow instrumentation markets.
- Effective January 1, 2023, the company acquired UK-based Syrinix, a pressure-monitoring and leak-detection provider, for $17.1m net of cash acquired. The purchase-price allocation remained preliminary at June 30; it included $12.0m of goodwill and $7.7m of intangible assets.
- Selling, engineering and administration expense rose in dollars, including personnel costs and Syrinix-related amortization, but declined as a share of sales in both the quarter and first half.
- The effective tax rate increased to 25.8% from 24.4% in Q2 and to 25.1% from 24.1% for the first half.
- First-half net additions to the warranty and after-sale reserve were $4.9m versus $2.3m in the prior-year period. The ending reserve was $11.0m.
Outlook, risks and contingencies
The filing gives no quantitative revenue or earnings guidance. Management expects operating cash flows, available borrowing capacity, and access to capital to support ongoing needs, capital expenditures, and product development. It describes continued industry demand drivers including aging water infrastructure, AMI adoption, water conservation, and sustainability.
- Risks include reliance on single suppliers for most brass castings and certain resin and electronic subassemblies; disruptions could raise costs, delay deliveries, and require higher inventory or quality-control spending.
- Environmental-law contingencies could lead to material future costs if circumstances change, although compliance spending in 2022 and the first half of 2023 was not material. The company reported no material pending legal proceedings.
- Management reported no material change to the risk factors in the 2022 Form 10-K and no material subsequent events through filing. Disclosure controls were assessed as effective; no materially affecting internal-control change was reported.
Important facts for investors to verify
- Whether sales growth, particularly utility water and cellular AMI/BEACON adoption, continues and translates into durable margins.
- Whether elevated inventory and primary working capital normalize, and how supply availability affects cash conversion.
- The final fair-value allocation and operating contribution of Syrinix, given that the acquisition accounting was preliminary.
- Credit-facility usage and any debt outstanding, which the provided filing text does not clearly quantify.
- Developments in supplier concentration and environmental exposures, as well as changes in warranty and after-sale costs.