Badger Meter, Inc. — Q2 2020 Form 10-Q
Business and period. Badger Meter sells municipal water metering, radio and analytics solutions, and flow instrumentation for industrial applications. This unaudited report covers the quarter and six months ended June 30, 2020; comparisons are with the same 2019 periods unless stated otherwise. COVID-19 disruptions were a major influence on results.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $91.1 million | $103.5 million | $199.6 million | $208.4 million |
| Gross margin | $35.9 million; 39.3% | $40.3 million; 38.9% | $79.2 million; 39.7% | $80.7 million; 38.7% |
| Operating earnings | $12.7 million; 13.9% of sales | $15.0 million; 14.5% | $28.7 million; 14.4% | $29.4 million; 14.1% |
| Net earnings | $9.5 million | $11.4 million | $21.4 million | $22.2 million |
| Diluted EPS | $0.33 | $0.39 | $0.73 | $0.76 |
| Operating cash flow | Six-month figure: $52.3 million | Prior-year six-month figure: $40.9 million |
- Q2 sales declined about 12.0%, net earnings 16.1%, and diluted EPS 15.4%. First-half sales declined 4.2% and net earnings 3.6%.
- Q2 municipal water sales were $72.4 million, down 9.0%; flow instrumentation sales were $18.7 million, down 21.8%. For the first half, municipal water sales were $158.1 million, down 1.6%, and flow instrumentation sales were $41.5 million, down 12.9%.
- Gross margin percentage improved in both comparison periods, supported by product mix, lower commodity costs and temporary cost reductions. Lower volume and manufacturing absorption weighed on Q2 operating earnings.
- Cash and cash equivalents were $85.2 million at June 30, up from $48.9 million at year-end 2019. Short-term debt was $4.5 million, leaving reported net cash of $80.7 million. Capital expenditures were $3.6 million in the first half.
- Current assets were $223.4 million and current liabilities $62.7 million. Shareholders’ equity was $341.1 million. The company paid $9.9 million in dividends during the first half; declared dividends were $0.34 per share versus $0.30 a year earlier.
Changes, outlook and risks
- COVID-19-related customer delays and shutdowns affected demand and manufacturing, particularly in April. Orders improved as restrictions eased; backlog increased because orders exceeded sales while manufacturing interruptions limited output. Municipal water demand was more resilient than flow instrumentation demand, which management expected could be negatively affected for longer.
- Temporary measures—including travel restrictions, a hiring freeze, lower discretionary spending, short-term furloughs and executive salary reductions—generally lasted about nine weeks and ended in mid-June. Management said it would continue to manage hiring and discretionary spending and could take further actions if warranted.
- Management said the pandemic’s duration and financial impact remained highly uncertain and provided no specific earnings or revenue guidance in the filing. It cited contingency plans and stated that operating cash flows and available borrowing capacity were expected to fund foreseeable needs.
- Management reported approximately $125 million of revolving credit availability in its COVID-19 discussion and $128.3 million of unused credit lines in the liquidity discussion. The filing does not clearly reconcile these figures. The credit agreement runs through September 2021; the company reported compliance with its covenants.
- Operating cash flow benefited from working-capital reductions and deferred federal tax installment payments under the CARES Act. The company said the Act was not expected to materially affect its financial statements.
- Key risks include prolonged pandemic effects on customer demand, employees, suppliers, manufacturing and shipping; reliance on single suppliers for certain components; and potential environmental liabilities. No material legal proceedings were pending, and environmental compliance expenditures had not been material. Management disclosed no material subsequent events.
Important facts for investors to verify
- Whether customer orders, backlog and manufacturing output continued to recover after June 30, particularly in flow instrumentation.
- How much of first-half operating cash flow reflected sustainable operations versus temporary working-capital changes and deferred tax payments.
- The available borrowing capacity and reconciliation of the filing’s $125 million and $128.3 million figures.
- Whether margin gains from mix, lower commodity costs and temporary savings persisted as volumes and pandemic-related measures changed.
- Any developments in environmental exposures, key-supplier continuity, and the outstanding $1.0 million contingent D-Flow acquisition payment.