Badger Meter, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Unaudited consolidated results; dollar amounts below are in millions unless stated otherwise.
Business context
Badger Meter supplies water-flow measurement, water-quality monitoring, radio and software solutions, primarily to water utilities and industrial customers. Utility water remained its largest business. The company said demand was strong, particularly for ultrasonic meters, ORION Cellular endpoints and BEACON SaaS, while supply-chain constraints limited its ability to meet demand for some products.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $137.8 | $122.9 | $270.2 | $240.7 |
| Gross margin | $54.8; 39.7% | $50.1; 40.8% | $105.5; 39.0% | $99.5; 41.3% |
| Operating earnings | $22.1; 16.0% | $18.7; 15.2% | $41.0; 15.2% | $36.4; 15.1% |
| Net earnings | $16.7 | $14.0 | $31.0 | $27.8 |
| Diluted EPS | $0.57 | $0.48 | $1.06 | $0.95 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $28.9 | $45.1 |
Q2 sales increased 12.2% year over year, or 13.7% excluding the stronger U.S. dollar. Six-month sales rose 12.3%. Q2 net earnings grew about 19%; six-month earnings grew about 12%. Gross margin percentage fell in both comparisons amid inflation and production disruption, while operating margin improved slightly year to date. Selling, engineering and administration expense declined as a percentage of sales, reflecting higher sales and spending controls.
Six-month operating cash flow declined $16.2 million year over year, primarily due to higher working capital, shipment timing, supply-chain challenges and management incentive payouts. Capital expenditures were $2.8 million versus $4.4 million. Cash increased to $100.2 million at June 30 from $87.2 million at year-end. Dividends paid were $11.7 million during the first half; declared dividends were $0.20 per share in Q2, compared with $0.18 a year earlier.
Liquidity, balance sheet and debt
Current assets were $303.9 million and current liabilities were $97.3 million at June 30, 2022. Receivables were $77.2 million and inventories were $111.4 million. Primary working capital was $127.1 million, or 23.8% of trailing-twelve-month sales, compared with $123.6 million, or 24.5%, at December 31, 2021. The balance sheet does not show a separate debt balance; the filing text does not provide a clear total debt value. Net interest expense was $22,000 for the first half.
The company reported a $150 million multi-currency credit line supporting commercial paper of up to $100 million, compliance with all covenants, and $156.5 million of unused credit lines at June 30. Management said operating cash flow, borrowing capacity and access to capital should provide adequate resources for operations, capital spending and product development.
Changes, outlook and risks
- Utility water sales rose 14.1% in Q2 and 14.6% for the first half; flow instrumentation sales rose 3.8% and 2.1%, respectively. Flow instrumentation demand was partly constrained by supply availability.
- Management cited pervasive material and expense inflation, intermittent component shortages and logistics constraints. Pricing actions partially offset cost pressures. The company reported record backlog and warned that disruptions could make sales patterns uneven through the rest of 2022.
- The filing gives no specific numerical full-year guidance. Management said the duration and business impact of COVID-19, potential variants, inflation and supply/logistics disruptions remained difficult to estimate.
- Single suppliers provide most brass castings and certain resin and electronic subassemblies. Losing suppliers could increase costs, delay deliveries and raise inventory or quality-control costs.
- Environmental matters could result in future costs that may be material, although compliance spending in 2021 and the first half of 2022 was not material. The company reported no material pending legal proceedings.
- Foreign-currency translation produced a $7.7 million loss in the first half, contributing to accumulated other comprehensive loss of $7.5 million at June 30.
Most important facts to verify
- Whether supply constraints and record backlog convert into shipments and revenue, and how sales may be distributed across the remainder of 2022.
- Whether pricing can continue to offset inflation without further gross-margin pressure.
- Working-capital needs, inventory levels and operating cash-flow recovery as shipment timing normalizes.
- The company’s actual borrowing and commercial-paper usage, since the balance sheet does not separately state total debt.
- Potential exposure from environmental matters and reliance on single suppliers.