Badger Meter, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Unaudited results. Badger Meter sells municipal water metering and related radio/software solutions, along with flow-instrumentation products for industrial markets.
Financial results
Amounts are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Net sales | $103.5 | $113.6 | $208.4 | $218.7 |
| Gross margin | $40.3; 38.9% | $41.5; 36.5% | $80.7; 38.7% | $78.3; 35.8% |
| Operating earnings | $15.0; 14.5% | $16.4; 14.4% | $29.4; 14.1% | $26.3; 12.0% |
| Net earnings | $11.4 | $6.2 | $22.2 | $13.7 |
| Diluted EPS | $0.39 | $0.21 | $0.76 | $0.47 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $40.9 | $25.2 |
Revenue and earnings drivers
- Q2 sales fell 8.9% year over year. Municipal water sales were $79.5 million, down 9.7%; flow-instrumentation sales were $24.0 million, down 6.6%.
- First-half sales declined 4.7%. Municipal water revenue was $160.7 million, down 4.6%; flow instrumentation was $47.7 million, down about 5.0%.
- Management attributed municipal weakness to customers deferring orders for newer radio and meter products under testing, and to a large Middle East order in the prior-year quarter that did not recur. Flow-instrumentation weakness reflected lower industrial volumes, especially in North America; first-half results also faced unfavorable currency movements.
- Gross margin percentage improved in both periods, supported by favorable municipal product mix, pricing, lower commodity costs including brass, and, for the first half, the nonrecurrence of prior-year facility-relocation charges. Q2 operating earnings declined despite the higher gross-margin rate.
- Net earnings comparisons benefited materially from the absence of an $8.2 million pension-settlement charge recorded in 2018. Thus, reported earnings growth does not reflect sales growth: revenue declined, while first-half operating earnings rose.
Cash, debt and liquidity
- Cash was $23.9 million at June 30, 2019, versus $13.1 million at year-end 2018; short-term debt was $4.6 million versus $18.1 million. The company reported a $19.3 million net-cash position.
- First-half operating cash flow was $40.9 million, compared with $25.2 million a year earlier, primarily reflecting higher earnings and working-capital management. Capital expenditures were $4.5 million, versus $5.2 million.
- Primary working capital was $114.1 million, or 26.9% of trailing-twelve-month sales, compared with $124.6 million, or 28.7%, at December 31, 2018. Receivables declined; inventory increased modestly, and payables rose partly due to payment timing.
- The company reported $128.4 million of unused credit lines. Its amended credit facility includes a $125 million line, supports commercial paper of up to $70 million, and runs through September 2021. The company stated it was in compliance with financial covenants and considered its liquidity adequate for operations, investment and product development.
- Lease liabilities were $9.9 million at June 30 following adoption of the new lease accounting standard in January 2019. Dividends paid in the first half were $8.7 million; treasury-stock repurchases were $2.8 million.
Outlook, risks and notable items
- No specific quantitative earnings or revenue guidance is provided in the filing. Management expected the new three- and four-inch commercial E-Series ultrasonic meters to begin shipping later in 2019; it also described continued customer pilots and testing for ORION Cellular LTE-M endpoints. The company planned a next-generation ultrasonic-meter launch using D-Flow technology in 2019.
- Management highlighted continued conversion from manual meters to radio-enabled systems, growing adoption of ultrasonic meters, and increasing software-as-a-service revenue from BEACON analytics. These trends may support mix and margins, but customer order timing and product adoption remain uncertainties.
- Key disclosed risks include competitive pricing and bids, municipal customers’ ability to fund purchases, general industrial demand, product development and performance, commodity and component costs, foreign exchange, cybersecurity, and reliance on single suppliers for many brass castings, certain resins and electronic subassemblies.
- An additional $2.0 million of contingent payments related to the D-Flow acquisition was expected in 2019 and recorded in payables. The warranty and after-sale reserve was $5.4 million, up from $4.2 million at year-end 2018.
- No material legal proceedings or material subsequent events were reported. Environmental matters remain a contingency that could result in material future costs if circumstances change; related compliance expenditures in 2018 and the first half of 2019 were not material.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether deferred municipal-water orders convert to sales and whether the announced product launches ship on schedule.
- Whether margin improvement from product mix, pricing and lower input costs persists as sales volumes and industrial demand change.
- How much of the earnings increase reflects recurring operations versus the prior-year pension-settlement comparison.
- Cash conversion, inventory trends, supplier concentration and the timing of the remaining D-Flow contingent payment.
- Potential exposure from environmental contingencies, warranty costs, and the company’s expanded responsibility on systems and installation contracts.