Water flow measurement device manufacturer Badger Meter, Inc. (BMI 16.65%) revealed its second-quarter 2018 earnings on Wednesday, and the company relayed credible top-line progress. The Milwaukee, Wisconsin-based organization also booked a healthy advance in earnings per share -- after adjusting for a significant charge taken during the quarter.
Badger Meter results: The raw numbers
| Metric | Q2 2018 | Q2 2017 | Year-Over-Year Change |
|---|---|---|---|
| Revenue | $113.6 million | $104.2 million | 9% |
| Net income | $6.2 million | $10.6 million | (41.5%) |
| Diluted EPS | $0.21 | $0.36 | (41.6%) |
Data source: Badger Meter, Inc.
What happened with Badger Meter this quarter?
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Badger Meter followed up a slightly disappointing sales result in its last reporting period with record revenue in the second quarter, nearly hitting double-digit growth against the second quarter of 2017.
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Management attributed the top-line strength to brisk domestic sales of its core flow measurement products for municipalities. The organization also benefited from a bump in international sales, which were concentrated in the Middle East.
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Within product lines, the company singled out fast growth in its E-Series Ultrasonic water meters. The E-Series Ultrasonic is a "smart water meter" aimed at the residential and light commercial markets. The device provides water flow measurement data via an LCD display attached to its metering component.
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Badger Meter also reported attractive demand for its Orion Cellular LTE Endpoint, another smart water meter reading system, which uploads data to an online dashboard at predetermined, fixed intervals.
- From an industry perspective, management noted that domestic sales of flow measurement products picked up in the water, wastewater, petrochemical, and oil and gas markets during the second quarter.
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Operating margin dipped nearly 2 percentage points against the prior-year quarter, to 14.3%. Higher brass costs and a tilt in the selling mix toward international water meter sales (which carry a lower margin than domestic meters) both impacted gross profit. Higher healthcare costs, selling expenses, and research and development expenses weighed on the selling, general, and administrative expense category.
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Though the decrease in operating margin was slight, net income dropped by double digits as the company took a charge of $8 million as part of a multi-quarter initiative to terminate its pension plan. This earnings drag was reduced by a $4 million benefit in the form of a lower provision for income taxes against the prior-year quarter, due to last year's U.S. tax legislation.
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Adjusting for an impact of $0.21 per share due to the pension-termination charges, comparable diluted earnings per share of $0.42 marked an increase of 17% against Q2 2017. Management stated that all pension settlement charges would be complete by the end of next quarter.
Image source: Getty Images.
What management had to say
As discussed above, Badger Meter is extending beyond traditional flow components into fast-growing smart water meter opportunities, and increasingly, its strategy calls for partnering with a wide range of companies to promote the technology behind its next-generation products. Badger Meter CEO Kenneth Bockhorst outlined a few of these ventures in the company's earnings press release:
Our opportunities for 2019 and beyond include Phyn, a joint venture between Belkin International, Inc. and Uponor Corporation, which utilizes our D-Flow ultrasonic technology in a smart water monitoring system for residential use. Our ORION Cellular products will be ready with LTE-M chips in the first quarter of 2019. These are the next generation chips for business-to-business cellular communications, allowing us to provide additional features for our customers while also improving our cost position. And our inclusion in AT&T's Smart City Alliance will allow us to explore new ways our smart water solutions can join forces with their industry-leading cellular networks to help water utilities better benefit from smart water metering solutions. ... We believe the ongoing acceptance of our products, continued operational efficiencies and an unrelenting eye on innovation bodes well for our future.
Looking forward
Badger Meter doesn't provide forward earnings guidance. However, as sales volumes have firmed up, the company may well continue to exhibit top-line momentum in the second half of the year. In the earnings release, CEO Bockhorst observed that management was confident about the remaining two quarters of 2018, citing "continued interest in [the company's] flagship products" as well as a growing order backlog. In addition, Bockhorst noted that copper prices have recently started to moderate. As I've previously explained, Badger Meter uses brass, derived from copper, across most of its manufactured meter products. In recent quarters, copper price increases have sometimes hit the double digits, so any easing on this front will provide a welcome earnings tailwind.
