Water meter and flow instrumentation specialist Badger Meter (NYSE:BMI) finished 2018 with high-single-digit sales expansion and an appreciable jump in net profitability, as demand trends for its municipal and residential products remained vibrant. Below, we'll look both at product lines that boosted the top line and at the organization's operational performance over the last three months, as revealed by its earnings report issued on Feb. 5.

Note that all comparative numbers in the discussion that follows are presented against the prior-year quarter, the fourth quarter of 2017.

Check out the latest Badger Meter earnings call transcript.

Badger Meter results: The raw numbers

Metric Q4 2018 Q4 2017 Year-Over-Year Change
Revenue $104.4 million $96.7 million 8%
Net income $11.2 million $7.2 million 55.6%
Diluted EPS $0.39 $0.25 56%

Data source: Badger Meter. EPS=Earnings per share. 

What happened with Badger Meter this quarter?

  • Water utility sales increased 8%, paced by the company's "smart water meters" aimed at both residential and commercial markets: the E-Series Ultrasonic line and Orion Cellular endpoints. The E-Series Ultrasonic device uses an LCD display attached to its metering component to provide water flow measurement data, while Orion Cellular endpoints upload data to users' online dashboards at fixed intervals.  

  • Flow instrumentation product sales improved 9%. Management relayed that the segment achieved market-share gains in the key target markets of water, wastewater, and oil and gas.  

  • Management characterized the quarter's gross margin of 38.5% as "strong." While gross margin slipped roughly 180 basis points, executives pointed out that it was up against a difficult comparison given a particularly profitable fourth quarter of 2017. 

  • Badger Meter held selling, engineering, and administrative expenses (SEA) in check despite the higher sales level. SEA expense of $25.3 million compared quite favorably to the prior-year quarter's expense of $25.1 million.

  • The discipline exerted on overhead expenses enabled the company to offset the lower gross margin and bring more of its sales increase to the bottom line. Operating income increased by roughly $1 million to $14.8 million.

  • Income tax expense dipped by $2.3 million to $3.3 million due to a lower effective tax rate stemming from U.S. tax legislation at the end of 2017.

  • The differentials in operating income and income tax expense were responsible for most of the wide improvement in net income and earnings per share (see table above). Lower interest expense and lower postretirement benefits comprised the rest of the difference in earnings between the two periods.

  • Badger Meter can boast of a healthier balance sheet at year-end. The company reduced total debt on its books from $44.6 million at the end of 2017 to $18.1 million on Dec. 31, 2018. Net debt (i.e., total debt less cash on hand) stands at just $5 million. All debt maturities are short-term, implying that Badger Meter will have zero debt on its books by year-end 2019, unless it issues debt for new acquisitions. 

Modern boiler and steam generator spanning an entire building floor.

Image source: Getty Images.

What management had to say

In Badger Meter's earnings conference call, CEO Kenneth Bockhorst discussed current order flow, as well as market reception to the company's technology-enabled devices, which are pacing its next phase of growth:

I continue to feel good about our order rates and backlog, which position us well for the year. As always, seasonality, with the second and third quarters being strongest, along with unevenness quarter to quarter, are still anticipated, but overall, the backlog and quote activity bodes well for the year as a whole. We're experiencing increasingly positive feedback about our E-Series, Orion Cellular and Beacon product lines.

The market is becoming more knowledgeable about the benefits of cellular, in part from the smart cities' enthusiasm, but most importantly, because of the demonstrated benefits our customers are realizing. This is translating to commercial inquiries and wins. Our Orion LTE-M cellular radio offering is 5G ready, compatible, and will improve the battery life, extend the range, lower costs and increase the number of on-demand reads for utilities. We remain on schedule to complete the integration of D-Flow Technology into our commercial E-Series meters as the first quarter progresses and into our residential offering thereafter.

Looking forward

Badger Meter refrains from providing earnings guidance. However, during the earnings call, Bockhorst noted that the company has experienced three strong quarters in a row and maintains a positive outlook for 2019. Bockhorst also observed that Badger Meter enjoys some insulation from "unsettling macroeconomic uncertainties" as it has minimal exposure in China.

Finally, management stressed to investors that it expects to maintain its controlled approach to overhead expenses. While it will continue to invest in research and development to drive product innovation, the organization intends to bring SEA, currently around 24% of sales, down to roughly 22%. Along with higher revenue levels and an expected long-term improvement in gross margin, this operating expense discipline should help boost Badger Meter's profitability in the coming years.