Flow instrumentation and water meter manufacturer Badger Meter (BMI 2.02%) revealed mixed first-quarter 2019 results on Wednesday. Revenue was virtually unchanged against the prior year, yet both operating profits and net income soared during the last three months. Below, we'll review condensed financial results and dig into the quarter's salient details. Note that all comparative numbers are presented against the prior-year quarter.

Badger Meter results: The raw numbers

Metric Q1 2019 Q1 2018 YOY Change
Revenue $104.9 million $105.0 million 0.09%
Net income $10.8 million $7.5 million 44%
Diluted EPS $0.37 $0.26 42.3%

Data source: Badger Meter. EPS = Earnings per share. YOY = year over year. 

What happened with Badger Meter this quarter?

Close-up of a water meter displaying water usage volume.

Image source: Getty Images.

  • Municipal water sales dipped by 1%, which management attributed to extreme weather at the beginning of the quarter as well as intentional order delays by customers waiting to receive the next generation of the company's ORION Cellular smart water communication endpoints and E-Series Ultrasonic water meters.

  • Flow instrumentation sales decreased by 3%, due mostly to foreign currency translation. Additionally, lower sales in "de-emphasized" markets offset strength in targeted key industrial markets.

  • The company experienced a positive impact from product mix as it saw increased sales of higher-margin ultrasonic meters, radio-based meters, and service revenue. 
  • Operating margin jumped by 420 basis points to 13.7%, due to the favorable product mix, lower year-over-year brass input costs, and lower selling, engineering, and administrative (SEA) costs. This combination of lower raw materials cost and expense control should provide even more operating leverage when revenue picks back up.

  • Badger Meter continued to reduce its borrowings, paying down $7.1 million of debt during the quarter. With $15 million of cash on its balance sheet against $10.9 million of debt at quarter end, Badger Meter swung from a "net debt" (debt greater than cash balances) to a "net cash" position of roughly $4 million.
  • In March, the company secured a three-year smart water metering project with the city of Columbia, South Carolina. The city will use Badger Meter's Beacon Advanced Metering Analytics software-as-a-service (SaaS) tool and install ORION Cellular endpoints.

  • Alongside the April 17 earnings report, the company announced its second major municipal award of the year, a contract to supply the utility Aurora Water in Aurora, Colorado, with ORION endpoints. This project will also use Beacon software and provide Aurora's customers with Badger Meter's EyeOnWater software to provide insight into personal water consumption. 

What management had to say

During his prepared remarks in Badger Meter's earnings conference call, CEO Kenneth Bockhorst noted that both Columbia and Aurora are larger cities that chose the company's comprehensive smart water solution after extensive reviews of competing systems. Bockhorst highlighted the benefits to these and similar municipalities as a way of emphasizing future revenue opportunity for Badger Meter:

They chose Badger Meter for a variety of reasons, most important of which is our infrastructure-free cellular offering. The market is becoming more knowledgeable about the benefits of cellular in part from the Smart Cities enthusiasm, but also because of the demonstrated benefits our customers are realizing. This is translating into commercial increase and contract wins. Our ORION LTE-M cellular radio offering is 5G compatible and will improve battery life, extend the range, lower costs and increase the number of daily on-demand reads and functionality for utilities.

An interesting point to note on these two awards is that both cities will continue to use our industry-leading Recordall mechanical meters. At the core of our business is a customer-centric focus and our unique ability to provide a broad array of offerings on the meter and radio fronts. We believe this provides us with a strong competitive advantage. At the end of the day, choice does matter.

Looking forward

Management doesn't share forward quantitative earnings guidance, but in the company's earnings press release, Badger Meter stressed qualitative factors behind a positive outlook for the remainder of the year, including a solid backlog and order rates and heightened customer interest in new, larger versions of E-Series Ultrasonic meters and ORION Cellular LTE-M radios.

The company also hinted at near-term capital deployment, pointing out in the release that a strong balance sheet will support key growth initiatives, including tuck-in acquisitions. Thus, in addition to expected progress on the top line, shareholders may see some moderate, strategic merger activity from Badger Meter later this year.