Badger Meter's (NYSE:BMI) second-quarter report appeared to underscore misgivings investors may have had over a first quarter, which was notable for flat year-over-year revenue. In the last three months, the company saw a rather significant deflation of its top line, though margins held steady. Let's review the flow measurement instrumentation manufacturer's earnings in detail below. Note that all comparative numbers are presented against the prior-year quarter.

Badger Meter results: The raw numbers

Metric Q2 2019 Q2 2018  Change (YOY)
Revenue $103.5 million $113.6 million 9%
Net income $11.4 million $6.2 million 83.9%
Diluted EPS $0.39 $0.21 85.7%

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

What happened with Badger Meter this quarter?

  • Municipal water sales slumped 9.6%. Management attributed this to customers deferring orders as they wait for the latest versions of the company's advanced cellular endpoints and "smart" water meter systems. In addition, the company cited a large order from the Middle East in the prior year that did not repeat in the second quarter.
  • Flow instrumentation sales decreased by 6.6%, which management described as a broad-based decline among most industrial markets.
  • Product mix, geographical sales mix, and favorable cost and price relationships pushed gross margin up by 240 basis points to 38.9%, despite the compression from a weaker top line.
  • Operating margin was nearly level with the prior-year quarter, at 14.5%.
  • Though operating income slipped by roughly $1.3 million to $15 million, a large post-retirement charge of $8 million in the prior-year quarter caused comparative net earnings to show an outsize improvement this quarter, as seen in the table above.
  • The company paid down $6.5 million of debt during the quarter, bringing its total short-term debt balance to just $4.6 million, with no long-term debt remaining on its balance sheet.
  • Badger Meter repurchased $960,000 worth of its own shares during the quarter, marking $2.8 million worth of share repurchases in the first half of 2019.
A water meter with copper pipe fittings.

Image source: Getty Images.

What management had to say

Last quarter, Badger Meter attributed its flat sales to extreme weather in municipal water markets as well as deferred orders as customers awaited new products in the company's E-Series Ultrasonic water meters and ORION Cellular smart water communication endpoints lines. Delayed ordering patterns due to weather should have normalized in the second quarter. However, these sales obviously didn't have much of an impact in the current period. As for deferred purchases of advanced products, this appears to be an ongoing phenomenon, as CEO Kenneth Bockhorst explained in the company's press release: 

As a technology leader, we have encountered innovation-driven order postponements during new product launch windows. We believe we experienced that impact during the second quarter as customers, eager to adopt our new leading-edge solutions, are actively pilot testing products prior to systemwide deployment or are awaiting new product releases. While this phenomenon creates sales unevenness in the short-term, we believe being at the forefront of new technologies benefits us and our prudent customers given the long term horizon over which their decisions are based.

Looking forward

Badger Meter doesn't provide forward revenue or earnings guidance. The company did offer some qualitative information on its outlook, affirming that it retains a healthy order backlog and a solid new opportunities funnel on the sales front, "underscored by a high level of interest in [our] innovative smart water solutions."  

It may be time for management to provide a quantitative outlook that ties revenue more closely to the cadence of new product releases and the completion of customer product testing. At the moment, it's likely difficult for shareholders to grasp just when the promised sales of next-generation products will lift overall sales. And uncertainty is rarely kind to stock price: Following the earnings release, shares have traded down as much 8.5% in the Thursday session.

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