Shares of Milwaukee-based Badger Meter (NYSE:BMI) rose 4% in midday trading on Thursday as investors tangibly endorsed the company's third-quarter 2019 earnings report. While the flow measurement instrumentation manufacturer's earnings may seem unimpressive at first blush, they follow a second-quarter filing that notably disappointed shareholders. As we review highlights of the last three months below, note that all comparative numbers are presented against the prior-year quarter.

Badger Meter results: The raw numbers

Metric Q3 2019 Q3 2018 Change
Revenue $108.6 million $110.6 million (1.8%)
Net income $12.7 million $2.8 million N/A
Diluted EPS $0.44 $0.10 N/A

Data source: Badger Meter. EPS = earnings per share. N/A = not applicable; difference too great to be meaningful.

Key details from the third quarter

  • While sales declined against the prior-year quarter, they rebounded sequentially from a disappointing $103.5 million mark in the second quarter of 2019.
  • Municipal water sales dipped 3% against a vibrant prior-year performance, compounded by the loss of a high-volume, low-margin customer in the Middle East. Domestic municipal water sales edged up 2%.
  • Management attributed the domestic sales increase to the launch of new three- and four-inch versions of the company's popular E-Series ultrasonic meters. Badger Meter continued to report order deferments as customers test out new products introduced this year, signaling the possibility of relatively higher sales in the next few quarters.
  • The company saw a 1% increase in flow instrumentation sales, which was characterized by "modest increases across most industrial end markets."
  • While management highlighted improving trends in gross profitability, including positive product and geographical sales mix, and attractive price and cost relationships, gross margin slipped 130 basis points to 38.4%. Management attributed the decline to a warranty provision it recorded during the quarter on a sourced system integration module sold only outside North America.
  • Operating earnings of $16.4 million marginally improved on the $15.7 million in operating earnings in Q3 2018. However, the company took an outsize pension and postretirement charge of $11.8 million in the prior-year quarter, causing the disparity in net earnings between periods as seen in the table above.
  • Cash from operations improved by 36% to $20.2 million, which the company chalked up to better working capital management.
  • Badger Meter repurchased $522,000 of its common stock during the last three months, pulling its year-long repurchase tally up to $3.4 million.
Illustration of one blue and one red water meter, connected to water pipes.

Image source: Getty Images.

Management's comments on the quarter

While shareholders appeared pleased with the stabilization in Badger Meter's top line, any true sales momentum will play out over the next two to three quarters. In the company's earnings press release, CEO Ken Bockhorst provided some commentary on the health of its revenue, as well as Badger Meter's overall financial condition:

The municipal spending market remains healthy and we continue to be encouraged by the interest level, engagement and pilot testing of our leading technologies. As we have historically experienced, the introduction of innovative solutions in our markets can create order pauses and sales unevenness in the short-term. However, our customers contemplate the long-term in making their smart water investments and therefore, we continue to support technology and capabilities that offer improved performance and economics over that horizon.

Looking beyond demand trends, our profit margins continue to benefit from positive sales mix and continuous improvement activities across all aspects of our operations, and our balance sheet provides ample capacity to execute on disciplined, strategic acquisitions.

Looking to the fourth quarter and beyond

While Badger Meter doesn't provide forward sales or earnings guidance, there's reason for investors in the small-cap instrumentation specialist to anticipate recovering growth in the coming months. First, the company noted that the launch of its new line of E-Series ultrasonic meters occurred in the latter half of the quarter, so conceivably, these sales will have a more meaningful impact in Q4 2019.

In addition, management confirmed that customers continue to test the Orion Cellular LTE-M endpoint, a higher-end meter that communicates water data for analytics purposes. Deferred decisions may soon turn into purchase orders, rewarding patient shareholders in the upcoming year. Today's share price action appears to support such anticipation.

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