Badger Meter Outperforms

Zacks

Badger Meter Inc. (BMI) has reported first-quarter adjusted earnings per share (EPS) of 42 cents, almost double the 22 cents in the year-ago quarter. The upsurge resulted from higher sales of Badger Meter’s ORION family of metering technology systems for the municipal water market as well as higher sales of industrial flow products due to the Racine Federated acquisition. The EPS beat the Zacks Consensus Estimate of 27 cents by a wide margin.

Total revenue surged 33% on a year-over-year basis to $76.2 million in the quarter, ahead of the Zacks Consensus Estimate of $70 million. Higher sales of Badger Meter’s ORION family of metering technology systems for the municipal water market and industrial flow products were partially offset by lower sales of specialty products due to reduced sales of the ORION metering system for natural gas utilities to one particular customer in the first quarter of 2012 compared with the prior-year quarter.

Costs and Margins

Cost of sales increased 28% to $47.4 million in the reported quarter.  Gross profit improved 41% to $28.9 million in the quarter from $20.4 million in the prior-year quarter. Gross margin expanded 230 basis points year over year to 37.9% reflecting the addition of higher margin products from Racine Federated.

Selling, engineering and administration expenses increased 23% to $18.7 million in the quarter also due to the acquisition of Racine Federated. Operating income improved 95% to $10.2 million from $5.2 million in the year-earlier quarter, thereby expanding operating margins 430 basis to 13.4% in the quarter.

Financial Position

As of March 31, 2012, cash and cash equivalents amounted to $6.66 million compared with $4.9 million as of December 31, 2011. Receivables as of March 31, 2012 increased to $51 million from $41 million as of December 31, 2011. Inventories increased to $57.9 million as of March 31, 2012 from $49.4 million as of December 31, 2011.

Earlier, in November 2011, Badger Meter management authorized to repurchase up to $30 million of common stock over a period of two years. During the quarter, the company repurchased 520,000 shares of common stock for approximately $17 million.

Badger Meter completed its largest ever acquisition of Racine Federated, Inc., on January 31, 2012. Even after the share repurchase and the acquisition, Badger Meter ended the quarter with an impressive debt-to-total capitalization ratio of 28%. 

Our Take

The slowdown in municipal spending started early in 2011 as customers stretched their decision-making process driven by concerns regarding the economy. However, the improvement in results in the latest quarter is indicative of a recovering market.

The acquisition of Racine Federation, along with previously acquired Cox Flow Measurement and Remag, is expected to boost the flow measurement business globally. The acquisitions broadened the product range and customer base for Badger Meter. Further, it has also opened the door for future expansion in the global arena.

Badger Meter competes with Itron Inc. (ITRI) and Roper Industries Inc. (ROP). The quantitative Zacks #2 Rank (short-term Buy rating) for the company indicates a slight upward pressure on the shares over the near term.

Milwaukee, Wisconsin-based Badger Meter provides liquid flow measurement products and control technologies to utilities and industrial customers. Presently, Badger Meter’s product lines fall into two broad categories – water applications and specialty applications.

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