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Badger Meter Inc. (BMI - Analyst Report) reported second-quarter 2013 earnings per share (EPS) of 44 cents, a 15.4% decrease from 52 cents earned in the year-ago quarter and were short of the Zacks Consensus Estimate of 55 cents.

The year-over-year decline was caused by the litigation and pension charges, which together impacted earnings by about 5 cents per share. However, the prior-year quarter had a tax benefit of 3 cents per share.

Operational Update

Net sales increased 7.8% year over year to $88 million in the reported quarter. The results were ahead of the Zacks Consensus Estimate of $87 million. Higher sales of municipal water as well as industrial flow products resulting in the growth were partly offset by lower sales in specialty product.

Municipal water sales were up 12.5% due to an increase in residential meters and commercial meter sales, Management, however, believes that the increase in municipal water sales was because of return to normal buying patterns after the impact of weather on the first quarter sales.

Costs and Margins

Cost of sales increased 12.9% to $58 million in the reported quarter. Gross profit fell 1% to $29.8 million in the quarter from $30 million in the prior-year quarter. Gross margin contracted 300 basis points year over year to 33.8%, driven by lower prices and foreign exchange impacts.

Selling, engineering and administration expenses increased 4.5% to $19.6 million in the quarter due to a charge related to litigation issue, noncash pension charge and amortization of the intangibles associated with the purchase of Aquacue. Operating income plunged 10.5% to $10 million from $11 million in the year-earlier quarter. Consequently, operating margin contracted 230 basis points to 11.5% in the quarter.

Financial Position

As of Jun 30, 2013, cash and cash equivalents amounted to $2.7 million compared with $6.5 million as of Dec 31, 2012. Receivables increased to $52.7 million as of Jun 30, 2013 from $45.5 million as of Dec 31, 2012. Inventories decreased to $53.6 million as of Jun 30, 2013, from $61 million as of Dec 31, 2012.

Our Take

The acquisition of Aquacue is expected to enhance the product offerings by integrating the operations and technology. Badger Meter will continue to benefit from the launch of several new products during the quarter, including a polymer version of E-Series ultrasonic residential water meter. The company expects that the solid-state meter which requires low cost will drive growth in the upcoming quarters.

Badger Meter also released an updated version of ReadCenter Analytics software, which allows municipal water utilities to gather significant amounts of metering data and perform detailed analysis to improve their operations and customer service.

New product development is a key element of Badger Meter‘s growth strategy and the company will continue to invest in additional new products and product enhancements to meet evolving customer needs.

On the flipside, ongoing global economic weakness along with the uncertain municipal financial capabilities may affect the performance of Badger Meter, moving forward.

Headquartered in Milwaukee, Wis., Badger Meter provides liquid flow measurement products and control technologies serving water and gas utilities, municipalities and industrial customers worldwide. The company’s products, which are developed both internally and in collaboration with other technology companies, are used in a wide variety of applications, including water, oil and chemicals.

Badger Meter currently retains a Zacks Rank #3 (Hold). Badger Meter’s peers, such as Nanometrics Incorporated (NANO - Snapshot Report), Roper Industries Inc. (ROP - Snapshot Report) and Sensata Technologies Holding NV (ST - Snapshot Report) are yet to announce their quarterly results.


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