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Badger Meter's 1Q Earnings Lag

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Badger Meter Inc. (BMI - Free Report) reported first-quarter 2013 earnings per share (EPS) of 20 cents, down significantly from 42 cents earned in the year-ago quarter and was well short of the Zacks Consensus Estimate of 48 cents. The year-over-year decline was affected by lower sales to water utilities due to weather and other factors, which offset an increase in industrial sales as a result of the acquisition of Racine Federated last year.

Total revenue declined 6% on a year-over-year basis to $71.8 million in the quarter, missing the Zacks Consensus Estimate of $80 million. Higher-than-average snow, which significantly impacted meter replacement activities, a 30% decline in sales to utilities in communities in the Northeast affected by Hurricane Sandy as well as concerns related to municipal budgets affected sales. However, industrial sales were up slightly due to an extra month of sales from Racine Federated in the first quarter compared to the prior-year quarter.

Costs and Margins

Cost of sales declined 1% to $46.8 million in the reported quarter. Gross profit fell 13% to $25 million in the quarter from $28.9 million in the prior-year quarter. Gross margin contracted 300 basis points year over year to 34.9%, due to lower capacity utilization caused by decreased sales.

Selling, engineering and administration expenses increased 9% to $20 million in the quarter due to an extra month of expenses related to Racine Federated. Operating income plunged 54% to $4.7 million from $10.2 million in the year-earlier quarter. Consequently, operating margin contracted 680 basis points to 6.6% in the quarter.

Financial Position

As of the Mar 31, 2013, cash and cash equivalents amounted to $3.8 million compared with $6.5 million as of Dec 31, 2012. Receivables increased to $47.3 million as of Mar 31, 2013 from $45.6 million as of Dec 31, 2012. Inventories increased to $58.5 million as of Mar 31, 2013, from $61 million as of Dec 31, 2012.

Badger Meter also announced the acquisition of Calif.-based Aquacue, Inc., a small software technology company, for $14 million in cash on Apr 1. Aquacue’s software provides water management data to utilities and consumers to help them better manage water usage.

Badger Meter’s competitor for utility water meters, Elster, has decided to shut its U.S water meter business by mid 2013. Badger Meter has signed an exclusive agreement related to the announced decision and as part of the agreement, Elster AMCO is notifying its customers that Badger Meter has been selected as the recommended supplier for their mechanical water meters after Jun 30.

Our Take

The acquisition of Racine Federation is expected to boost Badger Meter’s flow measurement business globally. With the global flow metering market estimated at $5 billion, there is an immense growth potential.

The company will continue to benefit from the customers preference for the cost effective automatic meter reading (AMR) technology as well as growing interest in advanced metering analytics (AMA). Badger Meter continues to focus on new product development and introduced updated software versions for the ORION SE advanced metering analytics system. Badger Meter expects the ORION brand to continue to drive sales in the municipal water market.

Elster’s exit from the utility water meter business creates a sizeable opportunity for Badger Meter and would increase the latter’s market share from the current level of 28%. Furthermore, removal of this one player could have a positive impact on pricing dynamics in the space.

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).

Among Badger Meter’s peers, Roper Industries Inc. (ROP - Free Report) is expected to report first quarter earnings on Apr 29, 2013 while Nanometrics Incorporated (NANO - Free Report) and Watts Water Technologies, Inc. (WTS - Free Report) will announce results on Apr 30. The Zacks Consensus Estimate for Roper and Watts Water currently stand at $1.22 and 57 cents, respectively, while the Zacks Consensus Estimate for Nanometrics is a loss of 27 cents per share.

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