Badger Meter Beats in 3Q (BMI) (ITRI)

Badger Meter Inc. (BMI) reported third-quarter 2012 earnings per share (EPS) of 62 cents, up 35% from the year-ago quarter and way ahead of the Zacks Consensus Estimate of 47 cents. The outperformance was driven by a robust increase in sales, improved profit margins as well as successful ongoing cost reduction activities.

Total revenue surged 25% on a year-over-year basis to $87 million in the quarter, outperforming the Zacks Consensus Estimate of $81 million. The acquisition of Racine Federated as well as increased sales of the company’s municipal water products contributed to the increase.

Costs and Margins

Cost of sales increased 13% to $52.8 million in the reported quarter. Gross profit improved 51% to $34 million in the quarter from $22.8 million in the prior-year quarter. Gross margin expanded 670 basis points year over year to 39.4%, reflecting the addition of higher-margin products from Racine Federated as well as lower copper costs.

Selling, engineering and administration expenses increased 37% to $20 million in the quarter, mainly due to the acquisition of Racine Federated. Operating income improved 77% to $14.1 million from $7.99 million in the year-earlier quarter. Consequently, operating margins expanded 470 basis points to 16.2% in the quarter.

Financial Position

As of September 30, 2012, cash and cash equivalents amounted to $6.1 million compared with $6.5 million as of June 30, 2012. Receivables increased to $54 million as of September 30, 2012 from $51 million as of June 30, 2012. Inventories decreased to $60 million as of September 30, 2012 from $61 million as of June 30, 2012.

In November 2011, Badger Meter authorized the repurchase of shares worth up to $30 million over a period of two years. The company completed the program in the second quarter. The company has also hiked its quarterly dividend by 6.25% to 17 cents per share in August.

Our Take

Badger Meter has posted a strong third quarter. However, the fourth quarter is seasonally softer and some uncertainty remains in the utility market related to the economy and municipal budgeting.

The acquisition of Racine Federation, along with the 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 and opened the door for future expansion in the global arena. Furthermore, Racine Federated's products carry slightly higher margins and thus will contribute to margin expansion for Badger Meter.

Moreover, the new products introduced by the company including ORION SE Advanced metering analytics system and the Electronic E-Series received wide acceptance among its customers.

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

Headquartered in Milwaukee, Wisconsin, 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 competes with Itron, Inc (ITRI). The company retains a short-term Zacks #2 Rank (Buy).